Forensic accounting session

November 5, 2014

Jim Kaplan CIA CFE

AuditNet®

Forensic Accounting and Fraud:

Things You Must Know

Jim Kaplan CIA CFE AuditNet®

About Jim Kaplan CIA CFE

About Jim Kaplan

• Internal audit professional

• Certified Internal Auditor

• Certified Fraud Examiner

• Recipient of the IIA’s Bradford

Cadmus Award and Local

Government Auditors Lifetime

Achievement Award

• Founder and Creator of AuditNet®

What I am not

• IT Auditor

• CPA

• Forensic Accountant

• Lawyer

• Criminal Investigator

• Inspector General


AuditNet® Content

• AuditNet® provides more than 2,300 audit templates to

subscribers and site license users including TeamMate, ACL,

IDEA, Protiviti KnowledgeLeader, and AHIA.

• Content includes the complete AuditNet® library of over 15,000

audit procedures and workpapers. New content is added to the

site every month including articles, templates, surveys and

much more.

• Approximately 5% of the content is fraud specific (templates,

matrices, guides)

• Since 2009 AuditNet® has provided content for CCH Accounting

Research Manager

• 2014 acquired AuditNet.com domain name


Session Description

• Forensic Accounting and Fraud: Things You Must Know The areas of forensic

accounting and fraud detection have become increasingly more important to

business entities and their financial statement auditors. Learn what you need

to know, how you can best leverage forensic accounting and fraud detection

experts.


Agenda

• Part 1 Things You Should Know

— Fraud Statistics

— What is Forensic Accounting?

• Part 2 Leveraging Experts

— Skill Set for Forensic Accountants and Fraud Examiners

— Finding Forensic/Fraud Professionals

• Part 3 Resources

— Finding the tools, techniques and Web sites

— What’s Next? Leading Edge


Equity Funding Tone at the Top Example

6


Fraud Statistics


The Cost of Occupational Fraud

8


Duration of Fraud Schemes

9


Detecting Occupational Frauds

10


Source of Tips

11


Impact of Hotlines

12


Anti-Fraud Controls at the Victim Organization

13


Effectiveness of Controls

14


Perpetrator’s Position

15


Fraudster Video

16


What is Forensic Accounting

• Focus is:

— the evidence of economic transactions and reporting

— the legal framework which allows such evidence to be suitable to the purpose(s) of establishing accountability and/or valuation

• In other words:

— the identification, interpretation, and communication of the evidence of economic transaction and reporting events

http://www.rtedwards.com/journals/JFA/evidentiary.html


What is forensic accounting?

• Forensic Accounting - specialty practice area of accounting that describes engagementsresulting from actual or anticipated disputes or litigation.

• Forensic accounting - application of a specialized knowledge and specific skills to findevidence of economic transactions. The job demands reporting, where the accountability ofthe fraud is established and the report is considered as evidence in the court of law or in theadministrative proceeding.

• Forensic accounting - suitable for legal review, offering the highest level of assurance, andincluding the now generally accepted connotation of having been arrived at in a scientificfashion.


NEED FOR FORENSIC ACCOUNTING

• Corporate scandals have led business owners to turn to Forensic Accountants for proactivefraud checkups.

• CEOs must now certify that their financial statements are faithful representations of thefinancial position and results of operations of their companies and rely more heavily oninternal controls to detect any misstatement that would otherwise be contained in thesefinancials. Thus, publicly held companies are likely to see the necessity for forensicaccounting as a part of a strong internal control effort to comply with governmental andmarket demands for accurate reporting.

• Forensic accountants who work for private companies help prevent and detect misuse ofcompany resource.


Who needs Forensic Accountants?

• Forensic Accountants work in most major accounting firms

• Needed for investigating mergers and acquisitions, and in taxinvestigations, economic crime investigations, all kinds of civil litigationsupport, specialized audits, and even in terrorist investigations.

• Work throughout the business world, in public accounting, corporations,and in all branches of government (from the FBI and CIA to the offices ofthe local authorities). F

• Forensic Accounting firms are everywhere


Forensic Accounting vs Auditing: Interchangeable?

• Forensic Accounting

— the use of accounting skills to investigate fraud or embezzlement and to analyze financial

information for use in court cases or other legal proceedings.

• Litigation support

• Investigative accounting

• Forensic Auditing

— A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement

or other financial claims. In addition, an audit may be conducted to determine negligence

or even to determine how much spousal or child support an individual will have to pay.



• often mistakenly assumed to be exclusively associated with "negative"

applications, such as bankruptcy, fraud, business disputes, or matrimonial

divorce.

• may also be applied in "positive" assurance engagements such as due diligence

reviews, business valuations, audit committee advisory services and enterprise

risk management.



• Forensic accounting is applied to the evidence of first order activities, not secondary systems of controls.

• Analysis includes the crucial aspect of recognizing the implications of evidence that has been obtained.

• Additional protocol extensions are employed to forecast or predict future conditions based on known past transactions or events.


What is a Forensic Accountant?

One part accountant, one part detective and one part legal expert.

Specialty practice area of accounting that describes engagement that result from actual or anticipated disputes or litigation.

“Forensic means “suitable for use in court of law”


Objectives Differing

• Financial auditing. The auditor’s objective in a financial audit is to render an opinion on

whether the information appearing in a set of financial statements is presented fairly in

conformity with generally accepted accounting principles (GAAP).

• Fraud auditing. The objective of a fraud audit is for the auditor to assess the likelihood that

fraud will be detected or prevented in a corporate or regulatory environment.

• Forensic accounting. The objective of a forensic accounting engagement is related

specifically to the issue defined by the party engaging the accountant.

The objectives differ for each type of engagement.


Professional Standards

• AICPA - SAS No. 99 - Consideration of Fraud in a Financial Statement Audit

• PCAOB - AU Section 316 Consideration of Fraud in a Financial Statement Audit

• IFAC - International Standard on Auditing (ISA) 240

• IIA 2210.A2 - Internal auditors must consider the probability of significant

errors, fraud, noncompliance, and other exposures when developing the

engagement objectives.

• ACFE - Professional Standards for Certified Fraud Examiners


Forensic Accounting

• In response to an event

• Financial investigation

• Findings used as evidence in court

or to resolve disputes

Financial Audit

• Mandatory

• Measures compliance with

reporting standards

• Obtain reasonable assurance that

financial statements are free of

material misstatement

Forensic Accounting vs Financial Audit Differences


ETHICS - INTERVIEW WITH A FRAUDSTER

28


Equity Funding - Ethics Example

29


Forensics Accountant Profile

• Analytically-minded and inquisitive, with “street smarts”

• Ability to think creatively or “outside the box”

• Able to multitask and work well under pressure

• Able to communicate complex financial concepts in a manner that

is simple and easy to understand

• Usually hold at least the CPA and CFE (Certified Fraud Examiner) or

other forensic designations


Skill Set for Forensic and Fraud Professionals

• Forensic accountants are also referred to as fraud examiners

• Not constrained by generally accepted accounting concepts like materiality

• Background may include investigators, law enforcement or legal professionals

• Specialized certifications offered by professional associations including ACFE,

AICPA


Certified Professionals


Forensic Tools and Techniques

• Planning the audit

• The forensic audit team must carefully consider what they have been asked to achieve and

plan their work accordingly. The objectives of the investigation will include:

— identifying the type of fraud that has been operating,

— how long it has been operating for,

— how the fraud was concealed for the duration

— identifying the fraudster(s) involved

— quantifying the financial loss suffered

— gathering evidence to be used in court proceedings

— providing advice to prevent the re-occurrence of the fraud.

• The investigators should also consider the best way to gather evidence, through data-mining,

checking the transaction log systems, SWIFT for financial transaction,


Forensic Accounting Scope

• Discovery: Identifying the relevant key issues and information

• Analysis: Interpreting the discovery results

• Communication: Presenting the information verbally and in writing


The Role of Technology

• Computer forensics involves the gathering, analysis, interpretation and

reporting of evidence when a crime is suspected, or after a crime has been

committed


Using Big Data & Analytics to combat fraud and mitigate risk

36


Knowledge, Skills, Abilities: Needs

Auditor’s need KSAs to …

• Build a digital audit trail

• Collect “usable” courtroom electronic evidence

• Trace an unauthorized system user

• Recommend or review security policies

• Understand computer fraud techniques

• Analyze and valuate incurred losses


KSA’s Continued

• Understand information collected from various computer logs

• Be familiar with the Internet, web servers, firewalls, attack methodology,

security procedures & penetration testing

• Understand organizational and legal protocols for incident handling

• Establish relationships with IT, risk management, security, law enforcement


Data Analytic Tools for Detecting Anomalies

• The following software is used by auditors, accountants, fraud examiners,

compliance and other professionals to facilitate data analysis

• ACL

• IDEA

• Excel

— TopCaats

— ActiveData

• Arbutus


Forensic data mining

• Use of sophisticated procedures and technologies to identify concealed

patterns in financial, nonfinancial and textual data that would not otherwise

be detectable due to the size and complexity of the data.

40


Equity Funding Brainstorming Scenario

41


Patterns identified with data mining

• Numeric Patterns – fictitious invoice numbers, fictitiously-generated

transaction amounts…

• Time Patterns – Transactions occurring too regularly, activity at unusual times

or dates…

• Name Patterns – Similar and altered names and addresses…

• Geographic Patterns – Proximity relationships between apparently unrelated

entities…

• Relationship Patterns – Degrees of separation…

• Textual Patterns – Detection of “tone” rather than words…

• Unknown Patterns – Things you haven’t thought of…

42


Leading Edge

• Non-Obvious Relationship Association (“Link Analysis”)

• Linking items that are related but removed by several degrees of separation to

mask their relationship.

• Latent Semantic Analysis

• Concept searching based on tone, recurring themes and communication

nuances

43


Social Media Forensics and Fraud

• Using Social Media for Investigations

—Personal injury and workmen’s compensation (pictures

posted on Facebook)

—Unused vacation payouts – matching business travel with

online postings

—Living beyond means – photos of extravagant items (cars,

vacations etc.)

44

The Internet’s not written in pencil… It’s written in ink.

The Social Network


Subscription Based Services

• CCH's Accounting Research Manager® is the most timely

and comprehensive online database of expert-written

analytical accounting, auditing, governmental, internal

controls and SEC information as well as primary source

data. Updated daily, it provides current, complete and

objective resource for your financial reporting needs.

http://www.accountingresearchmanager.com/ARMMenu.nsf/vwHTML/ASPENARMPage/?OpenDocument


Online Tools and Resources Forensics & Fraud

• AuditNet®

— Templates and fraud checklists, workbooks and matrices

(subscription required)

• Association of Certified Fraud Examiners

• Protiviti KnowledgeLeader

— Fraud Prevention and Detection Audit Work Program

(subscription required)

• Corporate Executive Board

— Audit Director’s Roundtable (subscription required)

• Forensic Accountant & Fraud Examiner Tool Kit (available

free from AuditNet®)


Other Suggested Tools

• Google Alerts Monitor the web for interesting new content

https://www.google.com/alerts

• ACFE

— The FraudInfo blog provides updates on the biggest fraud stories in the news. Or, you

can have theFraudInfo e-newsletter delivered to your inbox.

— ACFE Insights provides news, analysis and commentary on the global fight against

fraud.

— The ACFE Report to the Nations on Occupational Fraud and Abuse, based on data

investigated by CFEs around the world, is one of the most thorough and oft-cited

studies on fraud in the workplace.

• White Collar Crime Fighter Newsletter – http://fraudresourcenet.com

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https://www.google.com/alerts

http://fraudinfo.com/

http://www.acfe.com/optinout.aspx?type=fraudinfo&action=subscribe

http://www.acfeinsights.com/

http://www.acfe.com/rttn.aspx

http://fraudresourcenet.com/


Interview with a Fraudster

48


Tour of Resources

• Join me as we take a tour of the resources mentioned.


• AuditNet® is more than audit templates and programs

• We have devoted the last 20 years to creating an online portal for

auditors including links to audit sites, aids and resources for small

audit departments, guides, surveys, technology solutions, and

much more.

• AuditNet®, a NASBA approved sponsor offers CPE with low cost,

hiqh quality Webinars under our Training without Travel™ format!

Discounts available for IDEA users.

• So let’s see everything you wanted to know about AuditNet® but

haven’t asked!

Navigation Tour


AuditNet® Home Page


AuditNet® Tour


Audit Templates Tour – Audit Programs


Audit News Tour – Audit News that ‘s Fit to Print


Events Tour – Training without Travel™


Resource Link Tour – Links to Audit Sites


Library Tour – Audit Sites by Topic


Publications Tour – Surveys, Newsletters and More Oh boy!


• Now that you have had a tour of AuditNet®

here are the latest updates and enhancements:

— Available as apps on iOS, Android, Windows

devices and tablets.

— Adding new industry related content

— Updating template description pages

— Translating AuditNet® content and site

into other languages

— Surveys on leveraging technology to

support moving auditors and audit

departments up the audit technology

maturity curve

— Partnered with FraudResourceNet – new

content rich site offering free subscription

to White-Collar Crime Fighter Newsletter

What’s New?


Keyword Analytics Survey

Page

60

+ =

December 3 Using Key Word Analysis of an Organization’s Big Data

for Error and Fraud Detection

Survey Link: https://www.surveymonkey.com/s/KeyWordAnalytics

Take the survey and join us. 2 CPE (NASBA approved sponsor)

Ticket Link to Register:

https://www2.gotomeeting.com/register/928325250

You must take the survey to attend the event at no charge!

https://www.surveymonkey.com/s/KeyWordAnalytics

https://www2.gotomeeting.com/register/928325250


Equity Funding – The End

61


Forensic Accounting and Fraud What You Need to Know

Forensic accounting session

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Transcript of Forensic accounting session