forensic accounting - msa 220 i – spring 2014 today’s topics n fighting fraud n fraud prevention...

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Today’s Topics

Fighting Fraud Fraud prevention Early detection Fraud investigations Legal intervention

Preventing Fraud The 13 Shenanigans

Fighting Fraud

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Fraud Prevention

Culture of honesty and integrity Manage by example Hire the right people Communicate expectations Positive work environment Proper handling of fraud

Enterprise risk management Identify risks-likelihood and impact Implementing controls Widespread monitoring Effective audit function

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Fraud Detection

By chance By intent-new trend

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Fraud Investigation Predication: circumstances that lead to past,

present or future fraud Using the evidence square

Testimonial evidence Documentary evidence Physical evidence Personal observation

Using a variation of the fraud triangle Investigation of theft Investigation of concealment Investigation of conversion Direct inquiry

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Investigation Process

Establish truth Use experienced investigators Guard hypotheses Prudent communication Independent corroboration of information Avoidance of questionable techniques Fair and objective reporting

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Legal Action

None More than 50%

Civil Good for non employees

Criminal Restitution and jail time Harder to convict Higher degree of evidence

Preventing Fraud

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Creating the Culture

Not everyone is honest Desperate people do desperate things!

Four ways to establish the culture Hire honest people and train them Cultivate a positive work environment Spread a relevant and understandable

code of ethics Provide employee assistance programs

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Hire and Train Honest People

30-40-30! (honest, swing, dishonest)

Privacy laws create problems Resume fraud Reinforce company policy

If it is to be “no tolerance”; make it no tolerance

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Positive Work Environment

Happy employees usually won’t rip you off!

“I don’t get mad, I get even” mentality

Note the list in the text.

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Code of Ethics

Make it relevant and understandable

Emphasize who gets hurt Promote open discussion

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Employee Assistance Programs

We are all human We can all use help

6:1 return ratio for EAPs Combine with your Management by

Objectives (MBO) program Private MBOs

The 13 Shenanigans

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Howard Schilit’sFinancial Shenanigans

3rd Edition published in 2010 Accounting gimmicks in financial

reports Schilit: president of the Financial

Shenanigans Detection Group, LLC International expert on financial

fraud

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FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Three Families—13 Shenanigans

The categories Earnings manipulation shenanigans Cash flow shenanigans Key metrics shenanigans

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FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Earnings Manipulation Shenanigans

1. Premature recognition of revenue2. Recognition of bogus revenue3. One time items masked as recurring

items4. Deferral of expenses5. Hiding expenses6. Shifting revenue into the future7. Shifting expenses into the present

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FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Cash Flow Shenanigans

8. Shifts to operating cash increases9. Shifts to investing cash decreases10. Misuse of mergers11. Unsustainable generation of cash

flow

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FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Key Metrics Shenanigans

12.Overstating performance metrics13.Distorting performance metrics

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FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Transparency is the Key

Are the #’s telling the story or making the story?

Is the company managing the business or managing the #’s?

“What is, is?” versus “What is. Is!”

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