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Forensic Accounting & Fraud Case Studies
Main Line Association For Continuing Education6-18-15David E. Goss, CPA/CFF/CGMA,CIA,CFE North American Forensic Accounting
PC901 Dawn Avenue, Suite A, Ephrata, PA 17522
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CONTACT INFORMATION
David E. Goss CPA/CFF/CGMA, CIA, CFE
North American Forensic Accounting PC
901 Dawn Avenue Suite A
Ephrata, PA 17522
717-466-6800
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FORENSICACCOUNTING PC
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TODAY’S DISCUSSIONForensic Accounting Considerations
Fraud Theories and The Trust Factor
Regular Audits vs Fraud Investigations
Case Studies
Check Preparation
Questions ?
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Forensic Accounting
• Encompasses both Litigation Support and Investigative Accounting.
• Forensic accounting engagements often result in the accountant being involved in highly controversial and adversarial situations.
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Forensic accountingFrom Wikipedia, the free encyclopedia
Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means “suitable for use in a court of law”, and it is to that standard and potential outcome that forensic accountants generally have to work.
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INCREASING DEMAND FOR FORENSIC ACCOUNTANTS
• Greed
• Opportunity
• Economic factors Layoffs Recession fueled bankruptcies Underemployment
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• Extensive travel: (2 to 3 weeks per month – 16 years) 49 of the 50 states Brazil Australia Canada England • Have been threatened – multiple locations• Items thrown at me• Endured physical hardships at various locations• Moved from hotel to hotel in the middle of the night• Wheel lugs loosened on rental car• Harassed by unmarked vehicle – Canada• Ticked / harassed by police – Canada• Individual who assisted me in one case – tires slashed / brake line
cut / serious accident • Protection order from suspect
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FRAUD TRIANGLE
• Opportunity – weaknesses in internal controls
• Pressure – personal financial problems, unrealistic performance goals
• Rationalization – justification for fraudulent activities
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The “Trust” Factor
“People are going to trust one another right up to the time they are caught.”
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REPORT TO THE NATIONS
REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE (ACFE)
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ACFE 2014 Report• Estimated $3.7 Trillion in fraud losses (worldwide) averaging 5 percent of
revenues in the study.
• 85% of occupational fraud incidents is through misappropriations
• 54% of frauds perpetrated by males and $ amount is significantly higher than females
• 33% of the frauds are perpetrated by accounting or operations personnel
• Frequently committed by perpetrators aged 31 to 45, dollar amount increases significantly for fraud committed by individuals over 60 (trust factor)
• #1 detection method – employee tips – 42%
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DIFFERENCES: AUDITS vs. FRAUD AUDITS
2008 ACFE Report to the Nation on Occupational Fraud & Abuse
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KEY ELEMENTS IN FRAUD SCHEMES
• All occupational fraud schemes have four key elements in common. The activity:
1. Is clandestine
2. Violates the perpetrator’s fiduciary duties to the victim organization
3. Is committed for the purpose of direct or indirect financial benefit to the perpetrator
4. Costs the employing organization assets, revenue or reserves
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OUTSIDE INFLUENCES
• An organization cannot control what affects an individual outside of the work environment
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EXTERNAL AUDITORS
• Long term analysis of frauds from 1998 through 2010 (Reuters):a) Auditors sometimes did not question
documents that appeared to be fabricatedb) Auditor trusted managements’ word that
no fraud had occurred
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EXTERNAL AUDITORS - continued
c) Most common auditor failings were lack of competence and diligence. Lack of
professional skepticism, and failure to assess and respond to fraud risks.
d) Time and budget constraints, fear of alienating clients
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BARRY WEBNE - STORY
Question – would you hire someone as your CFO who previously embezzled $1.0 million and spent time in prison?
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WHY DO THEY STEAL?
• Unspeakable problem (usually financial) that can be resolved by “borrowing” the money
• Economic distress
• Elaborate lifestyle
• Compulsive behavior – substance abuse/gambling problem
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ADDITIONAL CONSIDERATIONS
• Thefts by embezzlers are rarely detected
• If detected, the crimes are seldom prosecuted
• Sentences are usually light
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QUANTIFYING THE IMPACT OF FRAUD
Considerations:
• The effect of fraud on the management of the organization can be a devastating distraction from the normal operations of running the business
• Depending on the size of an organization, fraud can cripple the financial structure and jeopardize the future operations of a business
• Many companies carry inadequate levels of insurance coverage for employee dishonesty
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CASE STUDIESFraud Case Studies
• Criminal Defense - Bookkeeper
• Family Business
• Insurance Agency
• Construction Company
• Legal Association
• Community Bank
• Manufacturer
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CRIMINAL DEFENSE – BOOKKEEPER
• DA charged theft $180,000• IRS also charged bookkeeper personally for back
taxes not paid by business• Original premise - 100% innocent• Paying workers under the table• Discovery of records• QuickBooks – The “devil” in the details• DA offer
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FAMILY BUSINESSBackground
- External accountant
- Long term relationship
- Family run business – 275 employees
- IRS issues / questions
Discovery
- Meeting with new CPA firm
-Start of the investigation
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FAMILY BUSINESS (continued…)
Discovery
- Meeting with new CPA firm
-Start of the investigation
- Offer by suspect
Investigation
- Transfers from business checking account
- Paper vs. electronic records
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FAMILY BUSINESS (continued…)
Investigation
- Checks drawn to pay “payroll taxes”
Credit card companies
US Treasury
PA Dept. Revenue
Encoding
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FAMILY BUSINESS (continued…)
Investigation
- Quantification
- Insurance claim
Outcome
- Sentencing
- Restitution
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BANK ELECTRONIC TRANSFER
XYZ BANK HISTORY CHECKING
DATE DEPOSITS CHECKS BALANCE DESCRIPTION
65,760.13$ 4/16/2006 4,150.00$ 69,910.13$ VENDOR PAY4/16/2006 47,969.02$ 117,879.15$ SWEEP LOAN ADVANCE4/16/2006 (28,290.42)$ 89,588.73$ XYZ BANK LOAN TRANSACTION4/16/2006 (11,084.99)$ 78,503.74$ XYZ BANK LOAN TRANSACTION
4/17/2006 (9,312.33)$ 69,191.41$ AMERICAN EXPRESS ELEC REMIT 061108061025841
4/18/2006 (3,500.00)$ 65,691.41$ CHECK NUMBER 4968014/19/2006 (135.00)$ 65,556.41$ CHECK NUMBER 5268014/19/2006 (65.18)$ 65,491.23$ CHECK NUMBER 5610814/21/2004 (723.60)$ 64,767.63$ TRANSFER DR FROM 16731313634/21/2006 10,717.83$ 75,485.46$ DEPOSIT4/22/2006 99,713.52$ 175,198.98$ SWEEP LOAN ADVANCE
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INSURANCE AGENCYBackground
- Insurance agency
- Sole shareholder
- 10 to 15 employees
- Bookkeeper tenure 7 months
Discovery
- Income tracking
- Meeting with the bookkeeper
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INSURANCE AGENCY (continued…)
Investigation
- Fraud theory
- Insurance receipts/income
- Software tracking
- Documents
- Chain of custody
- Quantification
- Insurance claim
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INSURANCE AGENCY (continued…)
Status
- Civil complaints
- Sale of business lines
- Loss of business
- Sale of building
- IRS issues
Outcome
- Did justice prevail?
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CONSTRUCTION COMPANYBackground
- Electrical contractor
- Vice President
Discovery
- Red flags
- Compelling evidence or sloppy recordkeeping?
- Cost accounting records – journal entries
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CONSTRUCTION COMPANY (continued…)
Investigation
- Fraud theory
- Inventory
- Outside vendor
- Invoice template
- Dumpster diving
- Interviews
- Quantification
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CONSTRUCTION COMPANY (continued…)
Investigation continued
- Personal bank records
Motive
- Greed / girlfriend
Outcome
- FBI – DOJ report
- Sentencing
- Full restitution
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LEGAL ASSOCIATIONBackground
- 600+ attorneys
- Bookkeeper
- Audited financial statements
Discovery
- Red flags – bank statement
- Forgery – checks and notary signature
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LEGAL ASSOCIATION (continued…)
Opportunity
- Trust and “Family”
- Lunch breaks
- Position
Investigation
- Fraud theory
- Bank statements
- Bank reconciliation
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LEGAL ASSOCIATION (continued…)
Investigation continued
- Interview
- Quantification
- Theft duration – 4 years
Motive
- Financial pressures
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LEGAL ASSOCIATION (continued…)
Outcome
- Full restitution
- No prosecution
- Subsequent events
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LEGAL ASSOCIATION (continued…)
Outcome
- Full restitution
- No prosecution
- Subsequent events
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COMMUNITY BANKBackground
- Small town
- VP Bookkeeping / IT – 25 year employee
- Audited financial statements
- FDIC audits
Discovery
- FDIC audit – sample selection
- Confession
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COMMUNITY BANK (continued…)
Opportunity
- Position and Trust
- Knowledge of internal controls
- FDIC bank examiner 2003
Investigation
- Fraud theory
- Audit trail documentation
- Quantification
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COMMUNITY BANK (continued…)
Investigation continued
- Credit card cash advances
- Theft – 4 years
- Credit history checks
Motive
- Financial pressures
- QVC
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COMMUNITY BANK (continued…)
Outcome
- FBI prosecution
- Federal prison sentence
- Full restitution
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MANUFACTURERBackground
- Blackmail scheme
- Outside trucking firm
- Inside transportation supervisor
Discovery
- Excel spreadsheets
- “The bookcase”
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MANUFACTURER (continued…)
Investigation continued
- Trucking invoices
- Imbedded kickbacks
Motive
- Financial pressures ?
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MANUFACTURER (continued…)
Investigation continued
- Trucking invoices
- Imbedded kickbacks
Motive
- Financial pressures ?
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MANUFACTURER (continued…)
Outcome
- $2.7 million
- Insurance claim
- Death
Main Line Association For Continuing Education6-18-15David E. Goss, CPA/CFF/CGMA,CIA,CFE
North American Forensic Accounting PC
901 Dawn Avenue, Suite A, Ephrata, PA 17522717-466-6800
www.naforensics.com
www.facebook.com/northamericanforensicaccountingllc