Forensic and Investigative AccountingForensic and Investigative Accounting

Chapter 2

Forensic Accounting Education, Institutions, and Specialties

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Chapter 2 Forensic and Investigative Accounting 2

Just as termites never sleep, fraud never sleeps.

Just like termites, fraud can destroy the foundation of an entity.

Termites, Rust, and FraudTermites, Rust, and Fraud

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Professors’ Top Ten Topics in Professors’ Top Ten Topics in Forensic Accounting CurriculaForensic Accounting Curricula

1.1. Fundamentals of fraud.Fundamentals of fraud.

2.2. Financial statement fraud.Financial statement fraud.

3.3. Types of fraud.Types of fraud.

4.4. Cooking the books and problems in Cooking the books and problems in accounting.accounting.

5.5. Elements of fraud: pressure, opportunity, and Elements of fraud: pressure, opportunity, and rationalization.rationalization.

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Professors’ Top Ten Topics in Professors’ Top Ten Topics in Forensic Accounting CurriculaForensic Accounting Curricula

6.6. Antifraud controls.Antifraud controls.7.7. Internal control evaluation.Internal control evaluation.8.8. Theory and methodology of fraud Theory and methodology of fraud

examination.examination.9.9. Principles of ethics and corporate code of Principles of ethics and corporate code of

conduct.conduct.10.10. Fraud detection and deterrence programs.Fraud detection and deterrence programs.Practitioners tend to emphasize litigation servicePractitioners tend to emphasize litigation servicemore than professors.more than professors.

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Knowledge, Skills and Abilities Knowledge, Skills and Abilities Needed by Forensic AccountantNeeded by Forensic Accountant

Law, legal system, courts, and courtroom Law, legal system, courts, and courtroom procedure.procedure.

Financial statement fraud.Financial statement fraud. Corporate governance, shareholder rights and Corporate governance, shareholder rights and

litigation, securities laws, and protections.litigation, securities laws, and protections. Report writing and communication.Report writing and communication. Criminal law and procedure.Criminal law and procedure.

(continued on next slide)(continued on next slide)

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Knowledge, Skills and Abilities Knowledge, Skills and Abilities Needed by Forensic AccountantNeeded by Forensic Accountant

Computer fraud and cybercrime.Computer fraud and cybercrime. Human factors involved in intelligence Human factors involved in intelligence

gathering, interview techniques and gathering, interview techniques and understanding the motivations for fraud and understanding the motivations for fraud and other criminal activities.other criminal activities.

Ethical issues in business.Ethical issues in business. Business valuation.Business valuation.

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Accountants must be attuned to detecting Accountants must be attuned to detecting fraud at every level of service, including standard fraud at every level of service, including standard accounting services, compilations, reviews, and accounting services, compilations, reviews, and bank reconciliations. If there is fraud and bank reconciliations. If there is fraud and you you don’t detect itdon’t detect it, , you are going to be sued,you are going to be sued, and and you will likely lose, as the public perception is the you will likely lose, as the public perception is the accountant is the watchdogaccountant is the watchdog..

Robert J. DiPasquale, Parsippany, N.J.Robert J. DiPasquale, Parsippany, N.J.

Source: H.W. Wolosky, “Forensic Accounting to the Forefront,” Source: H.W. Wolosky, “Forensic Accounting to the Forefront,” Practical AccountantPractical Accountant, February , February 2004, pp. 23-28.2004, pp. 23-28.

Find It, or I’ll SueFind It, or I’ll Sue

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Forensic Accounting Knowledge BaseForensic Accounting Knowledge Base

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Careers in Forensic AccountingCareers in Forensic Accounting

ParadeParade magazine on April 15, 2007, indicated magazine on April 15, 2007, indicated that the hottest jobs for college graduates that the hottest jobs for college graduates were forensic accountants.were forensic accountants.

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Income Expectations for Income Expectations for Forensic AccountantsForensic Accountants

Salaries start around $50,000.Salaries start around $50,000. Senior-level government employees can Senior-level government employees can

earn between $85,000 to $95,000.earn between $85,000 to $95,000. In the private sector, one can earn between In the private sector, one can earn between

$125,000 to $150,000.$125,000 to $150,000.

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Consulting FeesConsulting Fees

Forensic accountants work with attorneys, Forensic accountants work with attorneys, private investigators, law enforcement private investigators, law enforcement officers, corporate security specialists, the officers, corporate security specialists, the IRS, and the FBI.IRS, and the FBI.

In 1999, Kessler International stated that the In 1999, Kessler International stated that the firm charges about $300 per hour for firm charges about $300 per hour for forensic consultations.forensic consultations.

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Background in Forensic AccountingBackground in Forensic Accounting

AccountantsAccountants ConsultantsConsultants Internal auditorsInternal auditors IRS auditorsIRS auditors Government Government

auditorsauditors FBI agentsFBI agents

SEC accountantsSEC accountants Bankruptcy specialistsBankruptcy specialists ProfessorsProfessors Bank examinersBank examiners Chief financial officersChief financial officers Valuators of closely Valuators of closely

held businessesheld businesses

A forensic accounting background is helpful A forensic accounting background is helpful in these professional specialties:in these professional specialties:

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Specialties Within Forensic and Specialties Within Forensic and Investigative AccountingInvestigative Accounting

Employee Crime SpecialistEmployee Crime Specialist Asset Tracing SpecialistAsset Tracing Specialist Litigation Services Specialist and Litigation Services Specialist and

Expert WitnessExpert Witness

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Forensic Groups and CredentialsForensic Groups and Credentials

GroupGroup CredentialCredential

American College of American College of Forensic Examiners Forensic Examiners International (ACFEi)International (ACFEi)

Certified Forensic Certified Forensic Accountant (Cr.FA)Accountant (Cr.FA)

Association of Certified Association of Certified Fraud Examiners (ACFE)Fraud Examiners (ACFE)

Certified Fraud Examiner Certified Fraud Examiner (CFE)(CFE)

Association of Certified Association of Certified Fraud Specialists (ACFS)Fraud Specialists (ACFS)

Certified Fraud Specialist Certified Fraud Specialist (CFS)(CFS)

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Forensic Groups and CredentialsForensic Groups and Credentials

The CFFA group becomes:The CFFA group becomes:Master Analyst Financial Forensics(MAFF)Master Analyst Financial Forensics(MAFF)Change CFFA to MAFF (twice)Change CFFA to MAFF (twice)

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Forensic Groups and CredentialsForensic Groups and Credentials

GroupGroup CredentialCredential

Forensic Accounting Forensic Accounting Society of North America Society of North America (FASNA)(FASNA)

NoneNone

National Association of National Association of Certified Valuation Certified Valuation Analysts (NACVA)Analysts (NACVA)

Certified Valuation Analyst Certified Valuation Analyst (CVA)(CVA)

Certified Forensic Financial Certified Forensic Financial Analyst (CFFA)Analyst (CFFA)

Certified Fraud Deterrence Certified Fraud Deterrence (CFD) (merged with CFFA (CFD) (merged with CFFA in 2007)in 2007)

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Professional Groups and CredentialsProfessional Groups and Credentials

GroupGroup CredentialCredential

National Litigation Support National Litigation Support Services Association Services Association (NLSSA)(NLSSA)

NoneNone

Network of Independent Network of Independent Forensic Accountants (NIFA)Forensic Accountants (NIFA)

NoneNone

Institute of Business Institute of Business AppraisersAppraisers

Certified Business Certified Business Appraiser (CBA)Appraiser (CBA)

American Institute of CPAsAmerican Institute of CPAs Certified Financial Certified Financial Forensics (CFF)Forensics (CFF)

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Seven Important MAFF AreasSeven Important MAFF Areas

The NACVA’s Master Analyst Financial Forensics lists seven The NACVA’s Master Analyst Financial Forensics lists seven important areas:important areas:Financial Litigation SpecializationFinancial Litigation SpecializationForensic Accounting SpecializationForensic Accounting SpecializationBusiness and Intellectual Property Damages SpecializationBusiness and Intellectual Property Damages SpecializationMatrimonial Litigation Support SpecializationMatrimonial Litigation Support SpecializationBusiness Valuation in Litigation SpecializationBusiness Valuation in Litigation SpecializationBankruptcy/Insolvency SpecializationBankruptcy/Insolvency SpecializationFraud Risk Management SpecializationFraud Risk Management Specialization

A description of these areas can be found on their website A description of these areas can be found on their website http://www.nacva.com/cti/cffa/asphttp://www.nacva.com/cti/cffa/asp

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CPA Certificate ImportantCPA Certificate Important

AICPA research indicates that CPAs AICPA research indicates that CPAs represent 94 percent of forensic experts represent 94 percent of forensic experts hired over two years.hired over two years.

Source: Field of Forensic Service Remains Hot, A. E. Feldman Blog, Source: Field of Forensic Service Remains Hot, A. E. Feldman Blog, http://blog.aefeldman.com/2009/04/13/field-of-forensic -services-rem...http://blog.aefeldman.com/2009/04/13/field-of-forensic -services-rem...

Chapter 2 Forensic and Investigative Accounting 20

Fundamental Forensic Knowledge of a CFFFundamental Forensic Knowledge of a CFF

Professional responsibilities and practice management.Professional responsibilities and practice management. Laws, courts, and dispute resolution.Laws, courts, and dispute resolution. Planning and preparation.Planning and preparation. Information gathering and preservation (documents Information gathering and preservation (documents

interviews/interrogations, and electronic data).interviews/interrogations, and electronic data). Discovery.Discovery. Reporting, experts, and testimony.Reporting, experts, and testimony.

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Difficulties With FraudDifficulties With Fraud Joseph Wells saysJoseph Wells says

Regrettably, the actual cost of fraud is Regrettably, the actual cost of fraud is unknownunknown and and unknowableunknowable. It is a . It is a concept the criminologists call “the dark concept the criminologists call “the dark figure.” Unlike visible crimes such as figure.” Unlike visible crimes such as robbery, not all frauds are uncovered. Of robbery, not all frauds are uncovered. Of those uncovered, not all are reported. No those uncovered, not all are reported. No agency is tasked with compiling agency is tasked with compiling comprehensive data on fraud. comprehensive data on fraud.

Source: http://www.nysscpa.org/cpajournal/2006/906/infocus/p16.htmSource: http://www.nysscpa.org/cpajournal/2006/906/infocus/p16.htm

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PredicationPredication The ACFE group indicates that in the private The ACFE group indicates that in the private

sector, a fraud investigation should not be sector, a fraud investigation should not be conducted without proper conducted without proper predicationpredication..

Examples: Anonymous tips, complaints, audit Examples: Anonymous tips, complaints, audit inquires, conflict of interest.inquires, conflict of interest.

Thus, Thus, predicationpredication is the basis for undertaking a is the basis for undertaking a fraud investigation.fraud investigation.

Without predication, the target might be able to Without predication, the target might be able to sue for real or imaginary damages.sue for real or imaginary damages.

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Skills of a Forensic AccountantSkills of a Forensic Accountant

MeanMean

Analytical Skills Analytical Skills 6.51 6.51

Basic Accounting Skills Basic Accounting Skills 6.31 6.31

Problem Solving Skills Problem Solving Skills 6.30 6.30

Data Analysis Skills Data Analysis Skills 6.276.27

Interviewing Skills Interviewing Skills 6.25 6.25

Verbal Communication Skills Verbal Communication Skills 6.11 6.11

Basic Computer Skills Basic Computer Skills 6.05 6.05

Source: D.A. McMullen and M.H. Sanchez, “A Preliminary Investigation of the Necessary Skills, Education Requirements, and Training Requirements for Forensic Accountants,” Journal of Forensic and Investigative Accounting, Vol. 2, Issue 2, July-December, 2010, p.43.

Chapter 2 Forensic and Investigative Accounting 24

Characteristics of a Forensic AccountantCharacteristics of a Forensic Accountant

MeanMean

Persistence Persistence 6.12 6.12

Skepticism Skepticism 6.12 6.12

Puzzle Skills Puzzle Skills 6.08 6.08

People SkillsPeople Skills 6.04 6.04

Flexibility Flexibility 5.91 5.91

Works well in teams Works well in teams 5.84 5.84

Experience in Auditing Experience in Auditing 5.80 5.80

Source: D.A. McMullen and M.H. Sanchez, “A Preliminary Investigation of the Necessary Skills, Education Requirements, and Training Requirements for Forensic Accountants,” Journal of Forensic and Investigative Accounting, Vol. 2, Issue 2, July-December, 2010, p.43.

Chapter 2 Forensic and Investigative Accounting 25

Increasing Demand for Forensic AccountantsIncreasing Demand for Forensic Accountants

2012 AICPA survey: Noticeable increase in demand 2012 AICPA survey: Noticeable increase in demand for FA services.for FA services.

Forty-seven percent of respondents saw an increase in Forty-seven percent of respondents saw an increase in hours spent.hours spent.

2011 AICPA survey: one-half of participants had 2011 AICPA survey: one-half of participants had average increase in FA services of 20 percent.average increase in FA services of 20 percent.

2011 AICPA survey found 25 percent of participants 2011 AICPA survey found 25 percent of participants hired more FA professionals.hired more FA professionals.

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Society for Financial Examiners Society for Financial Examiners

Established in 1973, the Society for Financial Established in 1973, the Society for Financial Examiners is a professional organization for Examiners is a professional organization for examiners of insurance companies, banks examiners of insurance companies, banks savings and loans, and credit unions. SOFE savings and loans, and credit unions. SOFE offers three professional designations which offers three professional designations which are earned by completing extensive are earned by completing extensive requirements and a series of examinations. requirements and a series of examinations.

Source: www.sofe.org/aboutSource: www.sofe.org/about

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International Association of Asset International Association of Asset Recovery Recovery

The International Association of Asset The International Association of Asset Recovery (IAAR) has a new certification called Recovery (IAAR) has a new certification called the Certified Specialist in Asset Recovery the Certified Specialist in Asset Recovery (CSAR). The IAAR mission is to help (CSAR). The IAAR mission is to help practitioners to win back assets that rightful practitioners to win back assets that rightful belong to victims, government agencies, other belong to victims, government agencies, other organizations, or individuals who have been organizations, or individuals who have been victimized by criminal or wrongful conduct. victimized by criminal or wrongful conduct.

Source: www.iaaronline.orgSource: www.iaaronline.org

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Corporate Crime Reporter Corporate Crime Reporter

The Corporate Crime Reporter is a legal print The Corporate Crime Reporter is a legal print newsletter published and mailed 48 times a newsletter published and mailed 48 times a year (corporatecrimereporter.com). Some year (corporatecrimereporter.com). Some articles are posted on their website, but are articles are posted on their website, but are only highlights from the print newsletter. only highlights from the print newsletter.