A Guide to Forensic Accounting Investigation

by Skalak, Steven L.; Golden, Thomas W.; Clayton, Mona M.; Pill, Jessica S.

• ISBN13: 9780470599075
• ISBN10: 0470599073
• eBook ISBN(s): 9781118017739
• Edition: 2nd
• Format: Hardcover
• Copyright: 2011-05-03
• Publisher: Wiley
• More Book Details

Summary

The auditing profession has evolved significantly from its earliest roots of protecting the pharaoh's riches. The catastrophic business failures have caused some to rethink the value of the audit. Due to lack of alternatives, the marketplace has demanded that auditors take responsibility for fraud detection and this demand has been buoyed by the Sarbanes-Oxley Act, the new PCAOB Risk Based Auditing and new Internal Controls standards, all requiring increased performance on the part of the auditor to find material financial statement fraud. The book explores exactly what assurance auditors should be expected to provide and suggests alternatives to providing the capital markets more of what they are requiring- greater assurances that the financial statements they rely upon for investment decisions are free of material error, including fraud. The book shows how audit firms need to retool to provide access to a new breed of auditor- the forensic specialist.

Author Biography

Thomas W. Golden, CPA, CFE (Chicago, IL). Partner, PricewaterhouseCooper LLP specializes in providing consulting and expert witness testimony in both civil and criminal matters with special expertise in forensic accounting, fraud investigation, and financial statement accounting. He is a former Chairman of the Board of Regents for the Association of Certified Fraud Examiners and the current President of the Better Government Association, a citizen watchdog group in Chicago, IL. Mr. Golden is an adjunct professor at DePaul University.

Steven L. Skalak, CPA, (Chicago, IL) is the National Practice Leader for PwC Investigations & Forensic Services of PricewaterhouseCoopers LLP. He has participated in a variety of corporate investigations relating to allegations that the Securities and Exchange Acts were violated, and of accounting or auditing improprieties. Steve has represented Audit Committees, Directors, Officers, Auditors, and Companies in class action litigation with shareholders and SEC investigations.

Mona M. Clayton, CPA, CFE, (Chicago, IL) Partner for Pwc specializes in international fraud investigations with particular emphasis in Latin America where she has conducted investigations.  She has designed investigative practice aids providing for consistent methodologies to be incorporated across common scheme investigations. Ms Clayton is an adjunct professor at DePaul University.

Table of Contents

Preface.

Acknowledgements.

Chapter 1 Fraud: An Introduction.

Fraud: What Is It?

Fraud: Prevalence, Impact, and Form.

Fraud in Historical Perspective.

Types of Fraud.

Root Causes of Fraud.

A Historical Account of the Auditor's Role.

Auditors Are Not Alone.

Deterrence, Auditing, and Investigation.

Conceptual Overview of the Fraud Deterrence Cycle.

First Look Inside the Fraud Deterrence Cycle.

Auditing and Investigation.

Chapter 2 Psychology of the Fraudster.

Calculating Criminals.

Situation-Dependent Criminals.

Power Brokers.

Fraudsters Do Not Intend to Harm.

Kinds of Rationalization.

Auditors' Need to Understand the Mind of the Fraudster.

Conclusion.

Chapter 3 The Roles of the Auditor and the Forensic Accounting Investigator.

The Patrolman and the Detective.

Complexity and Change.

Auditor Roles in Perspective.

Not All Good People.

Each Company Is Unique.

Role of Company Culture.

Estimates.

Choices.

What Auditors Do.

Bedrock of an Effective Audit.

SPADE.

Auditing Standards Take a Risk-Based Approach to Fraud.

Management Override.

Regulatory Reaction to Fraud.

Financial Benefits of Effective Fraud Management.

Conclusion.

Chapter 4 Auditor Responsibilities and the Law.

Appendix: Summary of PCAOB Matters Involving Detection of Fraud.

Chapter 5 When and Why to Call in Forensic Accounting Investigators.

Today's Auditors Are Not Forensic Accounting Investigators.

Auditors Are Not Authenticators.

Auditors Have Limited Exposure to Fraud.

Auditors Are Not Guarantors.

Historically, Audits May Have Been Predictable.

Potential Trigger Points of Fraud.

Reliance on Others.

Conclusion.

Chapter 6 Internal Audit: The Second Line of Defense.

What Do Internal Auditors Do?

Internal Audit Scope of Services.

The Handoff to Forensic Accounting Investigators and Legal Counsel.

Perception Problem.

Complex Corporate Fraud and the Internal Audit.

WorldCom and the Thornburgh Report.

Case Studies: The Internal Auditor Addresses Fraud.

Reporting Relationships: A Key to Empowering Fraud Detection.

Tomorrow's Internal Auditor, Tomorrow's Management and Board.

Chapter 7 Teaming with Forensic Accounting Investigators.

Forensic Accounting Investigators' Cooperation with Internal Auditors.

Forensic Accounting Investigators' Cooperation with External Auditors.

Objectives of All Interested Parties.

How Should the Investigation Objectives Be Defined?

Who Should Direct the Investigation and Why?

Ready When Needed.

Where to Find Skilled Forensic Accounting Investigators.

Chapter 8 Anonymous Communications.

Typical Characteristics of Anonymous Tips.

Federal Statutes Related to Anonymous Reporting and Whistle-Blower Protections.

Receipt of an Anonymous Communication.

Initial Understanding of Allegations.

Determine Whether Any Allegation Requires Immediate Remedial Action.

Development and Implementation of the Investigative Strategy.

Disclosure Decisions.

Prioritize the Allegations.

Interviewing Employees.

Follow-Up Tip.

Conclusion.

Chapter 9 Personal Privacy and Public Disclosure.

Introduction.

Data Privacy: Providing Context.

Data Privacy in the United States.

Data Privacy in the European Union.

Navigating the Legal Differences Between the U.S. and the EU.

Elsewhere around the Globe.

Public Disclosure.

Conclusion.

Chapter 10 Building a Case: Gathering and Documenting Evidence.

Critical Steps in Gathering Evidence.

Whose Evidence Is It?

Evidence Created by the Forensic Accounting Investigator.

What Evidence Should Be Gathered?

Important Considerations regarding Documents and Working Papers.

Conclusion.

Chapter 11 Independence, Objectivity, Skepticism.

Accountant's Independence.

SEC Final Rules for Strengthening Auditor Independence.

SEC Regulation of Forensic Accounting Services

Consulting versus Attest Services.

Integrity and Objectivity.

Professional Skepticism.

Trust but Verify: A Case Study.

Loose-Thread Theory of Auditing.

Further Thoughts on the Loose-Thread Theory.

Chapter 12 Potential Missteps: Considerations When Fraud Is Suspected.

Confronting Suspects.

Dismissing the Target.

Assumptions.

The Small Stuff Could Be Important.

Materiality: More on a Key Topic.

Addressing Allegations.

The Case of the Central American General Manager.

Exercising Skepticism.

Case Outcomes.

Chapter 13 Potential Red Flags and Fraud Detection Techniques.

Types of Fraud Revisited.

Fraud Detection: Overview.

Laying a Foundation for Detection.

Interpreting Potential Red Flags.

Importance of Professional Skepticism.

Revisiting the Fraud Triangle.

Identifying and Evaluating Risk Factors.

Information Gathering.

Analytic Procedures.

Analytic Techniques.

Assessing the Potential Impact of Fraud Risk Factors.

Evaluating Controls.

Unpredictable Audit Tests.

Observation and Inspection.

Financial Statement Fraud: Detection Techniques.

Revenue Recognition.

Corruption.

Summary.

Chapter 14 Investigative Techniques.

Timing.

Communication.

Early Administrative Matters.

Predication.

What Should You Know before You Start?

A Word about Insurance.

Exceptions and Other Considerations.

Considerations on International Assignments.

Accounting Issues.

Data Analysis.

Document Review.

Conclusion.

Chapter 15 Corporate Intelligence.

Definition of Corporate Intelligence.

Evolution of Corporate Intelligence.

Today's Business Need.

Legal and Regulatory Drivers of Corporate Intelligence.

Cost Drivers of Corporate Intelligence.

Negotiation Drivers of Corporate Intelligence.

Basic Deployment and Consumption of Corporate Intelligence.

Customary Data Fields Necessary to Fulfill Corporate Intelligence Remits.

Analysis and Reporting of Findings.

Coordination and Selection of Management and External Advisors for Intelligence-Gathering.

Timing of Deployment.

Limitations of and Inherent Barriers to Corporate Intelligence.

Legal Parameters and Operating Constraints vs. Enabling Legislation.

Ethical Debates Surrounding Corporate Intelligence.

Summary.

Chapter 16 The Art of the Interview.

Difficulty and Value of Obtaining an Admission.

Planning for the Interview.

Types of Interviews.

Others May Wish to Attend Interviews.

Interview Process.

Documenting the Interview.

Use of Subterfuge.

Summary.

Chapter 17 Data Mining: Analysis of Structured and Unstructured Information.

Definition and Benefits of Data Mining.

Structured vs. Unstructured Data.

Planning.

Methods of Data Acquisition.

Structured Data Analysis.

Unstructured Data.

Advanced Data Analysis Tools.

Conclusion.

Chapter 18 Report of Investigation.

Types of Reports.

Importance of Adequate Preparation.

Standards of Reporting.

Written Report of Expert Witness Opining for the Plaintiff on a Civil Fraud Claim.

Affidavits.

Informal Reports.

Giving a Deposition.

Mistakes to Avoid in Reporting.

Working Papers.

Relationship Review.

Substantive Working Papers.

Each Working Paper Should Stand on Its Own.

Testimony Binder.

Interview Memorandums.

Chapter 19 Supporting a Criminal Prosecution.

Key Considerations.

Referral Considerations.

Plea Agreements.

Filing a Civil Lawsuit.

Chapter 20 Working with Attorneys.

In the Company of Lawyers.

Confidentiality Requirements.

Forming the Investigative Team.

Documentation.

Civil Litigation.

Interviewing.

External Audit Firm.

Working for or Interacting with Law Enforcement or Government Agencies.

Disagreements with Counsel.

Conclusion.

Chapter 21 Financial Reporting Fraud and the Capital Markets.

Targets of Capital Market Fraud.

Securities Investment Model.

Some Observations on Financial Fraud.

Summary.

Chapter 22 Financial Statement Fraud: Revenue and Receivables.

Improper Revenue Recognition.

Revenue Recognition Detection Techniques.

Analytical Procedures to Identify or Explore Potential Revenue Red Flags.

Improper Allocation of Value in Multiple-Element Revenue Arrangements.

Improper Accounting for Construction Contracts.

Related-Party Transactions.

Revenue and Receivable Misappropriation.

Inflating the Value of Receivables.

Extended Procedures.

Round-Tripping.

Improperly Holding Open the Books.

Consignments and Demonstration Goods.

Summary.

Chapter 23 Financial Statement Fraud: Other Schemes and Misappropriations.

Asset Misstatements.

Understatement of Liabilities and Expenses.

Backdating Share Options.

Off-Balance-Sheet Transactions.

Two Basic Accounting Models.

Cookie Jar Reserves.

Improper and Inadequate Disclosures.

Materiality.

Disbursement Schemes.

Invoice Schemes.

Check Tampering.

Expense Reimbursement Schemes.

Payroll Schemes.

Fraud in an Economic Downturn.

Unauthorized Trading.

Mortgage Fraud.

Chapter 24 Ponzi Schemes.

Ponzi Scheme Origin and Development.

Recent Spotlights.

Insights into Ponzi Schemes - Passing Trend or Lasting Reality?

Accountant's Challenges.

Regulatory Bodies and Task Forces.

Bankruptcy Implications.

Summary.

Chapter 25 Money Laundering.

Relationship between Fraud and Money Laundering.

Counter-Terrorist Financing.

Varying Impact of Money Laundering on Companies.

The Five-Point Program for AML-Regulated Businesses.

AML and Forensic Accounting Investigation.

Legal Arrangements Lending Themselves to Anonymity.

Auditing and Money Laundering.

Relationship between Fraud Investigation and AML.

Chapter 26 Foreign Corrupt Practices Act.

Background.

Recent Enforcement Trends.

U.K. Bribery Act 2010.

The Role of the Forensic Accountant.

Red Flags.

Reporting.

Conclusion.

Chapter 27 Construction Projects.

The Nature of the Construction Industry.

Contract Pricing Strategy.

Standard Form Contracts.

Issues in Analysis.

Change Orders.

Financial Damages.

Under-Bid.

Inflation.

Analysis of Claims.

Summary.

Chapter 28 Contract Compliance.

Effective Integrated Internal and External Contract Compliance Program.

The Role of the Forensic Accountant.

Government Contracting.

Risk and Compliance.

Recovery.

Crisis Management/Litigation Support.

Chapter 29 Other Dimensions of Forensic Accounting.

Environmental Issues.

Intellectual Property.

Insurance and Business Interruption.

Marital Dissolution.

Shareholder Litigation.

Business Valuation.

Business Combinations.

Cybercrime.

Chapter 30 Corporate Remediation.

What is Remediation?

What is Driving Corporate Remediation?

Why is Remediation Necessary?

How to Remediate.

Role of the Forensic Accountant.

Recent Cases.

Remediation Going Forward.

Index.