View
225
Download
3
Category
Preview:
Citation preview
ACCOUNTING TECHNIQUES USED IN A FRAUD INVESTIGATION
Mary Anne Basilone, CPA, CFE, MMT, MA
Diane A. Matthews, PhD, CPA/CFF, CFE
Carlow University Master of Science in Fraud & Forensics Bachelor of Science in Forensic Accounting Bachelor of Science in Accounting
1
TOPICS COVERED
INVESTIGATIVE METHODOLOGY
METHODS OF PROOFDIRECT INDIRECT
DIGITAL ANALYSIS TECHNIQUES
2
METHODOLOGY OVERVIEW
STEPS IN CONDUCTING A
COMPREHENSIVE FRAUD INVESTIGATION
3
PROCESS MAP
4
Dorrell, D., Gadawski, G. (2012). Financial forensics body of knowledge. Hoboken, New Jersey: John Wiley & Sons.
5
INVESTIGATIVE METHODOLOGY THE PROCESS MAP
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Identify parties to the case Correlate the matters of law Confirm technical capabilities
AICPA/BVFLS Practice Aids Litigation Services Handbook,
4th & Cumulative Supplements NACVA Resources
Clear conflict - firm-wide database Insure matching of expectations between counsel
and facts and circumstances of matter Determine whether engaged as consultant or
expert Prepare and secure engagement letter & retainer Establish concrete timelines, e.g. discovery cutoff,
report submittal, etc. Establish counsel communications protocol, e.g.
whether/how subject to discovery
Identification of all parties Specification of key timelines Privilege determination Agreement on standards
“Entity / Party Chart” Signed engagement letter &
retainer Retainer
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
6
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Continually define/refine universes of data, primary and secondary
Litigation Services Handbook, 4th, (matter-specific references)
GenoPro Gold
Initiate data collection processes Prepare Document Request(s) as necessary TASKS
Genogram Entity(s)/party(s) chart Background investigation
Insure that all possible data sources are defined
Establish protocol to manage data requested and obtained
“Entity(s)/Party(s) Chart” Genogram Document Request Timeline Analysis
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
7
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Gain confidence of parties Obtain information from parties
Kolb’s “Experiential Learning” www.Reid.com ; w-z.com Edwin T. Hall works ACFE Fraud Examiner’s
Manual
For Depositions: Prepare Deposition Matrix Attend depositions with counsel and advise
For Interviews: Background investigation on identified parties Use interpersonal communication techniques to
analyze responses for further investigation Proxemic communication Kinetic communication Expectations-based analysis
Prepare interview matrix (next slide) Establish preliminary hypothesis using Scientific
Method
Veracity of parties “Hidden agendas” of parties Blind leads Additional/unrelated matters Communication inhibitors
Deposition Matrix Updated Genogram Updated “Entity/Party Chart” Interview Matrix Video/audio recordings Preliminary Hypothesis
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
8
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Obtain validating data Obtain refuting data
Internet research, e.g. Best Websites for Financial Professionals, Business Appraisers, and Accountants, 2nd
TimelineXpress software InData (Events Analysis)
Combine first-hand knowledge (e.g., Interviews and Depositions) with second-hand knowledge (e.g., Background Research data
See “Online Databases – Sources of Information” See “Government Sources of Information” Identify disparities for additional investigation TASKS
Establish search protocol Collect data for validation/corroboration
Veracity of parties Currency of information Admissibility of data
Search Log Updated Genogram “Events Analysis” Output notebook
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
9
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Define data collection plan Obtain data / information Surface evidence
IRS’ MSSP (Market Segment Specialization Program) for selected industries
IRS Indirect Methods-Intro IRS Indirect Methods-Example
Identify remaining data needed to substantiate/refute positions
Develop plan to obtain data using investigatory steps
Surveillance (Electronic / Physical) Confidential Informants Undercover
NOTE: All preceding activities are dependent upon evidence admissibility – counsel must advise
TASKS Records-based expectations Reasonableness testing
Non-existent data Interpersonal data not
verifiable
Data collection plan
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
10
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Obtain data / information Surface evidence
Investigator’s Little Black Book, 4th
“TimelineXpress” from inData Corporation
Criminal Investigations
NOTE: All activities in this Stage are dependent upon evidence admissibility – counsel must advise
Mobile v. fixed surveillance Lead, participant and covert informants Develop the assumed identity to gather data /
information Document all data / information gathered Develop “Lifestyle Analysis” (See document) Validate / correlate prior data obtained through
alternate techniques
Missing information Privacy laws Unreliable informant Inconclusive information Entrapment Engagement/personal risks
Video/audio recordings Root tracing results Digital photographs Validation /correlation of prior
data and deliverables
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
11
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Substantiate information by using scientific methods
Perform any additional indirect or direct analytical forensic techniques as needed
Validate / correlate prior data obtained through alternate techniques
Genogram/Entity / Party Chart Deposition Matrix/Interview Matrix Search Log/Background Investigation Lifestyles Analysis Net Worth Method
Indirect analytical techniques are inconclusive
Direct analytical techniques do not support the indictment
Documented results Validation /correlation of prior
data and deliverables
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Background investigation Online sources Government sources
Software: Genogram/ Timeline/IDEA software
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
12
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Obtain sufficient relevant data to provide credible evidence
Bragg, Steven M., Business Ratios and Formulas (Wiley)
Benford’s – www.nigrini.com IDEA software
Summarize and analyze the findings of all deliverables and observations
Identify any missing information or “gaps” DRAFT the Forensic Accountant’s Report TASKS
Common-sizing Horizontal analysis Vertical analysis Statement analysis (written)
Forensic Accountant’s Report does not support the indictment
Additional techniques do not substantiate missing gaps
“Gap” Analysis Indictment Matrix WPN (words/pictures/numbers)
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
13
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Prepare for trial Integrate parties & information Ensure the completeness of all
testimony and exhibits
Writing and Defending Your Expert Report (SEAK)
The Visual Display of Quantitative Information (Tufte)
Obtain counsel’s and opposition’s DRAFT Trial Brief
Identify the presentation sequence of evidence Identify portions of report used as exhibits Identify items used for expert testimony Develop tactical trial plan TASKS
Reperform Reverse Proof
Meeting tight/changing timelines
Presentation too complicated
Scripted Report
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
14
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Add credibility to the case by providing expert information
Cross-Examination: T/he Comprehensive Guide for Experts (SEAK)
Kolb, Experiential Learning
PRACTICE, PRACTICE, PRACTICE Deliver expert witness testimony Explain exhibits TEACH the trier(s) of facts
“Surprises” Extraordinary personal stress
Expert Witness Testimony Transcript
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
15
AssignmentDevelopment
References
Purpose of Stage Potential Issues
Deliverables
Tasks to be Performed
Obtain the results of the case Benefit from the experience
Learn from the experience Assess firm’s performance TASKS
Evaluate performance of each party Update CV Extract “show and tell” as feasible Follow-up with counsel; grading form
Continuous professional development
Verdict Judge’s Ruling “Lessons Learned” Updated CV
TrialPreparation
DataCollection
Interviews&
Interrogation
Scoping
BackgroundResearch
LaboratoryAnalysis
Undercover
ConfidentialInformants
Surveillance-Electronic,
Physical
Analysis ofTransactions
Testimony&
Exhibits
Post-Assignment
Your previous results
Forensic Accounting/Investigation Methodology (FA/IM)Forensic Accounting/Investigation Methodology (FA/IM)©©
INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL/REPORTSFOUNDATIONAL
16
METHODS OF PROOF (OF FRAUD)
FOR FINANCIAL INVESTIGATORS
DIRECT METHODSSPECIFIC ITEM METHODFINANCIAL RELATIONSHIPSFINANCIAL STATEMENT ANALYSIS
HORIZONTAL VERTICALTREND RATIO CASH FLOW
17
INDIRECT METHODSNET WORTH METHOD
(AKA ASSET METHOD)
EXPENDITURES METHOD
(AKA LIFESTYLES METHOD)
(AKA SOURCES AND APPLICATION OF FUNDS METHOD)
BANK DEPOSIT METHOD
18
METHODS OF PROOF (OF FRAUD)
FOR FINANCIAL INVESTIGATORS
Information for specific industries IRS’s Market Segment Specialization Program
(MSSP) Audit Techniques Guides (ATGs) Learn distinct , detailed practices in a particular industry Examination techniques Common & unique industry issues Business practices Terminology
Example of market segments: Construction or entertainment industry Professions: lawyers or real estate agents
19
METHODS OF PROOF (OF FRAUD)
FOR FINANCIAL INVESTIGATORS
Direct-Specific item method Most common method Relies on specific transactions Uncovers specific financial transactions which relate
to illegal activity, and to the suspect Review books, records, bank accounts… directly traces a
transaction
Direct (vs circumstantial) proof Easiest to present @ trial Most difficult for the suspect to refute Example: Ghost employee on the payroll
20
METHODS OF PROOF (OF FRAUD)
FOR FINANCIAL INVESTIGATORS
FINANCIAL STATEMENT ANALYSIS
NEED FOR FINANCIAL STATEMENT ANALYSISCOSOREPORT TO THE NATIONS
POWER OF FINANCIAL STATEMENT ANALYSIS
FINANCIAL RELATIONSHIPS
SALES VERSUS COST OF GOOD SOLD
SALES VERSUS ACCOUNTS RECEIVABLE
SALES VERSUS INVENTORY
ASSETS VERSUS LIABILITIES
FINANCIAL STATEMENT FRAUD
FICTITIOUS REVENUES
TIMING DIFFERENCES
CONCEALED LIABILITIES AND EXPENSES
IMPROPER DISCLOSURES
IMPROPER ASSET VALUATION
FINANCIAL STATEMENT ANALYSIS
PERCENTAGE ANALYSIS:HORTIZONAL
PERIOD TO PERIOD INDUSTRY STANDARDSCOMPETITORS
VERTICALCOMMON SIZE STATEMENTS
TREND ANALYSIS
FINANCIAL STATEMENT ANALYSIS CON’T
RATIO ANALYSISLIQUIDITYASSET MANAGEMENTDEBT MANAGEMENTPROFITABILITY
CASH FLOW ANALYSISOPERATING INVESTINGFINANCING
CIRCUMSTANTIAL PROOFADMISSIBLE IN COURT(1954 Supreme Court Holland v. U.S.)
WHEN TO USE? Inadequate books/records Suspected: books do not reflect all income Significant increase in net worth Gross profit % changes significantly Expenses exceed reported income without cause Suspected income from unidentified sources is large
26
INDIRECT METHODS OF PROOF
SOURCES OF INFORMATION County courthouse: deeds
of ownership, titles, liens, UCC filings
The target Informants/associates Real estate records Bankruptcy records State motor vehicle records Loan applications
Surveillance Credit card
applications/statements Tax returns Insurance records Child support/divorce records Employment: salary, W-2s Cancelled checks Deposit slips
27
INDIRECT METHODS OF PROOF
NET WORTH METHODUsed to prove illicit income
Person’s assets or expenditures exceed known sources of income
4 ways to dispose income:1. Save it
2. Buy assets
3. Pay off debt
4. Spend it
28
Used extensively in drug &
money laundering cases
INDIRECT METHODS OF PROOF (O
NET WORTH METHOD FORMULA Assets
-Liabilities
=Net worth
-Prior year’s net worth
=Increase in net worth
+Living expenses
=Income (or expenditures)
-Funds from known sources
=Funds from unknown sources
29
Assets valued @ cost
US BLS publishes
annual living expenses—
utilities, food, gas
INDIRECT METHODS OF PROOF (O
EXPENDITURES METHOD Sources & Application of Funds; Lifestyles Method
CLUES Lavish residence Expensive cars/boats Vacation home Private schools for children Exotic vacations
WHEN TO USE?...WHEN TARGET Operates mostly on a cash basis Little or no net worth but large expenditures Little or no change in assets or liabilities
30
INDIRECT METHODS OF PROOF (O
EXPENDITURES METHOD FORMULA
Total expenditures (i.e., Application of funds)
-Known sources of funds
=Funds from unknown sources
31
INDIRECT METHODS OF PROOF (O
BANK DEPOSIT METHODWHEN TO USE?
Assets & liabilities are fairly constant No indications of extravagant lifestyle Target’s known income is being deposited into financial
institutions
HOW? Analyze bank deposits, cancelled checks, currency
transactions
32
INDIRECT METHODS OF PROOF (O
BANK DEPOSIT METHOD FORMULA
Total deposits to all accounts
-Transfer and redeposits
=Net deposits to all accounts
+Cash expenditures
=Total receipts from all sources
-Funds from known sources
=Funds from unknown or illegal sources
33
INDIRECT METHODS OF PROOF (O
DIGITAL ANALYSIS TECHNIQUES
SOFTWARE PROGRAMS PERFORMDATA MINING
Extracting information from databases Comb DB for obscure patterns Sort data to detect potential fraud
same address for two employees
DATA ANALYTICS Statistical process used to analyze data Identify red flags, transaction trends, patterns,
anomalies
34
FUNCTIONS Sorting Record selection Joining files Multi-file processing Correlation analysis Date functions Graphing
Verifying multiples of a number
Compliance verification Duplicate searches Vertical ratio analysis Horizontal ratio analysis
35
DIGITAL ANALYSIS TECHNIQUES
FUNCTIONS
36
DIGITAL ANALYSIS TECHNIQUES
Data file inquiry Random unit sampling Calculate totals Calculate averages Specific criteria searches Unusual item inquiries Link analysis graphics
Identify gaps in sequence Identify duplicates Differentiate normal
patterns from suspect patterns
Benford’s Law analysis Stratification
EXAMPLES Identify invoices w/o PO Look for invoices from
vendors not “approved” Analyze claims paid by
insurance providers Look for high volume
purchases from one vendor
Match names, addresses, phone numbers, SS numbers between employee and vendor files
Identify dormant accounts with activity
Search for large, rounded transaction values
37
DIGITAL ANALYSIS TECHNIQUES
COMMERCIAL SOFTWARE Excel ACL IDEA ActiveData for Excel AutoAudit SNAP! Reporter DataWatch’s Monarch for
Windows Oversight Systems
Case Management Software—Analyst’s Notebook i2; LexisNexis CaseMap Organize, evaluate, explore
evidence
Timeline Software—TimelineXpress (inData Corp)
Genogram--GenoPro
38
DIGITAL ANALYSIS TECHNIQUES
ACCOUNTING TECHNIQUES USED IN A FRAUD INVESTIGATION
Mary Anne Basilone, CPA, CFE, MMT, MAChair, Accounting & Forensic Accounting Programsmabasilone@carlow.edu
Diane A. Matthews, PhD, CPA/CFF, CFEAssociate Dean, School of Managementdamatthews@carlow.edu
39
Recommended