- 1. INTRODUCTION TO FORENSICACCOUNTING & LITIGATION SUPPORT
Ronald H. Burkett, CPA, CVA1 [email protected]
Burkett & Burkett CPAs, PA 3101 Sunset Blvd. West Columbia, SC
29169 P.O. BOX 2044 West Columbia, SC 29171 803.794.3712
2. WHAT IS FORENSIC ACCOUNTING? According to the Association of
Certified FraudExaminers (ACFE), forensic accounting is the useof
professional skills in matters involving potentialor actual civil
or criminal litigation, including, but notlimited to, generally
acceptable accounting andaudit principles. Forensic Accounting
involves both investigativeaccounting and litigation support 2 3.
FORENSIC ACCOUNTING ENGAGEMENTS There are several categories of
possible forensicaccounting engagements: Economic Damages/Profit
Loss Reorganizations Securities Fraud Business Valuation Post
Acquisition Disputes (Earnouts) Family Law Marital Asset Addendum
Financial Declarations Fraud Criminal and Civil Cases3 4. WHAT
SKILLS ARE REQUIRED? Analytical Detail-Oriented Ethical Responsive
Insightful Inquisitive Persistent Skepticism EvaluativeSource:
AICPA Characteristics and Skills of the Forensic Accountant, 2009.
4 5. WHY IS THE NEED FOR FORENSICACCOUNTING SO PREVALENT? In a word
FRAUD 5 6. FRAUD In a perfect world, employees would not steal
fromtheir employers, so there would be no need forfraud
examinations. However, this is not a perfectworld and employees do
steal from their employersfor a variety of reasons most of which
revolvearound NEED or GREED. 6 7. 2010 REPORT TO THE
NATIONSOccupational fraud may be defined as:The use of
onesoccupation for personalenrichment through thedeliberate misuse
ormisapplication of theemploying organizationsresources or
assets.7Source: ACFE Report to the Nations on Occupation Fraud
& Abuse, 2010. 8. 2010 REPORT TO THE NATIONS Typical
organization loses 5% of its annualrevenues to occupational fraud.
Three primary categories of occupational fraud: Asset
misappropriations most frequent and leastcostly Corruption schemes
bribery, extortion, or conflict ofinterest Financial statement
fraud schemesSource: ACFE Report to the Nations on Occupation Fraud
& Abuse, 2010.8 9. 2010 REPORT TO THE NATIONS9Source: ACFE
Report to the Nations on Occupation Fraud & Abuse, 2010. 10.
2010 REPORT TO THE NATIONS10Source: ACFE Report to the Nations on
Occupation Fraud & Abuse, 2010. 11. WHAT IS FRAUD EXAMINATION?
Fraud means any act, expression, omission, orconcealment calculated
to deceive another to his orher disadvantage; specifically; a
misrepresentationor concealment with reference to some fact
materialto a transaction that is made with knowledge of itfalsity
or in reckless disregard of its truth or falsityand with the intent
to deceive another and that isreasonably relied on by the other who
is injuredthereby. We will explore the elements of fraud
(commonlyreferred to as the fraud triangle) and whatcompanies can
do to prevent and detect.11(Merriam-Webster Dictionary of Law) 12.
THE FRAUD TRIANGLE12Source: Occupational Fraud Abuse by Joseph T.
Wells, CPA, CFE (Obsidian Publishing Company, 1997) 13. KEEPING THE
FOX OUT OF THE HEN HOUSE! Thwarting Employee Theft: Hiring,
Managing and Insuring 13 14. FRAUD SCHEMES AND RED FLAGS Asset
Misappropriation / Cash Fraud Skimming = theft of assets never
recorded in theaccounting records, off-book Larceny = theft of
assets recorded in the accountingrecords 14 15. FRAUD SCHEMES AND
RED FLAGS Inventory, Equipment and Other Assets Fraud Inventory
misuse (borrowing) Inventory theft Unconcealed larceny Falsified
receiving reports Fraudulent shipments Fraudulent write-offs15 16.
FRAUD SCHEMES AND RED FLAGS Credit Card Fraud Federal statute 15
U.S.C. 1644 provides penalties forthe use of counterfeit,
fictitious, altered, forged, lost,stolen, or fraudulently obtained
credit cards. A violatormay be fined up to $10,000 and/or
imprisoned for up to10 years. SC State law Section 16-14-60
providespenalties up to $5,000 and/or up to five years in prisonfor
each of the following offenses: Unauthorized use of a lost or
stolen card Company credit cards Counterfeit cards 16 17. FRAUD
SCHEMES AND RED FLAGS Vendor Fraud Generally, Off-book fraud:
Bribery / Kickbacks Overbilling Bid-Rigging Illegal Gratuities 17
18. YOU DISCOVERED FRAUD NOWWHAT?18 19. LEGAL ELEMENTS OF FRAUD
Steps in the Investigation Investigation Confidentiality prevent
embarrassment or vulnerability tolawsuit if the case does not lead
to action Consult legal counsel, if appropriate (CFE must be
hiredthrough attorney to protect attorney/client privilege)
Documentation Chain of custody Confrontation / Interview Be careful
of false imprisonment19 20. RIGHTS AND DUTIES OF EMPLOYEES Employee
duty to cooperate Predication Each step of investigation based on
sufficient basis andreason; otherwise, employer may be liable for
civilactions defamation or invasion of privacy Invasion of privacy
Written policy lower expectation of privacy 20 21. PROSECUTING
EMPLOYEES Prosecution (criminal charges) is exclusively theright of
the government, regardless of the results ofthe companys internal
investigation. Civil charges may be brought by an individual or
thegovernment.Source: Conducting Internal Investigations US, ACFE,
5/5/0421 22. PROSECUTING EMPLOYEES Civil claim of common law fraudA
representation (usually of fact0 about a material point which is
false and intentionally and knowingly so (or, in some
circumstances, recklessly so) which is believed and acted upon by
the victim to the victims damage.Criminal offense may be complete
even if the victim does not suffer damage.Source: Conducting
Internal Investigations US, ACFE, 5/5/04 22 23. ROLE OF THE EXPERT
WITNESS To help triers of fact understand the impact ofdifferent
types of financial transactions or attach ameasurable value to
plaintiffs jury. To ensure this, the expert must remember that
thejury HAS TO believe his testimony To ensure that counsel
understands the subjectmatter to which you are testifying23 24.
UNDERSTANDING THE ENGAGEMENT What are the issues? In order to begin
to understand where you will fit into theattorneys strategy, it is
first necessary to understand theissues in the lawsuit. Who are the
parties? What you really want to know and what the attorneywants to
know is do you have any prior relationshipswith the parties that
create conflict of interest, either realor perceived, that would
preclude your offeringtestimony in this matter. Who is the client?
While you will be dealing primarily with the attorney, it is
24important to know who the actual client is. 25. UNDERSTANDING
CASE TIMELINE Case Filed - Pleadings, Counterclaims, Replies
Discovery Period For detriment period of time Can take depositions,
issue subpoenas Discovery Cut-off You cannot compel any additional
discovery Pretrial Meeting with Judge to decide issues and
determineprocedure Trial25 26. ENGAGEMENT MANAGEMENT Understanding
the Engagement Are you qualified as an expert in this matter? Set
reasonable expectations Do not practice law Engagement Letters Know
the case dates 26 27. KNOW YOUR ROLE AND RULES Know your role -
Will you testify? Know the rules - Every location is different Your
report should be in an acceptable format Otherwise it may be thrown
out despite your hard work27 28. TESTIFYING EXPERT Your job is to
have an opinion To express your opinion in clear, concise language
Your standard is reasonable degree of certainty orreasonable degree
of accounting certainty Is not an advocate for the client you must
havecredibility To be an advocate for your position To tell the
truth 28 29. TESTIMONY Depositions Trial Direct Examination Cross
Examination Re-direct Examination Re-cross Examination29 30.
DEFENDANT; REPUTATION SAVED HIM 1814, Newberry WhyCounty Criminal
Court Defendant had a James Gordon tried for reputation for
beingassault and batterysuch a big liar that the Confessed his
guilt on jury did not believe himthe stand Jury acquitted him30 31.
31MY COUSIN VINNY 32. 32MY COUSIN VINNY 33. CASE STUDIES: UPRIGHT
ELEVATOR 33 34. CASE STUDIES Upright Elevator Company: Facts:
Victim: Elevator repair company Perpetrator: Company bookkeeper
Scheme: Misappropriation of $5.3 million, throughmanipulation of
payroll Duration: 1996 through 200334 35. CASE STUDIES Upright
Elevator Company (contd)Where some stolen funds were spent: NYS
Lotto$ 1,561,561 Checks to Cash $ 1,210,865 Credit Cards $ 738,988
Ticket Broker$ 323,935 Psychic$48,000 Dentist$28,965 Beauty Salon
$12,677 Saks Fifth Ave.$ 7,305 Childrens Cancer Research $ 2035 36.
CASE STUDIES Upright Elevator Company (contd) Company Oversight No
applicant screening/reference checks No segregation of duties No
mandatory vacation policy Lack of appropriate oversight /
authorization / approval system36 37. CASE STUDIES Upright Elevator
Company (contd) Cycle of Fraud: Pressure Bookkeeper continued fraud
to satisfy gamblingaddiction Opportunity Due to lack of oversight
and poor internalcontrols, bookkeeper was able to prolong fraud
Rationalization Bookkeeper felt she was contributingsignificantly
to the firm and deserved more37 38. CASE STUDIES Reward
Electronics: Facts: Victim: Electronics company Perpetrator: CFO
Scheme: Misuse of American Express RewardsProgram Points Duration:
1999 through 2003 38 39. CASE STUDIES Reward Electronics: Facts:
Amex Points Accumulated: 3.2 million(approx. $40k per year) Where
points were used: Bloomingdales Saks Fifth Avenue Brooks Brothers
Smith & Wollenskys Toys R Us39 40. CASE STUDIES Good Business
Practice We saw it as good business practicea newcorporation viewed
as positive to have a credit ratingand establish a track record.
The points are minefrom AMEXs point of view theyare minea customer
reward loyalty program, not setup as a corporate kickback to send
points to anorganization but to the cardholder.November 3, 2003
CFO, Reward Electronics 40 41. CASE STUDIES Poor Judgment AMEX gave
it to me just the same as any othercorporate cardholderthese are my
points. In retrospect, I used poor judgment. When you areexercising
poor judgment you dont realize it until itspointed out to
you.November 3, 2003 CFO, Reward Electronics 41 42. CASE STUDIES
Reward Electronics (contd) Company Oversights: Lack of appropriate
oversight / authorization Poor / ineffective internal controls42
43. CASE STUDIES Reward Electronics (contd) Cycle of Fraud:
Pressure CFOs wife pressured him into a more luxuriouslifestyle
Opportunity Due to lack of oversight and poor internalcontrols, CFP
was able to continue fraud Rationalization CFP rationalized that
the Amex points werefor his personal use 43 44. SUMMARY An
organization will only be as effective as thesound internal
controls it has in place Know your employees through proper
screening Ensure that there is appropriate segregation ofduties
Ensure that there are proper levels of authorizationand approval 44
45. RONALD H. BURKETT, CPA, CVA Ronny Burkett is a Certified Public
Accountant, Certified Valuations Analyst and President of Burkett
Burkett & Burkett Certified Public Accountants, P.A. The firm
has 3 locations, 49 employees and 2 affiliate companies. Burkett
has over 30 years of experience in tax, finance, business
valuations, and litigation support services. Burkett is a graduate
of the University of South Carolina, Class of 1974, with a Bachelor
of Science Degree in Accounting. He is the immediate past Chairman
of Midlands Technical College Board of Commissioners and current
Commissioner. He has presented seminars across the United States on
topics such as income taxes, financial statements, business
valuations and litigation support. He also coauthored two books on
Business Valuations and Litigation Support45 that were used in the
early 90s as CPE for CPAs around the country. 46. THANK YOU Ronald
H. Burkett, CPA, [email protected] Burkett &
Burkett CPAs, PA 3101 Sunset Blvd. West Columbia, SC 29169 P.O. BOX
2044 West Columbia, SC 29171 803.794.3712
