forensic accounting & fraud case studies main line association for continuing education 6-18-15...

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

[email protected]

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FORENSICACCOUNTING PC

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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

[email protected]

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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.

http://books.google.com.hk/books/about/Forensic_Accountancy.html?id=Tfg8twAACAAJ&redir_esc=y

http://en.wikipedia.org/wiki/Accountancy

http://en.wikipedia.org/wiki/Litigation

http://books.google.com.hk/books/about/Forensic_Accountancy.html?id=Tfg8twAACAAJ&redir_esc=y

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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

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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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UNDERSTANDING THE FRAUD CYCLE

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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 BUSINESS

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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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Investigation

- Checks drawn to pay “payroll taxes”

Credit card companies

US Treasury

PA Dept. Revenue

Encoding

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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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FORENSICACCOUNTING LLC

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CHECK - MEMO LINE

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INSURANCE AGENCY

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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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REMITTANCE REPORT

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AUDIT TRAIL

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VOIDED/DELETED TRANSACTIONS

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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 COMPANY

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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 ASSOCIATION

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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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BANK STATEMENT

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ALTERED TRANSACTIONS

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ACTUAL BANK STATEMENT

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ACTUAL BANK STATEMENT

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- Interview

- Quantification

- Theft duration – 4 years

Motive

- Financial pressures

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Outcome

- Full restitution

- No prosecution

- Subsequent events

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Outcome

- Full restitution

- No prosecution

- Subsequent events

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COMMUNITY BANK

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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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- Credit card cash advances

- Theft – 4 years

- Credit history checks

Motive

- Financial pressures

- QVC

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Outcome

- FBI prosecution

- Federal prison sentence

- Full restitution

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MANUFACTURER

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MANUFACTURERBackground

- Blackmail scheme

- Outside trucking firm

- Inside transportation supervisor

Discovery

- Excel spreadsheets

- “The bookcase”

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MANUFACTURER (continued…)


- Trucking invoices

- Imbedded kickbacks

Motive

- Financial pressures ?

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- Trucking invoices

- Imbedded kickbacks

Motive

- Financial pressures ?

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Outcome

- $2.7 million

- Insurance claim

- Death

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FRAUD TRIANGLE

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TO BE CONTINUED

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CHECK PREPARATION

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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

[email protected]

www.naforensics.com

www.facebook.com/northamericanforensicaccountingllc