CFF Flashcards
What is the primary role of a forensic accountant acting as an expert witness?
To assist the trier of fact. The legal system allows the use of experts as a way of assisting the trier of fact (a judge or jury) rather than as advocates for a particular party. As expert witnesses, forensic accountants are not to be advocates for the defendant or plaintiff, but rather advocates for their opinion.
3 services forensic accountants acting as consultants can provide…
- Advice on a fraud risk mitigation.
- Valuation of an estate.
- Financial impact of mergers and acquisitions.
Forensic accountants do not provide opinions on the fair presentation of financial statements. The objective of audit engagements usually is to express an audit opinion on whether financial statements, taken as a whole, are fairly presented. In contrast, forensic accounting consulting engagements tend to focus on one or more particular areas of a dispute of investigation.
3 areas outside of accounting that are important for forensic accountants to have knowledge of…
- Information Technology. For example, analyzing the audit trail of a financial reporting system.
- Psychology. For example, forensic accountants may interview individuals involved in or related to an investigation.
- Criminology. For example, consideration of the Fraud Triangle (rationalization, financial pressure, and opportunity) in connection with a fraud investigation.
What is the Forensic and Valuation Services Executive Committee?
The AICPA body that has rule-making authority in the area of forensic and valuation services.
Which section of the AICPA Code of Professional Conduct does not apply to forensic accountants?
The “Other Members” section. This section applies to unemployed or retired CPAs. Since all CFF’s have to be CPA’s, this does not apply.
What are 3 courses of action a member of the AICPA should consider when responding to an ethical conflict?
- Consulting with the appropriate persons within the firm or the organization that employs the member.
- Requesting the advice of other individuals in the field.
- Obtaining advice from appropriate professional bodies or legal counsel.
What are 3 valuation approached identified in VS section 100?
- Income approach.
- Market approach.
- Cost approach.
Do AICPA members need to comply with non-authoritative guidance issued by the AICPA?
No. Members are not required to comply with non-authoritative. They may deviate from non-authoritative guidance if the member can justify departures, particularly if the facts and circumstances of the member’s engagement are nearly similar to those of which the guidance applies.
List 3 major titles in the Federal Rules of Civil Procedure (FRCP).
- Trials.
- Pleadings & Orders.
- Evidence.
What is the “First Appearance”?
The initial appearance of the defendant before a judicial office is referred to as the first appearance.
What is a “Pleading”?
The initial stage of a civil lawsuit involves the filings of pleadings by the respective parties. The purpose of pleadings is to give notice to the parties and the court of the assertions of each side and to assist in the determination of the issues.
What is a “Preliminary Hearing”?
A preliminary hearing usually occurs after the initial appearance, bail hearing, or Gerstein decision; a preliminary hearing is not constitutionally required. A preliminary hearing takes place before a judicial officer.
What is an “Arraignment”?
The arraignment occurs after the indictment has been filed. The defendant is brought before the trial court and asked to enter a plea.
For an indictment, how many jurors must vote to indict?
A simple majority. A simple majority is sufficient to issue an indictment.
In civil actions, what is an “Injunction”?
An injunction is a judicial order that restrains a person from beginning or continuing an action threatening or invading the legal right of another, or that compels a person to carry out a certain act, e.g., to make restitution to an injured party.
In civil actions, what are “Orders for Specific Performance”?
Orders for specific performance is the performance of a contractual duty, where damages may not be adequate remedy.
In civil actions, what are “Money Damages”?
Money damages are those damages paid to a person as compensation for a loss or injury.
In civil actions, what is an “Attachment”?
An attachment is a court order permitting a court officer, such as a sheriff, to seize a debtor’s property?
What is the most important criteria evidence must satisfy before any considerations affecting admissibility?
Relevance.
What are 3 criteria that FRE rule 702 require of expert testimony?
- It must help the trier of fact to understand the evidence or determine a fact at issue.
- It must be based on sufficient facts or data.
- It must be the product of reliable principles and methods.
Who might undisputed discovery requests be directed to in federal courts?
Both parties and non-parties to the lawsuit. Discovery tools, such as deposition, may be directed to either a party to the lawsuit or a non-party, by subpoena.
Name 3 of th3 4 major types of discovery tools.
- Requests for admission.
- Interrogatories.
- Depositions.
Why are excessive discovery tactics an issue in the court system?
Lawyers can bill for more hours worked if discovery is more extensive. Additionally, lawyers can include the most relevant documents in a larger group of discovery in order to force opposing counsel to expend more effort to identify the most relevant documents.
Name 3 advantages of alternative dispute resolution (ADR) over traditional litigation.
- Cost effective. ADR typically costs less than court litigation.
- Private. ADR, in most cases, does not create any public record.
- Tends to build rather than destroy relationships. ADR can bring opposing parties together and resolve disputes out of the public eye in a way that the opposing parties feel is fair and reasonable.
What is the role of a non-testifying expert whose work is typically not subject to discovery?
Non-testifying experts provide a wide range of advice, opinion, analyses, and so on for their clients. They are typically not subject to discovery when retained by the attorney.
What does “conflicting out an expert” mean?
Conflicting out an expert involves familiarizing an expert with one’s case with no intention of ever retaining the expert, thereby forcing the expert to decline an engagement with the opposing party due to a conflict of interest.
Who does the board of directors typically delegate the fraud risk management responsibilities to?
The audit committee.
What is the correct sequence of events needed for the evidence collection process to proceed?
Review documents and other relevant information, then conduct interviews. Reviewing documents and obtaining relevant information provides a basis for asking the right questions in interviews, and also for identifying suspects.
What is the purpose of informational interview questions?
Information questions are designed to gain information relevant to the investigation.
What is the purpose of assessment interview questions?
Assessment questions are designed to determine if the subject shows signs of deception and to assess the interviewee’s honesty.
What is the purpose of admission-seeking interview questions?
Admission-seeking questions are asked of subjects that show signs of deception.
What is the purpose of introductory interview questions?
Introductory questions are asked at the very beginning of the interview and seek to establish rapport, gain general background information, and establish a baseline for how the subject honestly responds.
When are subjects who show deception asked concluding or closing questions?
After admission-seeking questions. Answers to admission-seeking questions may or may not include a confession. Either way, some concluding questions are appropriate, although some interviewers might skip the concluding questions when there is a signed confession.
Name 3 important considerations when gathering documentary evidence.
- Maintaining the chain of custody. The chain of custody communicates the characteristics of evidence transference and the integrity of the justice system and interjects accountability among its processes and procedures involving evidence, Accountability exists through the specifying of individuals between whom evidence is transferred and passed.
- Working with copies, not originals. Working with copies of documents preserves the original document for evidentiary purposes.
- Marking documents with identification numbers. Assigning document identification numbers assists with recalling documents and keeps documents organized.
Fraud schemes relating to vendors and purchasing…
Procurement fraud.
Fraud schemes relating to accounts receivable and cash collections…
Lapping schemes.
What are sales skimming schemes?
Sales skimming schemes involve misappropriation of incoming cash. Such schemes can be classified according to the point in the cash collection process when the cash is stolen. This point can be at any time from the point of sale until the cash is properly deposited in the bank.
Describe money laundering…
Money laundering is a process of transforming ill-gotten funds to what appears to be legitimate money or other assets.
What is check washing?
When checks are washed, the payee’s name is replaced with a name from a stolen identity. The check is then cashed or negotiated using the stolen identity. Check washing is associated with identity theft.
Describe payroll fraud…
Payroll fraud includes improper hiring, improper charges to employee personnel files, and improper reporting of employee activities.
Name 3 “job positions” in an identity theft scheme…
- Procurer. The procurer may purchase the information from “specialists” on the internet or obtain it directly from hacking and phishing schemes, street sources, or leakers from inside an organization.
- Shopper. The shopper is the one who actually goes out and does things like pass stolen checks and use fake or stolen credit cards.
- Document forger. A document forger will use information from the procurer to create forged documents.
Describe Chapter 13 bankruptcy…
Chapter 13 applies to individuals with means-tested income large enough to disqualify them from filing under Chapter 7. The court may discharge some of the debt and create a payment plan for the rest.
Describe Chapter 11 bankruptcy…
Chapter 11 involves the creation of a payment plan and does not involve total liquidation of the business or assets. If a debtor passes the means test, they cannot file a Chapter 11.
Describe Chapter 7 bankruptcy…
Chapter 7 applies to both individuals and businesses. Subject to certain exceptions, it provides for complete liquidation of all the debtor’s assets and the complete elimination of debtor’s obligations. Individual debtors who possess sufficient means as determined by a means test must file under Chapter 13 instead of Chapter 7.
Who does Chapter 12 bankruptcy apply to?
Chapter 12 applies to farming and fishing businesses.
Describe a fictitious bidder scheme…
A fictitious bidder scheme relates to the creation of a fictitious company in order to embezzle funds.
What does Chapter 9 bankruptcy relate to?
Chapter 9 relates to the reorganization of a municipality.
What does Chapter 15 bankruptcy relate to?
Chapter 15 relates to cross-border insolvency.
What are fraudulent conveyances?
A fraudulent conveyance occurs in bankruptcy when a debtor attempts to avoid a debt by transferring money to another person or company.
What are petition mills?
A petition mill is a fraud in which the perpetrator (typically a purported financial adviser) files hastily prepared bankruptcy documents in the name of victims who come to the perpetrator as clients.
What are Bust-outs?
Bust-outs are fraud schemes where an individual applies for a credit card, establishes a normal usage patter and repayment history, then makes substantial purchases. Subsequent to making the purchases, the perpetrator files for bankruptcy.
What is data carving?
Data carving is putting together pieces of deleted files.
What is a file viewer?
The file viewer allows previewing of files and email messages in a wide variety of formats.
What is a registry viewer?
The registry viewer assists the examiner in acquiring information from the Windows registry that is relevant to the investigation.
What is the principal concern of FINCEN?
Anti-money laundering.
What are 3 audit tasks a Computer Assisted Audit Tool (CAAT) will aid in?
1.Extracting data from accounting or ERP systems.
2. Running sophisticated queries against a data set.
3. Testing program logic and controls.
What are 3 items a practitioner needs to consider before accepting a matrimonial forensics engagement?
- That they can be objective.
- That they are competent in the area of matrimonial forensics.
- That they are good communicators.
Does a practitioner need to have experience performing matrimonial forensics engagements before accepting one?
Practitioners do not need to have previously performed a matrimonial forensic engagement as long as they believe they can accomplish the engagement competently and objectively, and clearly present their results.
In a divorce case, which takes precedence, federal or state law?
State law usually takes precedence over federal law.
What is earnings management and is it illegal?
Earnings management can encompass the deferral of sales by legitimate means (for example, deciding not to ship merchandise when sales are recorded to shipping terms), and is not illegal. The type of earnings management that is forbidden by GAAP is that which results in an intentional misstatement of financial position and results of operations. A certain amount of earnings management is expected by the market and most likely is incorporated into the market price of stock. Not everyone agrees that earnings management, even the legal type, is ethical.
What are accrued liabilities?
An accrued liability represents an expense that a business has incurred but has not yet paid.
What are cookie jar reserves?
Contingent liabilities that management can use to artificially increase income of subsequent periods are sometimes called cookie jar reserves.
What are accrued revenues?
Accrued revenue represents revenue that has been earned, but payment has yet to be received by the company.
What are deferred revenues?
Deferred revenues are a generally accepted account used to typically record payments received for amounts where revenue are not yet earned.
Explain why this scenario is a red flag: A company’s board of directors is composed mainly of inside directors.
Boards of directors composed mainly of inside directors is indicative of an increased risk of fraud because inside directors are believed to be less independent (and perhaps less objective) than are outside directors and thus have more to gain by engaging in inappropriate behavior.
Explain why this scenario is a red flag: Management has created voluntary and overly optimistic forecasted financial results.
Voluntary management forecasts that contain overly optimistic financial results are a red flag because management may feel pressure to meet those published forecasts and do so by engaging in inappropriate behavior.
Explain why this scenario is a red flag: A company’s financial condition has improved but the industry is not experiencing similar improvements.
An improved financial condition of a company is a red flag if its industry is not experiencing similar improvements, because the reason fore the improved financial condition could be an inappropriate form of earnings management.
Explain why this scenario is a red flag: There has been an abnormal decline in customer demand of products and services provided by a company.
An abnormal decline in customer demand of products or services provided by a company is a red flag because management may feel pressure to engage in financial statement misrepresentation to meet earnings targets so that the market price of stock does not decline and bonuses are received.
What is a bill-and-hold scheme?
A bill and hold is a form of sales arrangement in which a seller of goods bills a customer for products but does not ship the product until a later date. This results in improper revenue recognition.
What is channel stuffing?
Channel stuffing is a business practice in which a company, or a sales force within a company, inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling.
What are lapping schemes?
A lapping scheme is a fraudulent practice that involves altering accounts receivables to hide the fact that a receivables payment has been stolen.
What is an improper cutoff of sales scheme?
Recording revenues for sales received around year-end in the wrong period in order to manipulate revenues is a form of improper cutoff of sales.
What is the mitigation requirement relating to personal physical injuries?
If a person who was injured later becomes able to work, that person has a duty to go back to work to earn wages to stop or reduce personal economic losses.
Are damages related to personal physical injuries taxable?
According to U.S. federal tax law, damages related to personal physical injuries are not taxable.
Are a party’s lost wage damages measured from after-tax wages or gross wages?
Because an injured party will not be taxed on damages related to personal physical injuries, the party’s lost wage damages should be measured from after-tax wages rather than higher gross wages to make them whole; paying an injured party damages based on gross wages will make it more than whole because it does not pay taxes on these damages.
The 1933 U.S. Supreme Court opinion that viewed circumstances using the “book of wisdom” means what?
Use all information up to the present time. The “book of wisdom” in the Supreme Court opinion refers to using all information known through the present time (that is, hindsight is needed to obtain justice).
What are the 3 general valuation models?
- Absolute value models.
- Relative value models.
- Option pricing models.
What are the 3 standard valuation approaches?
- Income approach.
- Market approach.
- Asset approach.
What is the standard of value for taxation?
Fair market value.
What is the standard of value for GAAP?
Fair value.
What is the standard of value for minority shareholder litigation?
Fair value.
What is the standard of value for strategic acquisitions?
Investment value. Strategic buyers are generally in the same industry as the target firm and are interested in buying the firm for strategic reasons rather than investment return; investment value is generally the type of value in strategic acquisitions - the value to a particular buyer.
What is fair value?
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
What is intrinsic value?
Intrinsic value is the perceived or calculated value of a company, including the tangible and intangible factors.
What is investment value?
Investment value is the value of a property to a particular investor.
What is fair market value?
Fair market value is the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market.
What needs to be disclosed in a written valuation?
- Any assumptions made.
- Any limiting conditions.
- Any hypothetical conditions.
Compensation received does not need to be disclosed in a written valuation report.
What is the primary use of a forensic accountant an an expert witness?
To assist the trier of fact.
What is the first thing a forensic accountant should do when contacted by an attorney or a client about a forensic accounting engagement?
Perform a conflict of interest check.
What is the AICPA body designated by the AICPA Council as having rule-making authority in the area of forensic and valuation services?
Forensic and Valuation Services Executive Committee.
What types of services does SSCS No. 1 apply to?
Both forensic accounting services and valuation services.
The requirements for professional competence, due professional care, adequate planning and supervision, and obtaining sufficient relevant data stem from where?
The AICPA Code of Professional Conduct.
What is a criminal defendant’s initial appearance in court called?
Arraignment.
What are the 3 types of evidence?
- Physical.
- Demonstrative.
- Testimonial.
What is the most important article in the Federal Rules of Evidence (FRE)?
Relevance and its limits.
Being able to show that evidence is in substantially the same condition as it was when it was obtained or seized is knows as…
Authentication
What are 3 methods of alternative dispute resolution?
- Arbitration.
- Mediation.
- Settlement Conference.
Which section of a forensic accountant’s engagement letter should mention arbitration?
Dispute resolution.
Which type of question seeks to assess the interviewee’s honesty?
Assessment.
Which type of question is used to calibrate the subject’s response?
Introductory.
How are occupational frauds most frequently detected?
By tips.
What is the first line of defense in minimizing fraud risk?
An effective fraud detection system.
What are the 3 components of Dr. Cressey’s fraud triangle theory?
- Opportunity.
- Rationalization.
- Pressure.
Name 3 forms of vendor fraud…
- Short shipments.
- Supplying substandard goods.
- Fraudulent cost-plus billing.
How many estimates cases of identity theft are there in the United States each year?
Over 15 million.
What are 3 steps in the money laundering process?
- Placement.
- Layering.
- Integration.
Which type of bankruptcy is most likely to involve government officials?
Chapter 9.
Which chapter of the bankruptcy code allows an individual or business to reorganize?
Chapter 11.
Creating a forensic image of a computer’s hard drive’s content while it is turned on and operational is often referred to as a…
Ghost Acquisition.
The constitutional amendment that protects the people against unreasonable searches and seizures by the government is…
The Fourth Amendment.
Finding a location from where an email message was sent is referred to as…
IP Tracking.
The part of the web not indexed by typical search engines is often referred to as…
The dark web.
How many community property states exist in which all assets acquired during the marriage are considered marital assets?
9.
Where are you most likely to find clues to assets not listed in the list of assets?
Loan applications or personal financial statements.
In order to prove damages in court, they must be proven with…
Reasonable certainty.
Which general valuation model mathematically calculated the present value of an asset’s expected future cash flows?
Absolute value.
Which valuation approach relies on the value of an asset by an unrelated purchaser?
Market appraoch.
What is the first step in the business valuation process?
Determining independence.
What are the 2 broad categories of forensic accounting services?
- Litigation services (testifying expert, fact witness, non-testifying consultant).
- Investigative services (consultant in cases that do not involve actual or threatened litigation, fact witness).
What is required for guidance to be considered authoritative?
Guidance is authoritative if issued only after following a process that includes deliberation in meetings open to the public, public exposure of proposed statements, and a formal vote by the appropriate body designated by the AICPA to issue such guidance.
Name the 4 main sections on the AICPA Code of Professional Conduct…
- Preface
- Members in Public Practice
- Members in Business
- Other Members
What are the 3 main steps to applying the conceptual framework approach?
- Identify threats.
- Evaluate the significance of a threat.
- Identify and apply safeguards.
Name / describe the threats a forensic accountant may encounter…
- Adverse interest threat - A client threatens to sue the forensic accountant. Now there is an adverse situation between the client and the forensic accountant.
- Advocacy threat - Objectivity and independence is compromised.
- Familiarity threat - A close friend may ask us to perform work.
- Management participation threat - We don’t want to step in and take on the role of management.
- Self-interest threat - If work is performed under a contingent fee where some other benefit it available.
- Self-review threat - The forensic accountant may rely on the firm’s own work product in terms of determining an opinion or reaching a conclusion.
- Undue interest threat - A threat to dismiss if the forensic accountant does not reach a certain conclusion.
The 2 types of jurisdiction that exist…
- In personam - Does the court have the authority to hear a case based on location?
- In rem - The court has jurisdiction because of a particular subject matter.
If someone wants to bring a case before the U.S. Supreme Court, what needs to be done?
They need to file a writ of cert.
How many supreme court judges need to approve a writ of cert for the court to hear the case?
4.
What is a motion for judgment of pleadings?
The court is being asked to make a judgment simply based on the pleadings.
What is a motion for summary judgment?
Asks the court to dismiss the case based on everything that’s been argue up to that point of time.
What is an injunction?
A judicial order that restrains a person from beginning or continuing an action, or compels a person to carry out a certain act.
Name 3 tort remedies…
- Compensatory damages - Lost wages, lost earnings, due to a bad act.
- Nominal damages.
- Punitive damages - An amount that’s added on over and above compensatory damages, designed to punish the wrong-doer.
Types of Federal Courts…
- Federal District Courts.
- Federal Appeals Courts.
- United States Supreme Court.
- Tax Court - Has jurisdiction over disputed tax deficiencies before they are paid.
- Court of Federal Claims - Has exclusive jurisdiction over claims for money damages against the United States, including disputed federal contracts.
What are the 2 categories of evidence?
- Direct - Evidence that can be believed without inference. (Video of Toyota rear ending Chevy).
- Circumstantial - Depends on credibility and inferences of witnesses. (Photo of Toyota having damage to front and Chevy having damage to back).
What are the 3 types of evidence?
- Testimonial - Testimony by a witness who makes assertions; facts. (The drivers of the Toyota and Chevy’s memories of what happened).
- Real of Physical - Real of tangible items that are considered indisputable. (The damage that was done to the Chevy is real and indisputable).
- Demonstrative - Evidence that illustrates a matter of significance.
What criteria must be met for evidence to be admissible?
- It must be relevant.
- It must have a proper foundation.
- It must be in the proper form.
- No exceptions can apply.
Regarding the discovery process, what are interrogatories?
A set of written questions directed to the other party to the lawsuit. May relate to any matter that may be required into under the score of the discovery. Only the parties to who they are directed may answer. Sent out during the pre-trial process and limited to a maximum of 25 questions to each party. Must be answered under oath under a wet time limit.
What are the 2 types of interrogatories?
- Identification Interrogatories - These seek facts such as names, addresses of potential witnesses, and summaries of data.
- Contention Interrogatories - These seek to explore what a party is contending and the basis for those contentions. Often much more controversial and subject to much more abuse.
Regarding the discovery process, what are depositions?
The examination of a witness or a party under oath in the presence of a court reporter. Unlike interrogatories, anyone who has knowledge or expertise relevant to the case may be deposed, they don’t have to be a party to the lawsuit. If a party is deposed who is not a party to the lawsuit, they have to be subpoenaed.
Regarding the discovery process, what is document inspection or protection?
A request made to parties of the lawsuit and addresses having copies of evidence in the form of paper documents. Asking for all types of electronically stored evidence turned over (emails, working papers, etc.).
Regarding the discovery process, what is a medical exam?
Can only be served on a party to the litigation. The reason triggering the request for a medical exam must be raised directly by the pleadings or a factual contention through discovery.
Regarding the discovery process, what is a request for admission?
Used at the end of the discovery process to screen out matters and pleadings that have been clarified by discovery. There are no limits on the number of requests for admission.
Is an expert consultant’s work subject to discovery?
No. It is covered by the attorney-client privilege and it not subject to be produced to the other side.
Is an expert witness’ work subject to discovery?
Yes. Often times an attorney will engage a forensic accountant as a consultant just to get some advice, knowing that the advice won’t be turned over to the other side. An expert witness’ advice might be subject to discovery.
Does an expert consultant testify in court?
No.
Does an expert witness testify in court?
Yes. As a witness you could be asked questions about the work you perform. You could be asked questions above the advice that you give.
What does FRE 702 specifically address?
Testimony by Expert Witnesses.
What is a motion in Limine?
A written motion that requests the court to enter an order regarding the admissibility of particular evidence at trial, including expert testimony. This would include expert testimony.
What does FRE 703 address?
The basis of the expert opinion.
What does FRE 704 address?
Whether the opinion ultimately addresses the issue at hand.
What does FRE 705 address?
Disclosing the facts or data underlying the expert opinion. The info that the expert relies on in formulating their opinion.
What does FRE 706 address?
The concept of court-appointed expert witnesses.
What are the elements needed to prove professional negligence?
- There was a duty to exercise professional care.
- The duty above was breached.
- A causal relationship between the breach of duty and the resulting injury needs to be demonstrated.
- There must be an actual loss or damages.
What are 2 options to manage the risk of professional negligence lawsuits?
- To have professional liability insurance. If a claim does arise, to have a insurer behind you who can help defend and fund, and if there is an issue ultimately settle the claim.
- Obtain indemnity from the retaining client or attorney.
Why is ADR beneficial?
- ADR saves money. The litigation process is very expensive.
- There is stress, litigation, and anxiety that litigation can produce, that may be avoided under an ADR process.
- Can help to protect privacy. Litigation can be a public affair (pleadings), available for public to view. Public can literally show up in court and watch the proceedings. Media as well. These types of things are not made public in an ADR setting.
- ADR can build relationships. Litigation can make enemies.
- ADR is usually quicker than court litigation.
What is the objective of a fraud risk assessment?
To make residual risks significantly smaller than inherent risks.
What is inherent risk?
The risk that naturally occurs to an organization before the consideration of any mitigation actions / controls.
What is residual risk?
The portion risk that still remains after action has been taken to reduce inherent risks.
4 things that need to be considered when identifying risks…
- The nature of the business - On a practical level, business that operate in a mainly cash environment experience a higher susceptibility to certain fraud risks.
- The environment and jurisdictions that the business operated in - In certain countries around the world, paying bribes is a known cost of doing business, if an entity has operations in these countries, the risks of bribery and corruption become elevated.
- The business culture and staff - The ethics and the values of the organization and its employees.
- The known effectiveness of existing internal controls - It’s important to remember that no system of internal controls can fully eliminate the risk of fraud, but well designed and effective controls can deter it.
What are preventative controls?
Manual or automated processes that prevent something bad from happening before it occurs. An example would be a user ID to access the payroll register. The used ID limits access to only those people who need to have access.
What are detective controls
Manual or automated processes that are designed to detect something bad that has already occurred. An example is a report on all vendors who had payment info changed within the last month. This could detect if any unauthorized changes had taken place.
4 steps in the fraud risk assessment process…
- Identify risk
- Address the likelihood of each risk
- Respond to likely risks
- Document & discuss findings.
What are the 3 broad types of fraud?
- Occupational fraud- When an employee defrauds their employer.
- External fraud - Frauds committed against an organization by outsiders (vendors, hackers, suppliers).
- Individual fraud - Individuals are the victims.
What is occupational fraud?
The use of one’s employment to misappropriate cash or other assets. Also known as internal fraud or internal fraud.
What are the 3 main types of occupational fraud?
- Corruption.
- Asset misappropriation.
- Fraudulent Financial Statements.
Name 3 types of employee corruption schemes…
- Bribery
- Bid rigging
- Kickbacks
What is skimming?
The theft of cash from a company before its recorded in the books.
What are cash transmission schemes?
The theft of funds while they are in transit. Cash may be stolen while one transit from one individual to another, or while on transit to the bank.
What is lapping?
For this to work, the fraudster must have control over both the accounts receivable records and the bank deposits. The fraudster steals a customer’s incoming payment on account. Then, the fraudster steals a second customer’s payment on account to cover the first outstanding account balance. And so on.
3 steps of money laundering…
- Placement - Depositing the funds into a financial institution.
- Layering - Moving money, typically from one account to another, to disguise the initial deposit.
- Integration - Making the funds available for use.
Who does Chapter 7 bankruptcy apply to?
Individuals and businesses. It provides for the complete liquidation of all of the debtor’s assets and complete elimination of all of the debtor’s obligations.
Who does Chapter 9 bankruptcy apply to?
Municipalities.
Who does Chapter 11 bankruptcy apply to?
Businesses and some individuals. Different from Chapter 7 because there is not a complete discharge of all debts but rather the court focuses on developing a payment plan that will satisfy the creditors.
Who does Chapter 12 bankruptcy apply to?
Farming and Fishing businesses.
Who does Chapter 13 bankruptcy apply to?
Individuals with above-average income.
Who does Chapter 15 bankruptcy apply to?
Foreign parties, but they obtain access to the US courts.
What are the common types of bankruptcy fraud?
- Concealment of assets - Not making known the assets that you possess, ultimately defrauding creditors who have claims.
- Fraudulent Conveyances - Asserts of the party filing bankruptcy were conveyed to other parties prior to the bankruptcy filing.
- Petition mills - Bankruptcies are filed in massive numbers.
- Multiple filing schemes - Bankruptcies are filed in different jurisdictions.
What are the similarities of a bust-out and a bleed-out scheme?
They both typically involve setting up a company, collecting money from customers, not paying vendors, and then filing for bankruptcy.
What are the differences between bust-out schemes and bleed-out schemes?
Bust-out schemes typically involve companies that are very short-lived, they are often premised on financial statements fraud.
Bleed-out schemes tend to take a little longer, something like the depletion of a pension funds, often takes time to do.
Most common type of fraud in a divorce case…
Concealment of assets.
What are the 5 phases of the digital forensic process?
- Assessment - The seriousness of the matter is considered, as well as the urgency of performing the digital image and processing. Should also consider the sophistication of the fraud scheme.
- Collection - How data is collected determines future admissibility. This step includes taking photographs and providing a written description of where the evidence was found and the condition it was in.
- Examination - Consider whether you have encrypted or non-encrypted devices. If encrypted, you need to consider how you will go about obtaining the encryption key.
- Analysis - Examine system log files, when was it accessed and by who. Also want to see if any other devices were connected to the device under investigation.
- Reporting - Provide a factual summary of activities and steps taken, including the chain of custody.
Name some documents and resources that could be helpful in identifying assets…
- Tax Returns.
- Bank & brokerage statements.
- Credit card statements.
- Personal financial statements.
- Loan agreements.
- Insurance policies.
- Internet services.
- Online search firms.
What are defined benefit plans?
Promises workers a specific monthly benefit at retirement. The amount of the benefit is known in advance, typically a formula that’s imbedded in the plan documents that lays out how the benefit is calculated, typically a function of age, earnings over course of employment, and number of years of service the individual has given to the company. (etc. 1% of last year’s salary x number of years of service). Pensions.
What are defined contribution plans?
The contribution is defined, but the ultimate benefit is not. Typically relates to savings plans, 401ks, ESPOS, etc.
What is ERISA?
Employee Retirement Income Security Act. A federal law. Covers private investment plans. States that it supersedes any and all state laws that relate to any employee benefit plan.
Define financial statement representations…
Quantitative or qualitative statements that are included or excluded from an entity’s financial statements that cause the financial statements to portray financial position, results of operations, and cash flows in a manner that is not consistent with the entity’s underlying financial position, results of operations, and cash flow.
What is ordinary negligence?
The absence of a reasonable level of care that is expected of persons in similar situations. A transposition error, for example, can lead to ordinary negligence. No intent to decieve.
What is gross negligence?
Due professional care was not exercised. Those charged with preparing the financial statements exhibited a reckless disregard for the duty owed to the known users of the financial statements. (Failing to make a material accrual). Didn’t intend to deceive.
What is constructive fraud?
Extreme negligence. No intent to deceive.
When does earnings management become fraud?
When companies intentionally provide misstated information with the intent to deceive users.
Most common method of financial statement fraud…
Improperly recognizing revenue and overstating assets.
Company characteristics that result in red flags for fraud…
- Complex organizational structure - Generally speaking, the more complex the organizational structure is, the higher susceptibility of financial statement fraud.
- Weak governance structure - Whenever you have weak governance or there are weak control processes, the company opens itself up for financials to be misstated.
- Complex third-party transactions - The more complex the transactions are, the more likely that hey might not be understood or misrepresented in the financials.
Management and personnel characteristics that result in red flags for fraud…
- Aggressive management style - High importance on operating targets, a culture of results first and people second. Increases likelihood of aggressive practices and financial fraud.
- Inadequate personnel practices.
Accounting anomalies that result in red flags for fraud…
- Unusual accounting practices - If a practice is not following any type of reporting framework (GAAP, IFRS).
- High frequency of financial statement restatements.
- Unusual transactions recorded at year end.
- Misreported or unrecorded transactions.
Operating anomalies that result in red flags for fraud…
- Frequent transfers among entity bank accounts - Particularly if the purposes for the transfers are not explained.
- Unusual transactions in the records - Off-shore bank accounts for example, especially if unusual for the entity.
- Frequent of unusual related party transactions.
Red flags for fraud relating to the financial condition of the organization…
- Abnormal declines in demand for a company’s products or services.
- Any type of worsening company operations or financial conditions (lawsuits against entity, health concerns against products an entity releases).
The most common investigation techniques employed by a forensic accountant when fraud is suspected…
- Public document reviews & background investigations.
- Interviews of knowledgeable persons.
- Use of confidential sources.
- Analysis of physical and electronic evidence.
- Physical and electronic surveillance.
- Undercover operations.
- Nontraditional analysis of financial transactions.
- Ratio analysis.
- Vertical & horizontal analysis.
What is the “ex ante” approach in terms of calculating damages?
The “ex ante” approach takes damages and discounts them back to the date of the bad act, and then those damages are brought up to the date of trail using a pre-judgment interest rate. This relates to time value of money.
What is the “ex post” approach in terms of calculating damages?
Takes past losses and brings them forward to the date of trial using a pre-judgment interest rate, and then projected losses beyond the date of trial are brought back to the date of trial via a present value calculation
What is the “book of wisdom” in terms of calculating damages?
A concept introduced by the US Supreme Court. All info that may be available through the present time should be considered when calculating damages. (significant growth in the industry after the date of the bad act).
What are the 4 levels of criteria needing to me bet for a patent holder to establish lost profits in a patent infringement case?
- Demand existed for the patented product during the period of infringement.
- Acceptable non-infringing substitutes were not available to satisfy demand during the period of infringment.
- The patent owner possessed the manufacturing and marketing capacity to have supplied the patented product to customers who purchases the infringing product.
- The amount of profit the patent holder would have made.
What are purchase price adjustments in terms of mergers and acquisitions?
Typically pertain to balance sheet measures. If the acquirer is acquiring things like inventory or working capital or net assets, the M&A agreement may contain a contractually defined purchase amount known as the “peg”. Typically these amounts are defined before the transaction closes, and there are provisions written into merger and acquisition agreements that provide for a true-up post-closing, purchase price adjustments.
What are purchase price adjustments in terms of mergers and acquisitions?
Typically pertain to balance sheet measures. If the acquirer is acquiring things like inventory or working capital or net assets, the M&A agreement may contain a contractually defined purchase amount known as the “peg”. Typically these amounts are defined before the transaction closes, and there are provisions written into merger and acquisition agreements that provide for a true-up post-closing, purchase price adjustments.
What are earnout provisions in terms of mergers and acquisitions?
A provision that is often used to bridge the gap in value between what the buyer wants to pay and the seller wants to receive. Over a period of time, the seller may be able to receive additional purchase consideration based on the performance of the acquired company post-transaction.
What are material adverse changes in terms of mergers and acquisitions?
Clauses incorporated into a M&A agreement that allow for the termination of a merger or acquisition prior to closing in the event that there is a material change to the target’s business operations or assets.
What are the 3 general valuation models?
- Relative value model.
- Absolute value model.
- Option pricing model.
What is the relative value model in terms of valuation?
Estimates the value of something by observing prices of similar things. Referred to as observational techniques or methods.
What is the absolute value model in terms of valuation?
Mathematically calculate the present value of an asset’s expected future cash flows. A stock or a bond that pays interest or dividends over time and there’s a value to can be assigned to that particular security based on the present value of those expected future cash flows coming from the stock or the bond/.
What is the option pricing model in terms of valuation?
Complex form of absolute value model that values enterprises still needing substantial development to teach their economic potential. A start-up entity that has one product that is starting to be developed and that may or may not succeed.
What are the 3 general approaches that are applied to actually performing a valuation?
- Income approach.
- Market approach.
- Asset approach.
What is the income approach in terms of valuation?
Looks at a set of expected cash flows or income out into the future that is discounted to present value and that present value under the income approach represents the value of the asset.
What is the market approach in terms of valuation?
Estimates the value of something by observing prices of similar things.
What is the asset approach in terms of valuation?
The value of a firm is determined by considered the value of individual assets. They are added to together. To the extent there are liabilities, they are considered. And the net represents the net asset value (firm value).
What is the Capital Asset Pricing Model formula?
Ri = Rf + Bi (Rm - Rf)
Ri = Expected equity return of the asset
Rf = Return on a risk free asset (such as a government bond)
Bi = Beta (how a particular security moves in relation to the rest of the market)
Rm = Return on the market portfolio
What is the cost approach in terms in valuation?
What did it takes in terms of costs to build up that asset, that is the value. Often used with intangible assets.
What are the 2 typical methods that are applied when performing a valuation using the income approach?
- Discounted cash flow approach - Looks at the cash flows over a period of time, variability in the cash flows is expected.
- Constant growth models - Value is derived using a single period cash flow metric divided by a capitalization rate (discount rate - an expected growth rate). Variability not expected, constant growth is expected.
What are the 2 methods that are used in performing a valuation using the market approach?
- Guideline public company method - Public companies are identified and the data from those companies is used to derive the pricing multiples that are then brought back to value to subject company.
- Guideline company transaction method - Data is typically obtained from databases (which show company transactions) and used to come up with pricing multiples that then can be applied to the subject company.
What is intrinsic value?
The value of a company including it’s tangible and intangible assets.
What is the going concern premise of value?
Assumes that a firm will continue to operate as a business enterprise. (Won’t file for bankruptcy).
What is the orderly liquidation premise of value?
Assumes a firm will no longer operate and will take steps to maximize net proceeds from selling off its assets. Assumes company will go out of business, that it will sell its assets, but it will take whatever time is necessary to expose those assets to the marketplace to achieve the maximum value.
What is the forced liquidation premise of value?
Assumes that a firm will no longer operate and that the assets will be sold quickly, even if the proceeds are not maximized. A “fire-sale”.
What are some of the typical assumptions and limiting conditions that are included in a valuation engagement letter, as identified in VS 100?
- The valuation may only be used for it’s stated purpose. It can’t be used for a different purpose. If it’s for litigation, the client can’t take that valuation and use it for financing purposes.
- We as valuation analysts are not auditing the financial information that is provided. We are accepting financial info that is provided to us as is.
- We are not providing opinions on the achievability of forecasts. We may get a forecast in a valuation, we may use it and do some procedures to rely on it, but we are not providing an opinion on whether or not it will be achieved.
- Environmental obligations.
- We are not trying to assess the effects of future possible legislation. (Changes in tax laws etc., that might affect valuation).
- We are relying on management’s representations. Similar to us saying we are not auditing the info we were provided.
5 litigation services that can be performed by forensic accountants…
- Litigation consultant.
- Expert witness.
- Mediator.
- Arbitrator.
- Bankruptcy trustee.
2 main differences between expert consultants and expert witnesses…
- Expert consultants are not subject to discovery and they do not testify in court.
Elements needed to prove professional negligence…
- There was a duty to exercise professional care.
- That duty was breached.
- There needs to have been a causal relationship between that breach of duty and whatever the resulting injury may be.
- There must be an actual loss or damage.
The 2 options to manage the risk of professional negligence lawsuits…
- To have professional liability insurance.
- Obtain indemnity from the retaining client or attorney (within an engagement letter).
2 types of ADR…
- Arbitration - Essentially where the neutral third party ultimately makes a decision as a trier of fact on the items in dispute.
- Mediation - A negotiation, a little more informal than an arbitration.
Reasons why ADR is advantageous compared to the litigation process…
- It saves money. Litigation is very expensive.
- Stress, anxiety (etc.), that litigation can produce can be minimized by ADR.
- The ADR process can help to protect privacy. Litigation in federal and state courts is a public affair.
- ADR can build relationships. Litigation can be very destructive and it can turn business partners into enemies, ADR can bring he parties together.
- ADR is usually quicker than litigation.
Roles a forensic accountant might play in a divorce proceeding…
- Identifying evidence. Essentially making requests for information that may assist in the divorce proceeding.
- Analyzing the evidence of information that is received.
- Serving as a consultant to the attorney who is handling the divorce for one of the parties.
- Performing business valuation services. Particularly when there is a business or business interest that is subject to division, a valuation is required.
- Performing asset tracing services.
- Searching for hidden assets.
- Determining Income.
- Serving a an expert witness.
- Serving as an arbitrator. Some forensic accountants may also act as mediators. Might also be involved in calculating child support payments.
What does a forensic accountant need to consider when presented with an opportunity to work on a divorce engagement?
- Evaluating whether they have the right expertise to take on the matter. Includes professional competence and whether they can appropriately communicate findings in the matter.
- Whether they can uphold integrity and objectivity.
- Whether they have sufficient staffing to undertake the project.
- Timing. Divorce matters often have deadlines and are subject to court schedules.
How many states in the US are community property states?
- This means that all assets acquired during marriage are considered marital assets.
Documents and resources for identifying assets…
1.Tax returns.
2. Bank and brokerage statements.
3. Credit card statements.
4. Personal financial statements,
5. Loan agreements.
6. Insurance policies.
7. Internet services.
8. Online search firms.
Specific court orders, with respect to retirement plans, that are entered to divide retirement assets (in divorces)…
- Debt relief orders (DRO).
- Qualified domestic relations orders (QDRO). Court order that directs the pension plan to award a portion of a participant’s pension benefits to the employee’s former spouse.
- Qualified court order (QCO).
- Military order (MO).
2 categories of evidence…
- Direct - Can be believed without inference.
- Circumstantial - Depends on credibility and inferences of witnesses.
3 types of evidence…
- Testimonial - testimony by a witness who makes assertions, facts.
- Real or physical - Real or tangible items that are considered indisputable.
- Demonstrative - Tangible evidence that illustrates a matter of significance.
What is needed for evidence to be admissible?
- It must be relevant. Not unfairly prejudicial.
- It must have a proper foundation. It must be reliable, and must have been obtained though a proper chain of custody.
- It must be in the proper form. IT needs to be properly authenticated.
- No exceptions can apply. Exceptions can include that the evidence is unduly prejudicial, threatens to confuse the jury, causes an unnecessary delay, or wastes time.
Privileges recognized by courts…
- Attorney-client. The most important for forensic practitioners. U.S. v. Kovel.
- Marital. Communications between spouses. A valid marriage must exist at the time.
- Physician-patient.
- Psychotherapist-patient.
- Priest-penitent.
- Against self-incrimination. Plead the 5th.
- Law enforcement. Informants identity remaining secret.
*Accountant-client privilege is not recognized.
3 court cases that shaped the “Opinions” section of the Federal Rules of Evidence…
- Daubert v. Merrell Dow Pharmaceuticals. 1993.
- Kumho Tire Co. v. Carmichael. 1999 product liability case. Case rested solely on the opinion of a tire expert. First time an expert’s opinion who was not a scientific expert was considered.
- General Electric Co. v. Joiner. 1997 product liability.
What does FRE 901 address?
Authentication of evidence. Before a doc can be admitted into evidence, it must be found to be authentic, substantially in the same condition it was when it was found. In the case of a written statement’ “Did you write this, did you sign this?”
Best evidence rule (FRE 1001 - 1008)…
In fraud cases, original documents (best evidence) must be presented if it is claimed they were forged or altered.
6 types of bankruptcy proceedings under Title 11…
- Chapter 7 - Individuals and businesses. Provides for complete liquidation of all debtor’s assets and complete elimination of all of the debtor’s obligations.
- Chapter 9 - Municipalities. Cities, towns going bankrupt.
- Chapter 11 - Businesses and some individuals. Not the same as Ch.7, it’s not a complete discharge of all debts, the court rather focuses on payment plans to satisfy creditors.
- Chapter 12 - Farming and Fishing Businesses.
- Chapter 13 - Individuals with above - average income. “Means-tested” income. Also different from Ch. 7. The court may discharge some of the debts and create a payment plan for the rest.
- Chapter 15 - Foreign parties. A party to the bankruptcy proceeding is located outside of the United States but they obtain access to the U.S. courts.
Walk through the steps in the bankruptcy process…
- Initial filing.
- A trustee is appointed to oversee the case.
- The trustee will then convene a meeting of the creditors. In that meeting, claims by the creditors are brought forward.
- Liquidation of debts and payment plan is developed.
- Ultimately when the bankruptcy is resolved there will be a full or partial discharge of the debts (depending on the type of bankruptcy proceeding).
General types of bankruptcy fraud…
- Concealment of assets.
- Fraudulent Conveyances.
- Petition mills.
- Multiple filing schemes.
- Bust-outs and Bleed-outs.
What are the common characteristics of bust-out and bleed-out schemes?
Both schemes involve setting up a company, collecting money from customers, not paying vendors, and then filing for bankruptcy.
What are bust-out schemes?
Typically involve companies that are very short-lived. The comp may be established following a suspicious buyout where someone buys all or some of a particular company. They are often premised on financial statement fraud being presented to vendors to obtain credit. Could have fictitious credit references. Usually very low or no A/R, similarly, low inventories, because the central feature of the bust-out is using credit that’s obtained to buy inventory, and then sell the inventory at a very significant discount, then leave the vendor’s without payment. Bust-outs typically rely on part-time employees and might have a history of business failures.
What are bleed-out schemes?
Takes longer than bust-out schemes. A new parallel company is established, usually via a leveraged buyout (a recent change in ownership). Pension funds will be depleted. Repayment of loans to investors takes priority over the payment of loans to other creditors. There can be changes in the cash-flow patterns as well as changes in the payment patterns.
What is Rule 2004 of the Federal Rules of Bankruptcy Procedure?
States that the court may order the examination of any entity (does not need to be a debtor or a creditor in the bankruptcy proceeding), also provides that an attorney with an interest in the case can issue subpoenas.
What are the 3 main types of occupational fraud?
Also known as internal fraud or employee fraud.
3 main types:
- Corruption. Employee commits acts that are not in the best interest of the organization because of some type of influence that affects the employee’s conduct (a purchaser might purchase goods from a friend or family at a premium, because of influence from that relative).
- Asset misappropriation. The improper conversion of an asset for personal use. Does not require that an employee actually steals an asset, might just borrow or misuse it for personal reasons. Cash is subject to the highest risk of misappropriation, since it can be easily converted to other assets. The 2 most common types of misappropriation are skimming or revenue receipts and fraudulent disbursements.
- Fraudulent financial statements. Revenue recognition fraud is the most common type.
The fraud triangle…
- Opportunity. Weak internal controls, or a lack of oversight of supervision by management, provide an opportunity to perpetuate a fraud.
- Rationalization. The justification by the individual for their fraudulent actions. “I’m only borrowing the asset”, “I haven’t received a raise”, “It’s not a lot of money”.
- Pressure. Exists when an employee has significant financial problems.
Types of employee corruption schemes…
- Bribery. The offering, giving, receiving, or soliciting, any item of value, to influence an other person or official.
- Bid rigging. The manipulation of a bidding process so that the outcome / reward is secretly predetermined, closely related to kickbacks. Bid suppression, rewarding someone for not bidding. Complementary bidding, rewarding bidders for entering fake bids that will clearly be rejected.
- Kickbacks. A form of negotiated bribery, a commission is paid to the bribe taker in exchange for services rendered or some type of business advantage provided.
Types of asset misappropriation schemes related to the revenue cycle…
- Sales skimming schemes. The theft of cash from a company before it’s recorded on the books. (stealing cash at time of sale and not recording the sale).
- Cash transmission schemes. Theft of funds while in transit (from one individual to the next or while on it’s way to the bank).
- Accounts receivable fraud. Lapping is the most common. Fraudster steals an income payment on account, then a second customer’s payment is stolen to cover the first customer’s balance, and so on.
- Improper credits to customer accounts. Credit is granted to unqualified customers due to improper influence.
- Improper write offs. Fraudster executes write off without authorization or forges an authorization.
Types of asset misappropriation schemes related to the expenditure cycle…
- Improper purchases. The purchase is not made in accordance with company polices and procedures (collusion, override of controls, etc.).
- Misappropriation of petty cash.
- Abuse of company credit cards and expense accounts.
- Unauthorized payments.
- Theft of company checks.
- Payroll fraud. Improper hiring, improper changes to personnel files (resulting in unauthorized pay raises or benefits), improper reporting of company activities.
- Production cycle frauds. Inventory-related, employees might be able to steal raw materials.
Types of asset misappropriation schemes related to the expenditure cycle…
- Improper purchases. The purchase is not made in accordance with company polices and procedures (collusion, override of controls, etc.).
- Misappropriation of petty cash.
- Abuse of company credit cards and expense accounts.
- Unauthorized payments.
- Theft of company checks.
- Payroll fraud. Improper hiring, improper changes to personnel files (resulting in unauthorized pay raises or benefits), improper reporting of company activities.
- Production cycle frauds. Inventory-related, employees might be able to steal raw materials.
Common types of vendor fraud…
- Short shipments. Shipping incomplete orders but billing as it it’s complete.
- Balance billing. Vendor bills company for balance on account rather than invoice for specific items.
- Fraudulent cost-plus billing. Change orders. Adding on to an agreed upon price for services.
- Supplying substandard goods.
How many cases of identity fraud occur in the United States each year?
Over 15 million.
Job positions in an identity theft ring…
- The procurer. Purchases identity info or obtains info from hacking or phishing schemes.
- The document forger. Specialized in check washing and making false ID cards.
- Sales manager. May sell some or all of the stolen ID info.
- The shopper. The one who goes out and passes stolen checks and uses fake or stolen credit cards.
- The money launderer. Puts the groups money into the financial system.
What is money laundering?
Process of placing illegally obtained funds into the financial system by making the funds appear to come from a legitimate source. The goal of money laundered is to make it appear as though the funds have come from legitimate sources.
3 steps of the money laundering process…
- Placement. Depositing the funds into a financial institution. Smurfing is common, breaking large deposits of money into smaller increments lower that $10,000 each.
- Layering. Moving money to disguise the initial deposit.
- Integration. Making the funds available for use. Off-shore accounts often used.
2 main types of services a forensic accounting performs…
- Investigative Services.
- Litigation Services.
3 sub-units of the types of litigation services a forensic accountant performs…
- Expert Witness. Rendering an opinion before a trier of fact based on the member’s expertise rather than his or her knowledge of the facts or events.
- Litigation Consultant. Provides advice about the facts, issues, and strategy of the matter but does not testify before a trier of fact.
- Other. Serves as a trier of fact or an expert.
a. Arbitrator.
b. Mediator.
c. Bankruptcy Trustee.
Examples of services or engagements a forensic might undertake…
- Computation of economic damages.
- Punitive damage studies.
- Professional standards analysis.
- Valuation of businesses, pensions, and intangibles.
- Fraud prevention, detection, and investigation.
- Bankruptcy consultant, trustee, and examiner.
- Tax analysis.
- Marital dissolution assessment and analysis.
- Contract cost and claims analysis.
- Historical results analysis.
What are some of the common components of an engagement letter?
- Introductory information - Basic facts of engagement.
- Description of services - What will be done.
- Scope of services - How we are going to do the job.
- Conflicts of interest - Stating which conflicts exist if any, or stating that no conflicts exist.
- Rights and duties - Establishing rules and responsibilities.
- Termination or expiration provision - Issuance of a report.
- Privacy, confidentiality, ownership - What type of communication is preferred.
- Dispute resolution - ADR or litigation.
- Choice of law provision - Which body governs the engagement.
- Limitations of liability and damages.
- Fees - How the fees will be structured.
- Other - Timeline, staff to be used.
Not all of these need to be included in each engagement letter. These are essentially template items.
What are some of the ways a forensic accountant may be subject to abuse or unreasonable demands?
- Uncompensated use of the expert’s name and reputation - Issue a report for financial statement purposes only, and then it gets used for litigation, with your name on it.
- Preliminary opinions without being retained.
- Stealing the expert’s opinion.
- “Conflicting out” the expert - One party retains experts so that another party can’t retain them.
- Late payments and non-payments.
- Attempting to shape the expert’s opinion or testimony - Attorney might want you to analyze something a certain way or make assumptions without a reasonable basis.
- Withholding information from the expert.
- Rush cases - Lawyers may overstate the info that is available and understate the amount of time allowed, causing the expert to rush, leading to errors or flawed wording / theories.
- Harassments at depositions.
- Pressure to act in unethical ways - WIthholding info from the other party.
Distinction between earnings management and fraud…
Not only is a certain amount of earnings management allowed, it is even expected by the marked given the desirability of management to make it’s company appear as financially profitable as possible. Reporting frameworks such as GAAP, allow for choices in the application of accounting practices, allowing management the ability to select from various methods when computing earnings. Management can manage earnings by timing business activities or recording business activities selectively, and still be in compliance with their reporting framework. Earnings management becomes fraud when companies intentionally provide misstated info with the intent to deceive users.
Methods to commit financial statement fraud - Improper revenue recognition…
- Sham sales. Seem as if they occurred, but have not met the revenue recognition criteria. Sometimes, no sale at all. Sometimes an arrangement between the buyer and seller to return the items after the balance sheet date.
- Premature revenue recognition.
- Improper cutoff of sales. Holding books open so the following year’s sales can be recorded in the current year. Sales did exist, just reported incorrectly.
- Recognition of conditional sales. Common on sales when a customer pays in installments. Profit is supposed to be recognized as the payments come in.
- Misstatement of percentage-of-completion contracts. Percentage of completion method requires several estimates, opening up the potential for fraud.
- Chanel stuffing. Involves making unauthorized shipments. A company will ship more productions than their distribution channel permits, typically more goods than the customer ordered. The reason is to increase sales and A/R. Can also occur by shipping defective or partially completed merchandise, but billing for the full product.
- Consignment sales. Product is owned by consignee and sold by consignor. Fraud occurs when consignor records revenue when goods are shipped to consignee before the goods are sold.
- Bill-and-hold sales. Sales which are billed, but goods have not been shipped to the buyer.
Methods to commit financial statement fraud - Asset misstatement…
- Commonly misstated assets.
a. A/R due to fictitious sales or re-dating (extending due date).
b. Inventory.
c. Property, plant , and equipment accounts. Capitalizing amounts that should be
expenses (repair and maintenance, research and development) - Embezzlement or misappropriation of assets can lead to asset overstatements.
- Kiting and lapping can lead to overstatements on financial statements. in kiting, the
suspect writes a check on a bank account, with not enough funds in the account the
honor the check, next the suspect deposits the check into another bank account, the
bank realizes, the suspect has stolen the funds. - Ponzi schemes create fictitious assets. Taking money from investors, and using funds
for alternative purposes, more investors then begin investing. - Assets can be misstates by understating their bases. Often the case for good will and
depreciable assets. - In divorces, assets may be purposely understated.
Methods to commit financial statement fraud - Misstatement of expenses and liabilities…
- Understatement of expense often occurs at the end of an accounting period.
- 3 basic approached to understating expenses.
a. Failure to record accrued expenses. Likely lawsuits, etc.
b. Misclassification of expenses as assets. Often an area where judgment is involved.
c. Undervaluation of expenses. - Liabilities can be overstated when companies establish cookie jar reserves. Recording
contingent liabilities that aren’t real, therefore, the company can book revenue in a
subsequent period when the write off the contingency. - Other methods to commit fraud include off-the-book arrangements and
inappropriate financial presentation. Enron, off balance sheet financing.
Red flags of financial statement fraud relating to company characteristics…
- Complex organizational structure.
- Weak governance structure.
- Weak internal control processes.
- Complex third-parts transactions.
Red flags of financial statement fraud relating to management and personnel…
- Aggressive management style.
- High dependence on operating performance.
- Inadequate personnel practices.
Red flags of financial statement fraud relating to accounting anomalies…
- Unusual accounting practices.
- High frequency of financial statement restatements.
- Unusual transactions recorded at year-end.
- Misreported or unrecorded transactions.
Red flags of financial statement fraud relating to operating anomalies…
- Frequent transfers among entity bank accounts.
- Unusual transactions in records.
- Unusual transfers to offshore banks.
- Frequent or unusual related-arty transactions.
Red flags of financial statement fraud relating to a company’s financial condition…
- Weak (or weakening) financial condition.
- Worsening company operations.
- Worsening industry and conditions.
6 pillars of corporate governance…
- Board of directors - Highest level of management. Responsible for establishing broad corporate polices and objectives. Includes inside directors as well as outsiders. Usually about 9 members.
- Audit committee - Sub-group of the board charged with overseeing financial reporting and disclosure, including appropriateness of accounting policies. Must be independent outside directors and at least one member must be a financial expert (such as a CPA).
- Internal auditor - Examines financial position and results of operations of the comp. Internal to the organization.
- CEO and CFO - Ability to set tone at the top relating to fair presentation of financial statements. Required under sarbanes oxley to file reports with the SEC certifying that the financials are fairly presented.
- External auditor - Serves as a preventive and detective method of preventing fraud. Required to brainstorm how fraud could be committed and how internal controls could allow for it to happen. Audit is then planned and performed with these concerns in mind.
- Public oversight orgs - SEC, PCAOB, GASB, etc. Protects the public.
Investigation techniques utilized by a forensic accountant…
- Public document reviews and background investigations. May be used to discover insider trading activities, related-party transactions, or businesses owned by the subject of the investigation that should be looked in to.
- Interviews of knowledgeable persons.
- Use of confidential sources.
- Analysis of physical and electronic evidence.
- Physical and electronic surveillance.
- Undercovers operations. Usually done by law enforcement, not the forensic accountant. But the forensic accountant can recommend the client use this technique.
- Nontraditional analysis of financial transactions. Round dollar entries, cut-off procedures, reversals / restatements, ratios.
- Ratio analysis.
- Vertical and horizontal analysis.
2 forms of dispute resolution…
- Civil resolution (court).
- Alternative dispute resolution.
a. Negotiation.
b. Arbitration.
c. Mediator.
d. Other.
Steps in civil trials…
- Filing of a complaint. Pleadings, etc.
- Serving defendant(s).
- Scheduling conference.
- Discovery and investigation. Exchange of info between parties.
- Pre-trial motions.
- Settlement of pre-trial conference.
- Trial.
- Post-trial motions.
- Appeal.
What is meant by joinder of claims?
A litigant asserting a claim for relief may join as many claims as she or he has against an adversary, regardless of subject matter. Multiple parties can be brought in to ensure a complete result in the case.
When is a compulsory joinder of claims required?
For any person who has a material interest in the case if in his or her absence, complete relief cannot be accorded, or his or her interest is such that proceeding without him or her would be prejudicial.
What is permissive joinder of claims?
Applies to parties who may be joined when they are considered to be proper parties.
What is impleader joinder of claims?
A special type of joinder for which a defendant can bring in a 3rd party who may be liable for the plaintiff’s claim.
Important motions in civil trials…
- Motion to dismiss.
a. Lack of jurisdiction over subject matter or person.
b. Improper venue.
c. Insufficiency of process or service of process.
d. Failure to state a claim upon which relief may be granted.
e. Failure to join a necessary party. - Motion for judgment on pleadings. Where the parties would say that the complaint, or the response to the complaint (counter-claim), that the court should make a judgment simply based on the pleadings.
- Motion for summary judgment. Asks court to dismiss simply on everything that has been argued to that point in time.
Remedies available in civil trials…
- Legal remedies.
a. Monetary damages. When calculating lost profits, for example, we are addressing
the concept of monetary damages. - Equitable remedies.
a. Injunctions such as restraining orders.
b. Orders for specific performance. - Tort remedies. Non-contract matters (personal injury claims)..
a. Compensatory damages.
b. Nominal damages.
c. Punitive damages. Amount added over and above compensatory damages, to
punish the wrong-doer. - Provisional remedies under FRCP 64 (Federal Rules of Civil Procedure).
a. Attachment.
b. Garnishment.
c. Replevin.
What is an injunction?
A judicial order that restrains from beginning or continuing an action, or that compels a person to carry out a certain act.
Steps in criminal proceedings…
- Arrest or summons issued. (In place of a complaint in civil proceedings).
- First appearance.
- Preliminary hearing.
- Filing of information or grand jury indictment.
- Discovery and pre-trial motions. (Exchange of info / evidence between parties).
- Trial.
- Sentencing.
- Post-conviction remedies. (Appeals).
Digital Forensics can be broken down into 2 main sub-units, what are they?
- Computer Forensics - Focuses on obtaining evidence from computers.
- Network Forensics - Focuses on obtaining evidence from computer and storage networks.
In a digital forensics environment, the investigator must be concerned with what main issues?
- Protecting the crime scene and evidence from alteration.
- Deciding what evidence to collect.
- Storing and cataloging evidence collected.
- Maintaining a secure and documented chain of custody.
- Interacting with other investigators on the scene.
What are the phases of the digital forensic process?
- Assess
a. Seriousness.
b. Urgency.
c. Sophistication.
d. Whether to power down the device. - Collect
a. Secure and document the site.
b. Log evidence (relevant serial numbers).
c. Secure evidence bags.
d. Take photographs. - Examination
a. Encrypted vs non-encrypted devices.
b. Looking for countermeasures.
c. Securing a forensic image (bit-by-bit image: original copy, client copy, counsel copy,
working copy). - Analysis
a. Booting a disk copy vs mounting a disk copy.
b. Examine system log files.
c. Using indexing to locate keywords.
d. Recover deleted files. - Reporting
a. Factual summary of activities and steps taken.
b. Evidences maintenance of chain-of-custody.
What are some of the general features of computer forensics software?
- Ability to make an image of a target computer. Not the same as a copy and paste. A
forensic image is preserving the inherent metadata (info housed within the file) of the
file. Goal is to be able to authenticate the data and render it admissible in court. - Recover passwords.
- Recover deleted files.
- Recover data from slack space.
- Analyze hidden contents, metadata, logs, and email headers. (Not accessible from
normal computers). - Analyze unallocated storage space.
- Index large numbers of files.
- Connect to databases and accounting systems.
- Log examiner activities and create reports.
