EXAM 3 Flashcards
Ch 9 - Evidence-Based Fraud Examinations
The Fraud Triangle and the Courts
The Fraud Triangle and the Courts
As John Gill noted, the antifraud professional needs to
“st___ to the f___s when you t____y,” which are provided by the t____e of fr___ a___.
“stick to the facts when you testify,” which are provided by the triangle of fraud action.
The Fraud Triangle and the Courts
From this structure the professional can identify evidence that supports 1) hy_____s (a.k.a. f____ th___s) and answer the important questions of 2) “w__, w___, w___, w___, and h__” (w__ had a___s, h__ was it co___d and c___d, w___ did the m__y go, etc.).
This approach 3) d__ n__ require that the professional answer the question of 4) “w__” that are associated with 5) p____e and ra____n
1) hypotheses (a.k.a. fraud theories) 2) “who, what, when, where, and how” (who had access, how was it committed and concealed, where did the money go, etc.)
3) does not
4) “why”
5) pressure and rationalization
The Fraud Triangle and the Courts
The primary lesson: 1) ___e that your w___ is g____d in the evidence. This means that reported 1.1( fi____s are supported by f___, d___, or in____n that you in___ v____y to the e___t possible.
This approach ensures 2) r____t, re__e c___ns that can be presented with a re__e degree of scientific certainty.
Without the 3) p___r c___ls and e___e (e.g., psychologist), professionals should 4) a___ co___g on m____s associated with the perpetrators 5) p____e or r____n.
1) Ensure that your work is grounded in the evidence
1.1) findings are supported by facts, data, or information that you independently verify to the extent possible
2) relevant, reliable conclusions
3) proper credentials and experience
4) avoid commenting on motives
5) pressure or rationalization.
Module 1—Fraud Examinations: Who, What, Where, When, How,
and Why: Evidence-Based Examinations
Evidence-Based Examinations
To complete an examination, the fraud examiner or forensic accountant needs to answer the essential questions of 1) w__, w__, w___, w___, h___, and w___—with ev____e.
1) who, what, where, when, how, and why—with evidence.
Evidence-Based Examinations
In addition, the answers need to be woven into a 1) co___t s___y.
2) C___l t___g and a____l r___g suggest that the fraud examiner or forensic accountant will have to make some 3) in___al co___ns to pull the various pieces of evidence and the answers to those questions into a compelling case
1) coherent story
2) Critical thinking and analytical reasoning
3) intellectual connections
Evidence-Based Examinations
However, evidence-based decision making suggests that examiners need to 1) g___d their st___e in the evidence.
A 2) st___e gr___d in the evidence is much more convincing to 3) pr___s, at___s, j___s, and j__s.
1) ground their storyline
2) storyline grounded
3) prosecutors, attorneys, judges, and juries.
The Hypothesis-Evidence Matrix
In_____e e___e is a f___t of li__ and an o__-g___ ch__e to examiners.
Incomplete evidence is a fact of life and an on-going challenge to examiners.
The Hypothesis-Evidence Matrix
How does the fraud examiner deal with situations where the evidence is less than perfect?
The answer is that fraud and forensic professionals always face the prospect of less-than-perfect evidence, and they address 1) p___l ev____y sh___gs or h___s in the 1.1) st____e through their c____on of the al____e h____es (al___e fr__ th__s).
In Chapter 1, this approach is referred to as the analysis of competing hypotheses and the specific tool is the 2) Hy___s-Ev__e M__x.
1) potential evidentiary shortcomings or holes
1.1) storyline through their consideration of the alternative hypotheses (alternative fraud theories)
2) Hypothesis-Evidence Matrix.
The Hypothesis-Evidence Matrix
Professionals in this field need to understand that 1) n__ o__ is b__r at generating 2) al___ve t___es of the case than opposing 3) at____s.
1) no one is better
2) alternative theories
3) attorneys.
Define Predication
the totality of 1) ci___ces that would lead a reasonable, 2) pr___y trained, and pr__t in____al to believe that a fraud has 3) o__d, is oc___g, or is a___t to o___r
1) circumstances
2) professionally trained, and prudent individual
3) occurred, is occurring, or is about to occur
Predication
Essentially, predication is the 1) st____g p___t for a f___al fr__d ex___on.
And predication is needed 2) p__r to investigation
1) starting point for a formal fraud examination
2) prior
Predication
S____n in the a___e of any corroborating circumstantial e___e is n__ a su___nt b__s for conducting a fr___ ex___on
Suspicion in the absence of any corroborating circumstantial evidence is not a sufficient basis for conducting a fraud examination
Predication
Typically, a few 1) r__ fl__s are n__ in themselves su___t as a b___s for a fraud examination. Especially when dealing with 2) fi___l st__nt fraud, where a 3) m___ty threshold is required, red flags require additional 4) a__t w__k.
A major obstacle is that many red flags have 5) r__le e__ns and d__ n___ result in the dis___y of a___t mis____n, cor___n, or at__ed fraudulent financial reporting.
1) red flags are not in themselves sufficient as a basis
2) financial statement
3) materiality
4) audit work
5) reasonable explanations and do not result in the discovery of asset misappropriation, corruption, or attempted
The Fraud Triangle: Opportunity, Perceived Pressure, and
Rationalization
The Fraud Triangle: Opportunity, Perceived Pressure, and
Rationalization
The profile of the typical fraudster is basically that of the 1) av___e c___n.
Notwithstanding predatory fraudsters, most are not habitual criminals, and very few have any criminal history.
1) average citizen.
The Fraud Triangle: Opportunity, Perceived Pressure, and
Rationalization
Further, common fraud perpetrators often are well-educated and respected members of their community, regularly attend community events, are often married, and have children.
Thus, the critical question remains: what causes good people to turn bad
The Fraud Triangle: Opportunity, Perceived Pressure, and
Rationalization
Three characteristics are needed to enable fraud: (The Fraud Triangle)
o O____ity
o Pe____ p___e
o Ra____n
o Opportunity
o Perceived pressure
o Rationalization
The Fraud Triangle: Opportunity, Perceived Pressure, and Rationalization
Types of Evidence
* Evidence of fi____l pr____s
- Evidence of v__s or si__r pr__ms
- Evidence of or___nal
pr___e to a___ve fi___al go__s - Evidence of the ch___e of getting __y with the f__d
- Evidence of ex___e e__
- Evidence of fa__y or p__r pr___e
- Evidence of financial pressures
- Evidence of vices or similar problems
- Evidence of organizational
pressure to achieve financial goals - Evidence of the challenge of getting away with the fraud
- Evidence of excessive ego
- Evidence of family or peer pressure
Evidence of financial pressures
-li___g b___d one’s m___
-g___d su___al d___t
-a p___r cr___t r___g
-living beyond one’s means
-greed substantial debt
-a poor credit rating
Evidence of vices or similar problems
-ga___g
-dr___s
-a___ry
-gambling
-drugs
-adultery
Evidence of organizational pressure to achieve financial goals
-bu___t pr___re
-b___s op____ties
-ma___g st___k pr__e
-budget pressure
-bonus opportunities
-maintaining stock price
The Fraud Triangle
It is important to understand that because 1) pr___e is fu___lly a factor un___e to the in___l, only 2) in___ct ev____ce can be gathered, and even that evidence is g___ly ci___ial.
1) pressure is fundamentally a factor unique to the individual
2) indirect evidence can be gathered, and even that evidence is generally circumstantial.
The Fraud Triangle
Because most fraudsters have 1) n__ cr___al hi___y and d__ n__t think of the___es as cr___ls, fraud perpetrators typically have to develop some 2) ra___on for their action
1) no criminal history and do not think of themselves as criminals
2) rationalization
The Fraud Triangle
Rationalization is a 1) ma___d, somewhat ar___y ju___on for otherwise un___al or i___l be__r
1) manufactured, somewhat arbitrary justification for otherwise unethical or illegal behavior
M.I.C.E
Another approach to capturing the motivation of the typical fraudster is encapsulated in the acronym M.I.C.E.
M___
I___
C___
E__/En___t
Money
Ideology
Coercion
Ego/entitlement
M.I.C.E
Money and ego are 1) s___-ex___y and are the two 2) m__ co___y ob___d m___s.
The roots of most fraud are 3) g__ (m__) and p___ (e__).
1) self-explanatory
2) most commonly observed motivations
3) greed (money) and power (ego)
M.I.C.E
1) I____ is often an 2) o___d ch____ic associated with t__r e__on schemes
1) Ideology
2) observed characteristic associated with taxpayer evasion schemes
The Problem of Intent: Examinations Centered on the Elements of Fraud
The Problem of Intent: Examinations Centered on the Elements of Fraud
The fraud triangle provides the necessary conditions for fraud to occur.
However, the examiner has to provide evidence of 1) i__t.
Intent, like all aspects of the examination, must be 2) gr___d in the ev___e.
1) intent
2) grounded in the evidence.
The Problem of Intent: Examinations Centered on the Elements of Fraud
The difference between a mistake and a fraud is 1) i___t.
If the fraud examiner or forensic accountant cannot prove intent, a civil or criminal conviction for fraud most likely cannot be sustained.
1) intent.
The Problem of Intent: Examinations Centered on the Elements of Fraud
An important element of intent can be inferred from 1) re___ve si__r a__s.
1) repetitive similar acts.
The Problem of Intent: Examinations Centered on the Elements of Fraud
More importantly, once the fraud examiner or forensic accountant has evidence that the alleged perpetrator
(1) c___d the a__
(2) b___d from that a__ (co___n)
(3) c____d his or her a___es
it becomes difficult for the alleged perpetrator to make the case that he or she did not intend to do something that would cause harm or injury
(1) committed the act
(2) benefited from that act (conversion)
(3) concealed his or her activities
The Problem of Intent: Examinations Centered on the Elements of Fraud
Related to 1) co___n, there is a debate in the profession about whether 2) tr___g m___y to a perpetrator’s b___k ac___t is suf___t ev___ce of co____n, or whether the fraud examiner or forensic accountant needs to show how the 3) i___-be___en mo__ was used.
1) conversion
2) tracing money to a perpetrator’s bank account is sufficient evidence of conversion
3) ill-begotten money was used.
The Complete Story
To be successful, the investigator must be able to 1) ex__n to prosecutors, attorneys, juries, judges, and other actors in the investigative process, 2) the ou__ of the in___n: w__, w__, w__, w__, and h__—a co___e s__y
1) explain
2) the outcome of the investigation: who, what, when, where, and how—a complete story
The Complete Story
Although fraud examination and forensic accounting use evidence-based 1) de___n ma__g, cr__l th___g sk___ls and ca___l analysis are essential to un___g what the nu__s mean
1) decision making, critical thinking skills and careful analysis are essential to understanding what the numbers mean
Module 2—Evidence
Evidence
Without ev___e, there is no p__, and neither cr___l co__ns nor ci__ ve__s are possible.
Without evidence, there is no proof, and neither criminal convictions nor civil verdicts are possible.
Define Evidence
Working definition:
Anything ___y ad___d at t___l that is re__t to the ca__.
Anything legally admitted at trial that is relevant to the case.
Evidence
The rules of evidence have been developed and refined over hundreds of years and are captured in the 1) Fe__l R__s of E___e, as well as by the S___s (where l__ generally m__ l those at the f__l l__l).
These intricate rules have the objective of ensuring that only 2) re___t and pr___ve ev___ce is admitted in co___
1) Federal Rules of Evidence, as well as by the States (where laws generally model those at the federal level)
2) relevant and probative evidence is admitted in court
What are the 3 types of evidence?
o T__ny
o R__
o De___ve
o Testimony
o Real
o Demonstrative
Evidence
Federal Rules of Evidence
Perhaps even more important, the rules of evidence seek to ensure that 1) i___t, u___le, and pr___ial ev__e is ex__d from the courtroom.
The objective is to handle court cases
(1) f__y
(2) ex___y
1) irrelevant, unreliable, and prejudicial evidence is excluded from the courtroom
(1) fairly
(2) expeditiously
Evidence
- Evidence must be 1) r__nt, ma__l, and c__nt
- To be admitted at trial, evidence must be 2) au___ed
- Once authenticated, evidence must be 3) u__d
1) relevant, material, and competent
2) authenticated
3) unaltered
Evidence
To maintain the integrity of evidence, it should generally be
- U___d from its o___al co___n.
- Logged for a c___n of ev___e or similar records to demonstrate ch__ of c__y.
- Stored in l___d c___s, preferably f____f.
- Secured with u__ed a__s p___d, in the case of el___nic files.
- B___d-u__ c___s, ele___c and h__d-copy, should be maintained in a s__e lo___n.
- In___d, so that it can be lo__d when n___y.
- Unaltered from its original condition.
- Logged for a chain of evidence or similar records to demonstrate chain of custody.
- Stored in locked cabinets, preferably fireproof.
- Secured with unauthorized access prevented, in the case of electronic files.
- Backed-up copies, electronic and hard-copy, should be maintained in a separate location.
- Inventoried, so that it can be located when necessary.
Fraudster’s Perspective
- White collar crime is around in both g___ and b___ ec___c times
- In good economic times, white collar crimes are ea__ to ex___e and co__l
- White collar crime is around in both good and bad economic times
- In good economic times, white collar crimes are easier to execute and
conceal
Fraudster’s Perspective
- In bad economic times, white collar crimes become un_____le
- A bad economy brings white collar crimes to the s___e
- In bad economic times, white collar crimes become unsustainable
- A bad economy brings white collar crimes to the surface
Evaluating the Quality of Evidence: Relevance, Reliability, and
Validity
Define Relevance
means that the i___on will make a dif___ce to a de___n m__
means that the information will make a difference to a decision maker
Evaluating the Quality of Evidence: Relevance, Reliability, and
Validity
Define Reliability
refers to the so___e pr__ng the in___n
refers to the source providing the information
Evaluating the Quality of Evidence: Relevance, Reliability, and
Validity
Define Validity
refers to the underlying ac___y and i___y of the inf___n
refers to the underlying accuracy and integrity of the information
What are the measures of reliability?
- R___
- U___ re____
- U___
- U___
- Reliable
- Usually reliable
- Unreliable
- Unknown
Measures of Reliability
- Reliable: Source’s reliability is un____d
- Usually reliable: The m___y of p__t in___n has p___n to be re___
- Unreliable: Source’s re__ has been s___ic
- Unknown: Reliability of source u___
What are each of their ratings?
- Reliable: Source’s reliability is unquestioned (Rank A)
- Usually reliable: The majority of past information has proven to be reliable
(Rank B) - Unreliable: Source’s reliability has been sporadic
(Rank C) - Unknown: Reliability of source unknown
D
What are the measures of validity?
- C___d
- Pr___e
- D____l
- Ca___t be j___d
- Confirmed
- Probable
- Doubtful
- Cannot be judged
Measures of Validity
Confirmed: The information has been c___d
Probable: The information is co___nt with p__ ac___ts
Doubtful: The information is inc___t with p__ ac___s
Cannot be judged: The information ca___t be ev___d
What are each of their rating?
Confirmed: The information has been corroborated
Rank 1
Probable: The information is consistent with past accounts Rank 2
Doubtful: The information is inconsistent with past accounts
Rank 3
Cannot be judged: The information cannot be evaluated Rank 4
Organizing the Evidence and Documenting Work Product
G___, do____g, or___g, re____g, and re___g data, in___n, and ev___e are an important part of the examination process
Gathering, documenting, organizing, retaining, and retrieving data, information, and evidence
Organizing the Evidence and Documenting Work Product
The professional should always begin with the 1) as___n that his or her
2) w__, r__rt, and co___ns, as well as all other aspects of his or her examination, will be 3) pr___d and scr____ed in a court of law
1) assumption
2) work, report, and conclusions
3) presented and scrutinized
Organizing the Evidence and Documenting Work Product
Careful a___n to work p__r de__l and the g__g, d__g,
or__g, and re___n of work product is of critical importance
Careful attention to work paper detail and the gathering, documenting,
organizing, and retention of work product is of critical importance
Module 3—Evidence Sources of the Act, Concealment, and
Conversion
Other Evidence Considerations
- Or___g all do___s for easy ret___
- Identifying ad___al d__a that will need to be g___d, either by the ex___r or via su__a or se___h w__nt
- Maintaining the ch__n of cu___y, including keeping the re___s in a l__d o__ or st
__e faci__
- Organizing all documents for easy retrieval
- Identifying additional data that will need to be gathered, either by the examiner or via subpoena or search warrant
- Maintaining the chain of custody, including keeping the records in a locked office or storage facility
Documents
- Documentary evidence is the 1) b___e of m__ fin___l fo___c in___s
1) backbone of most financial forensic investigations
Documents
- Sometimes m__e re__e than e___ses
- Potential for fin__s
- Provide evidence related to the a__, co__t and con___n
- Sometimes more reliable than eyewitnesses
- Potential for fingerprints
- Provide evidence related to the act, concealment and conversion
Documents
Some items for which a document should be examined include: (theres more but oh well)
-Si___es (fo__d)
-Ha___g (fo__d)
-F___s, t__s, and c__
-P__ Examination
-I__ Examination
-Signatures (forged)
-Handwriting (forged)
-Folds, tears, and cuts
-Paper Examination
-Ink Examination
Bank, Credit Card, and Investment Statements
May provide clues and other investigative leads:
o Ch___g account activity may show de___s from so__es other than known places of em___t
o Bank account dis___s may be made to previously unknown credit cards, installment accounts, and investment accounts
o Credit card statements may demonstrate that amounts spent far exceed the suspect’s
known sources of income
o Checking account activity may show deposits from sources other than known places of employment
o Bank account disbursements may be made to previously unknown credit cards, installment
accounts, and investment accounts
o Credit card statements may demonstrate that amounts spent far exceed the suspect’s
known sources of income
Bank, Credit Card, and Investment Statements
In addition, bank account disbursements may be made to previously unknown credit cards, installment accounts, and investment accounts.
These disbursements may become leads that the fraud or forensic professional can follow as they continue to 1) fo__ the mo__
1) follow the money
Bank, Credit Card, and Investment Statements
Investment accounts need to be 1) sc__d for t__dns, for money flows to other accounts (e.g., credit cards, checking accounts, other investment accounts), for new leads, and also to ensure that money that appears to be coming from unknown sources is not coming from the person’s previously accumulated investment holdings
1) scrutinized for transactions
Bank, Credit Card, and Investment Statements
- Provide e___e of the a_ and co___n
- Provide c__s to l___e
- Provide ev__e of the a__ and co___n
- Provide c__s to li__e
Useful Sources of Information
- B__ st____ts
- D___t ti___s
- Ca___ ch___s
- Ac___t ap___ns
- Sig____s
- Cr___t ca__ applications
- M___e applications
- Lo__ applications
know at least 5
- Bank statements
- Deposit tickets
- Canceled checks
- Account applications
- Signatures
- Credit card applications
- Mortgage applications
- Loan applications
Invigilation
Define Invigilation
an ex___on te__e that considers pe__s b__e, d__g, and af__ a suspected fraud has oc__d
an examination technique that considers periods before, during, and after a suspected fraud has occurred
Invigilation
- Look for c__s in pa__s of per___e around time of s___s ac__y
- Provides evi__e of the a__
- Helps calculate how much m__ may be m__g
- Look for changes in patterns of performance around time of suspicious activity
- Provides evidence of the act
- Helps calculate how much money may be missing
Interviewing and Interrogation
- In a civil case, interviews are most often carried out in the form of de___
- Used to find in___ and discover ev___
- Used to gather evi___ pertinent to the a__, co___t and co___n
- In a civil case, interviews are most often carried out in the form of depositions
- Used to find information and discover evidence
- Used to gather evidence pertinent to the act, concealment and conversion
Surveillance and Covert Operations
- Ga_r e___e
- Identify those engaged in illegal activities
- Identify co-conspirators
- Re___r m___
- Determine how an operation is conducted
- Conducted by private investigators or law enforcement
- Fixed point and mobile surveillance
- Vi___y
- U___r op___ns
Know 5
- Gather evidence
- Identify those engaged in illegal activities
- Identify co-conspirators
- Recover money
- Determine how an operation is conducted
- Conducted by private investigators or law enforcement
- Fixed point and mobile surveillance
- Videography
- Undercover operations
CTRs, SARs, and FinCen 8300
- Currency Transaction Reports (CTRs), Suspicious Activity Reports (SARs),
and FinCen Form 8300 are excellent sources of information for law
enforcement officers - CTRs must be filed when transactions include $10,000 or more in a single
day
you already know this hehe
Big Data, Data Analytics, Textual Analysis, Pattern Recognition, and
Other Digital Tools
- Pe__l in__n is captured in databases around the world
- Amount of information captured el___ly has ballooned to st__g levels
- Personal information is captured in databases around the world
- Amount of information captured electronically has ballooned to staggering
levels
Big Data, Data Analytics, Textual Analysis, Pattern Recognition, and
Other Digital Tools
- Data m___g s___e looks for hi___n pa___s to help predict fu__ b___ior
- The results of p___n recognition se___s and data analytics provide evidence of w__, w___, w___, __, h__, and w__
- Data mining software looks for hidden patterns to help predict future behavior
- The results of pattern recognition searches and data analytics provide evidence of who, what, where, when, how, and why
Other Physical Evidence
- Fi___s on do___s
- Ph__ do___s
- F___d s___es
- Ty___r’s u__e id___s
- Addresses and phone numbers can provide proof of linkages
- Dates and times provide evidence about who, when, what, why and how
- Medical conditions can provide insight into the financial pressure of
perpetrator
- Fingerprints on documents
- Phony documents
- Forged signatures
- Typewriter’s unique identifiers
- Addresses and phone numbers can provide proof of linkages
- Dates and times provide evidence about who, when, what, why and how
- Medical conditions can provide insight into the financial pressure of
perpetrator
Module 4—Evidence Sources Specific to Concealment
Probably the most interesting observation is that the most common concealment schemes were “m___l,” ph___y cre___s, followed by man___ns in the accounting systems (includes tax returns and GL, journal entries, and reconciling items)
Probably the most interesting observation is that the most common concealment schemes were “manual,” physically created, and altered documents, followed by manipulations in the accounting systems.
includes tax returns and GL, journal entries, and reconciling items
Altered Documents
- Fraud examiners and forensic accountants provide f___t l__ of de__e in
effort to identify po___e al__s - Altered acc___g b__s provide evi___e of c___nt
- Qualified pr___al should ex__e do__ts in qu__
- Fraud examiners and forensic accountants provide first line of defense in
effort to identify possible alterations - Altered accounting books provide evidence of concealment
- Qualified professional should examine documents in question
Methods to Alter Documents
- F__d si___s
- F___d h___g
- Re___d er___s
- Er__s
- Er___s
- Recently created documents supposedly created years ago
- Counterfeiting of documents with copy machines
- Counterfeiting of documents with typewriters
- Counterfeiting of documents with (color) printers and matched paper
- Forged signatures
- Forged handwriting
- Restored erasures
- Erasures
- Eradications
- Recently created documents supposedly created years ago
- Counterfeiting of documents with copy machines
- Counterfeiting of documents with typewriters
- Counterfeiting of documents with (color) printers and matched paper
Module 5—Evidence Sources Specific to Conversion: Locating Hidden Assets and Unknown Sources of Income
- Assets can be hidden through several methods
o H___n b__ ac___s
o Hi__n in___nt ac___nts
o Purchasing a___s through straw m__ or fr__ or___ns
o Transfer as__s or o__ip to another p__
o Hidden bank accounts
o Hidden investment accounts
o Purchasing assets through straw men or front organizations
o Transfer assets or ownership to another party
Concealed Offshore Financial Accounts, Transactions, and Loans and Divorce
Concealed offshore financial accounts, transactions, and loans
o Used by sophisticated in__s with significant h___s of ill-gotten gains
o Chosen for fav___le ta__ tr___t and com___nt to se__y
o Used by sophisticated individuals with significant hoards of ill-gotten gains
o Chosen for favorable tax treatment and commitment to secrecy
Concealed Offshore Financial Accounts, Transactions, and Loans and Divorce
Divorce
o In a bitter divorce, a spouse may h__e a___
o She or he disburses a large amount of m___y to the consultant at an offshore
address
o H__g a__s is a common ploy in marital disputes
o In a bitter divorce, a spouse may hide assets
o She or he disburses a large amount of money to the consultant at an offshore
address
o Hiding assets is a common ploy in marital disputes
Indirect Methods of Income Reconstruction
Using indirect methods to es___e a___s controlled by an en__, or in__e to an entity, is referred to as “f__l p___ng.”
These analyses are methods for developing in___s of co__d i___e and hi___n as__
Using indirect methods to estimate assets controlled by an entity, or income to an entity, is referred to as “financial profiling.”
These analyses are methods for developing indicators of concealed income and hidden assets
Indirect Methods of Income Reconstruction
What are the 3 types of Indirect methods?
o N__ w__ method
o The li___e pr__
o B___ r___s method
o Net work method
o The lifestyle probe
o Bank records method
Steps for Computing Net Worth
- C___e net worth for a b__ y__ and each su___nt year
- Determine known i__e for each y__ after the b__e year
- Calculate the ch__e in net w__
- S__t in__e from known s__s
- The remainder is in__e from un___n—and possibly il__l—sources
- Calculate net worth for a base year and each subsequent year
- Determine known income for each year after the base year
- Calculate the change in net worth
- Subtract income from known sources
- The remainder is income from unknown—and possibly illegal—sources
The Lifestyle Probe: Sources and Applications of Funds
The lifestyle probe, also called the 1) s___s and ap___n of fu___s an__is, addresses the flow of funds for a given p__d.
1) sources and application of funds analysis, addresses the flow of funds for a given period.
The Lifestyle Probe: Sources and Applications of Funds
- If known ex____s are g___r than known i__e there must be u___n in___
- If known expenditures are greater than known income there must be unknown income
The Lifestyle Probe: Sources and Applications of Funds
- Advantages over net worth method
o Ea__r to u__ and un___d
o Can be calculated for periods sh___r than o__ ye__
o Can be used to run a “q__ and d__” analysis
o Can be used to c__nt t___t with other an___l re__s
o Easier to use and understand
o Can be calculated for periods shorter than one year
o Can be used to run a “quick and dirty” analysis
o Can be used to confront target with other analytical results
Steps to Calculate Unknown Income
- Ga___r in___n on am__ts spent for a b__e y__r and each su___nt year
- De____e kn___n in__e for each year
- Ca___e the amount of all known ex___es
- S__ the e__e of all known inc__
- The difference equals in__e from u___n sources
- Gather information on amounts spent for a base year and each subsequent year
- Determine known income for each year
- Calculate the amount of all known expenditures
- Subtract the estimate of all known income
- The difference equals income from unknown sources
Bank Records Method
The basic formula for the bank records analysis is as follows:
- Id__y de__s to all k__ ac__ts
- A__: Known ca__ ex___s not paid by b__k account c__, A__ or E__.
- S__ the total “s__t” from a__ so__
- S____t: In___e from k___ sources
- The d__e e__s funds from un___n so___s
- Identify deposits to all known accounts
- Add: Known cash expenditures not paid by bank account check, ATM or EFT.
- Sum the total “spent” from all sources
- Subtract: Income from known sources
- The difference equals funds from unknown sources
Unknown Sources of Income: Defenses and Rebuttals
Possible defenses
- The estimated cash from unknown sources was ac___ in p__r pe__
- The estimated cash from unknown sources was obtained by g__ or in___e
- The estimated cash from unknown sources were l__ pr___
- The estimated cash from unknown sources were lo__y or other g__g wi__gs
- The estimated cash from unknown sources was accumulated in prior periods
- The estimated cash from unknown sources was obtained by gift or inheritance
- The estimated cash from unknown sources were loan proceeds
- The estimated cash from unknown sources were lottery or other gambling winnings
Ch 10 - Effective Interviewing and Interrogation
Enhanced Interrogation Techniques
- E___d int___ion t___es (e.g., torture) are of d__s value;
interrogator is told what he wa__s to h__ - N__t e__ c__e can be s__d (and that’s okay)
- Enhanced interrogation techniques (e.g., torture) are of dubious value;
interrogator is told what he wants to hear - Not every case can be solved (and that’s okay)
Enhanced Interrogation Techniques
- Adhere to high moral code, regardless of what is acceptable under current
law - Ensure values we seek to protect are vigorously preserved
- Adhere to high moral code, regardless of what is acceptable under current
law - Ensure values we seek to protect are vigorously preserved
Module 1: Introduction to Interviews and Interrogations
Introduction to Interviews and Interrogations
- Conducting t___h in___s and in___ns is often vital to re___ of case
- Interviewing is the s___tic q___g of a kn___le person in pursuit of details surrounding a forensic accounting issue
- Conducting thorough interviews and interrogations is often vital to resolution of case
- Interviewing is the systematic questioning of a knowledgeable person in pursuit
of details surrounding a forensic accounting issue
Introduction to Interviews and Interrogations
Interrogation involves the q____g of a s___ct or t___t to obtain e___e and to solicit a c___on
Interrogation involves the questioning of a subject or target to obtain evidence and to solicit a confession
Define Suspect
is a person s___d of co___g an o___e
is a person suspected of committing an offense
Define Subject or Target
Once the examiner is fairly s__ that the suspect has c___ed the fr__, the term changes
to su___t or t__
Once the examiner is fairly sure that the suspect has committed the fraud, the term changes
to subject or target
Define Target
Target is more commonly used by p____rs
prosecutors
Introduction to Interviews and Interrogations
Interviews and interrogations have many similarities
o Both require p___g, co___ed su____gs, some level of p___y, ra___t between the int___r and the in___e, and proper d___on upon completion
Both require planning, controlled surroundings, some level of privacy, rapport between the interviewer and the interviewee, and proper documentation upon completion
Introduction to Interviews and Interrogations
Interviews contrast with interrogations in many ways
o Interrogations, are adversarial in n___e
o Interviews are primarily an in___n-g____g e___e
o Interrogations act to t__t or co___ information already k___ or su___d by the ex___r
o In an interrogation, the interviewer must be vi___t of the ri___s of the interviewee
o Interrogations, are adversarial in nature
o Interviews are primarily an information-gathering exercise
o Interrogations act to test or confirm information already known or suspected by the examiner
o In an interrogation, the interviewer must be vigilant of the rights of the interviewee
Introduction to Interviews and Interrogations
- In c___l li___on, interviews are cr__
- In civil litigation, interviews are critical
Rewards for Effective Interviewing and Interrogation Skills
- Reduced in____n t___
- Increased p____ty of in___ve s__s
- Improved co___ce in in___ve co___ns
- D___t ev___e of c___y versus in__t ev__e from examination of b__s, re___s, and other evidentiary forms
- The el___n of in__t su__ts or ta___ts
- Reduced investigation time
- Increased probability of investigative success
- Improved confidence in investigative conclusions
- Direct evidence of culpability versus indirect evidence from examination of
books, records, and other evidentiary forms - The elimination of innocent subjects or targets
Interviews in Cases of Suspected Fraud or Corrupt
- Interview in order of least c__le to most c__e
o First, interview t___d p__y wi__s
o Next, interview co___ative w___s
o If further investigation is warranted, interview
suspected c__-co___s in al___d of___
- Interview in order of least culpable to most culpable
o First, interview third party witnesses
o Next, interview corroborative witnesses
o If further investigation is warranted, interview
suspected co-conspirators in alleged offense
Interviews in Cases of Suspected Fraud or Corrupt
In this fashion, fraud examiner has as much in___n as p__le when pr__e t___t is interviewed
In this fashion, fraud examiner has as much information as possible when prime target
is interviewed
Interviews in Cases of Suspected Fraud or Corrupt
___n-s___g interview or
interrogation can be a__d if interviews clear t___ of o___e
Admission-seeking interview or
interrogation can be avoided if interviews clear target of offense
Interviews in Fraudulent Financial Statement and Tax Return
Examinations
- Investigator starts with ___ pe___or
o Document perpetrator’s cl__s that financial statements are not materially misstated
o Therefore, if auditor finds fraudulent financial reporting, auditor has caught perpetrator in a lie
o Document perpetrator’s claims that financial statements are not materially misstated
o Therefore, if auditor finds fraudulent financial reporting, auditor has caught
perpetrator in a lie
Interviews in Fraudulent Financial Statement and Tax Return
Examinations
Perpetrator makes one of two assumptions
o Auditor or investigator will n__f__ the is___
o Auditor or investigator will not be s___d enough to u__l the underlying ev__
o Auditor or investigator will not find the issue
o Auditor or investigator will not be skilled enough to unravel the underlying evidence
Module 2: Details of the Interview and Interrogation
Process
Preparation and Planning
- Know as much as you can about w___s, cr___e, v___m, and possible per____rs
- K___ what n___s to be c__d in in___w
- Be able to detect cl___s to d__n
- Interviewer should have und__g of of___e un___r investigation
- Consider wi___s’ b___und
- Consider di___ns when selecting lo___ of in____
- Venue should be pr___, ideally selected by in__r and be a su__e, when possible
- Interrogations should be conducted by su__ whenever possible
- Know as much as you can about witness, crime, victim, and possible perpetrators
- Know what needs to be covered in interview
- Be able to detect clues to deception
- Interviewer should have understanding of offense under investigation
- Consider witness’ background
- Consider distractions when selecting location of interview
- Venue should be private, ideally selected by interrogator and be a surprise, when possible
- Interrogations should be conducted by surprise whenever possible
Understanding the Offense under Examination
- What are the l__ elements?
- What are the d__s of the al_ed i__e under ex___n?
- What m___gy was used to co___l the offense?
- What b___t was there to the sus__d perpetrator?
- What evidence of the a__, co___nt, and co__n has been obtained, and what evidence is needed to develop conclusions?
- W__ had an o___y to commit the offense?
- Did the possible perpetrator(s) have access to other assets of the victim?
- What are the legal elements?
- What are the details of the alleged issue under examination?
- What methodology was used to conceal the offense?
- What benefit was there to the suspected perpetrator?
- What evidence of the act, concealment, and conversion has been obtained, and what evidence is needed to develop conclusions?
- Who had an opportunity to commit the offense?
- Did the possible perpetrator(s) have access to other assets of the victim?
General Approach to Conducting Interviews
- Interviewer should be able to see entire b__ of interview subject
- Interviewer chair should be s__ feet in front of interviewee
- Be re__l and p___l at all times
- Avoid la___e that may c___se interviewee
- Avoid taking d___ n___
- Key is to watch bo___ la___e that suggests di___t and de__
- Interviewer should be able to see entire body of interview subject
- Interviewer chair should be six feet in front of interviewee
- Be respectful and professional at all times
- Avoid language that may confuse interviewee
- Avoid taking detailed notes
- Key is to watch body language that suggests discomfort and deceit
Other Interview Considerations
- Keeping qu__s reasonably s___
- Keeping questions to the p__
- Avoiding le___ questions that suggest a s___ic a___
- Dis___g the interviewee from sp___ng too much in the ab__ of underlying evidence
- Discouraging the interviewee from g__g o__-su__
- Making sure the interviewer un___s the interviewee’s response b___e moving on to new topics
- Ma__g c___ol of the interview
- Keeping questions reasonably short
- Keeping questions to the point
- Avoiding leading questions that suggest a specific answer
- Discouraging the interviewee from speculating too much in the absence of underlying evidence
- Discouraging the interviewee from getting off-subject
- Making sure the interviewer understands the interviewee’s response before moving on to new topics
- Maintaining control of the interview
Interviews of Witnesses
- Start with background information
- Organize questions in chronological order
- Document witness’ connection to suspects, subjects or targets of the investigation
- Document discussions between the witness and any subjects or targets
- Determine if the witness is in possession of any pertinent documents
- Elicit any opinions that the witness may have about events and acts under investigation
- Determine if the witness has any other ideas that should be looked into, or other witnesses that would be helpful
Interviews are conducted in three stages:
- The i__
- The b__
- The c___
- The introduction
- The body
- The close
Three Stages of Interviewing: Introduction, Body, and Close
During the introduction stage, the interviewer gr__ the interviewee and states the r___n for the interview
o The reason should be si__. st__ and n__t o___y co___d
During the introduction stage, the interviewer greets the interviewee and states the reason for the interview
o The reason should be simply stated, and not overly complicated
Three Stages of Interviewing: Introduction
- Generally, a professional non-confrontational tone
- Greet interviewee and state reason for interview
- Sets the tone for all interview types
- Establish rapport with interviewee
- Assess witness’ spirit of cooperation
- Provides the beginnings of the baseline for assessment of misdirection and
deceit
- Generally, a professional non-confrontational tone
- Greet interviewee and state reason for interview
- Sets the tone for all interview types
- Establish rapport with interviewee
- Assess witness’ spirit of cooperation
- Provides the beginnings of the baseline for assessment of misdirection and
deceit
Three Stages of Interviewing: Body
- Facts and evidence of the case are reviewed with interviewee
- Generally open-ended questions
- Allow interviewee to completely answer question
- Completely understand answers before moving on
- Demonstrate patience and don’t interrupt interviewee
- Focus on listening, gathering information, and watching for misdirection and deceit
- Issues with checklists and pre-written questionnaires
- Facts and evidence of the case are reviewed with interviewee
- Generally open-ended questions
- Allow interviewee to completely answer question
- Completely understand answers before moving on
- Demonstrate patience and don’t interrupt interviewee
- Focus on listening, gathering information, and watching for misdirection and deceit
- Issues with checklists and pre-written questionnaires
Three Stages of Interviewing: Close
- Review and summarize important aspects of the interview
- Clarify any questions regarding the interviewee’s responses
- Attempt to end the interview on a positive note
- Interviewer should leave the door open for future discussion
- Review and summarize important aspects of the interview
- Clarify any questions regarding the interviewee’s responses
- Attempt to end the interview on a positive note
- Interviewer should leave the door open for future discussion
Ending Questions
- Is there anything that I have forgotten to ask?
- Is there anything else you would like to add for the record?
- Is there anyone else I should speak with about the issues we have covered?
Two Stages of Interrogations: Introduction and Admission-
Seeking
- Reserved for obtaining confessions from those believed to be culpable for the acts under examination
- Reserved for obtaining confessions from those believed to be culpable for the acts under examination
Two Stages of Interrogations: Introduction and Admission-
Seeking
Two main phases
- An in__
- The process of o___ng a c__on to the ac___
- An introduction
- The process of obtaining a confession to the acts
