Forensic Accounting

Dr. Lynn H. Clements

CPA CFE Cr.FA CMA CFM
 What is Forensic Accounting?
• An orderly analysis, investigation, inquiry,
test, inspection, or examination along a
“paper trail” in the search for fraud,
embezzlement, or hidden assets
• Two parts:
– Investigative accounting
– Litigation support
• Treats all figures as suspect until proven
otherwise
 The History of Forensic
Accounting
• 1931
• World War II
• 1980s: Real estate bankruptcies, junk bond
schemes, and lawsuits
• 1988 ACFE was formed in Austin, Texas
• Initially called “investigative accounting”
• Increase in regulatory, tax and criminal
statutes became law
 The Need for Forensic
Accountants
• A 2001 survey found the following:
– 37% of the country’s top 100 accounting firms are
increasing their forensic and fraud services
– The average organization loses 6% of revenue to
employee fraud and abuse
– The typical perpetrator:
• Colleges and universities are responding
• Many frauds are not reported
• There are 13,000 CFEs in the ACFE, compared to
2,300 just 10 years ago
• Wells Report
 What Does a Forensic
Accountant Do?
• Attempt to obtain the truth and
develop an expert opinion
• Sniff out corruption
• Pore over financial documents,
reconstruct records, interview
people, and present report
interpreting and explaining
complicated financial information
• Solve a large puzzle
 The Services a Forensic
Accountant Provides
• Damages
• Antitrust Analyses
• Accounting
• Valuation
• General Consulting
• Other Analyses
 How to Become A Forensic
Accountant
• CFE (Certified Fraud Examiner):
– Experience requirements (point system)
– Educational requirements
– Uniform CFE Examination (online quiz)
– CPE
– Code of Ethics
– High moral character
– www.cfenet.com
– Fraud Check-Up
 How to Become A Forensic
Accountant
• Cr.FA (Certified Forensic Accountant):
– CPAs - one exam
– Regional conferences
– www.acfe.com
– American College of Forensic Examiners
 The Fraud Triangle

Motive

Rationalization Opportunity

[Source: Michael Kurland, How to Solve A Murder: Macmillan, 1995, pp. 7-8]
 Proactive Fraud Auditing
• Going fishing
• Thinking like a fraud auditor
• Choosing a fraud type
• Procedures
 Reactive Fraud Auditing
• Symptoms
• Cost Variances
• Expected Costs
• Employee’s Lifestyle
 Fraud vs. White-Collar Crime
• “White collar crime is criminal conduct that does not
involve violence or the threat of violence and usually
takes place in a professional work place”
• Fraud happens anywhere, white-collar crime is in the
workplace
• Fraud is perpetrated by anyone, white-collar crime is
by business people/professionals.
• Fraud is not always criminal, white-collar crime is
mostly criminal
• Fraud does not always involve something of value,
white- collar crime does.
 Red Flags
• No Company Policy Manual
• Feeling of disorganized
bookkeeping, purchasing,
receiving, and/or warehousing
departments
• Missing documents
• Unrecorded transactions
• No bank reconciliations
• Subsidiary ledgers out of balance
• No physical inventory counts
• Checks written to cash
• Large related party loans
• Excessive other revenue
• Negative operating cash flow
• Downward earnings trend
• Handwritten checks
• Extensive fund transfers
• Unusual transactions
(inconsistent)
• Deficient hiring policies and
procedures
• Employees’ lifestyles inconsistent
with salaries
• Employees who don’t take
vacations
• SPEs
• Excessive insider sales of stock
• Unexplained resignations of
upper management
• Excessive debt/equity ratio
• CPA switching
• Strange account titles
Forensic Accounting : Pros and Cons
• Why?
– Innovation in the industry
– Serve a cause, help to fight organized crime
– Gratification
– $175 to $300 per hour
• Why not?
– Verbal attacks by lawyers in depositions and on the
witness stand
– Dealing with lawyers on a regular basis
– Attention to detail