Forensic accounting session

Forensic Accounting and Fraud:
Things You Must Know
Jim Kaplan CIA CFE
AuditNet®
November 5, 2014

About Jim Kaplan CIA CFE
About Jim Kaplan
• Internal audit professional
• Certified Internal Auditor
• Certified Fraud Examiner
• Recipient of the IIA’s Bradford
Cadmus Award and Local
Government Auditors Lifetime
Achievement Award
• Founder and Creator of AuditNet®
Jim Kaplan CIA CFE AuditNet®
What I am not
• IT Auditor
• CPA
• Forensic Accountant
• Lawyer
• Criminal Investigator
• Inspector General

AuditNet® Content
• AuditNet® provides more than 2,300 audit templates to
subscribers and site license users including TeamMate, ACL,
IDEA, Protiviti KnowledgeLeader, and AHIA.
• Content includes the complete AuditNet® library of over 15,000
audit procedures and workpapers. New content is added to the
site every month including articles, templates, surveys and
much more.
• Approximately 5% of the content is fraud specific (templates,
matrices, guides)
• Since 2009 AuditNet® has provided content for CCH Accounting
Research Manager
• 2014 acquired AuditNet.com domain name

Session Description
• Forensic Accounting and Fraud: Things You Must Know The areas of forensic
accounting and fraud detection have become increasingly more important to
business entities and their financial statement auditors. Learn what you need
to know, how you can best leverage forensic accounting and fraud detection
experts.

Agenda
• Part 1 Things You Should Know
— Fraud Statistics
— What is Forensic Accounting?
• Part 2 Leveraging Experts
— Skill Set for Forensic Accountants and Fraud Examiners
— Finding Forensic/Fraud Professionals
• Part 3 Resources
— Finding the tools, techniques and Web sites
— What’s Next? Leading Edge

Equity Funding Tone at the Top Example
6

Fraud Statistics

The Cost of Occupational Fraud
8

Duration of Fraud Schemes
9

Detecting Occupational Frauds
10

Source of Tips
11

Impact of Hotlines
12

Anti-Fraud Controls at the Victim Organization
13

Effectiveness of Controls
14

Perpetrator’s Position
15

Fraudster Video
16

What is Forensic Accounting
• Focus is:
— the evidence of economic transactions and reporting
— the legal framework which allows such evidence to be suitable to the purpose(s) of
establishing accountability and/or valuation
• In other words:
— the identification, interpretation, and communication of the evidence of
economic transaction and reporting events

What is forensic accounting?
• Forensic Accounting - specialty practice area of accounting that describes engagements
resulting from actual or anticipated disputes or litigation.
• Forensic accounting - application of a specialized knowledge and specific skills to find
evidence of economic transactions. The job demands reporting, where the accountability of
the fraud is established and the report is considered as evidence in the court of law or in the
administrative proceeding.
• Forensic accounting - suitable for legal review, offering the highest level of assurance, and
including the now generally accepted connotation of having been arrived at in a scientific
fashion.

NEED FOR FORENSIC ACCOUNTING
• Corporate scandals have led business owners to turn to Forensic Accountants for proactive
fraud checkups.
• CEOs must now certify that their financial statements are faithful representations of the
financial position and results of operations of their companies and rely more heavily on
internal controls to detect any misstatement that would otherwise be contained in these
financials. Thus, publicly held companies are likely to see the necessity for forensic
accounting as a part of a strong internal control effort to comply with governmental and
market demands for accurate reporting.
• Forensic accountants who work for private companies help prevent and detect misuse of
company resource.

Who needs Forensic Accountants?
• Forensic Accountants work in most major accounting firms
• Needed for investigating mergers and acquisitions, and in tax
investigations, economic crime investigations, all kinds of civil litigation
support, specialized audits, and even in terrorist investigations.
• Work throughout the business world, in public accounting, corporations,
and in all branches of government (from the FBI and CIA to the offices of
the local authorities). F
• Forensic Accounting firms are everywhere

Forensic Accounting vs Auditing: Interchangeable?
• Forensic Accounting
— the use of accounting skills to investigate fraud or embezzlement and to analyze financial
information for use in court cases or other legal proceedings.
• Litigation support
• Investigative accounting
• Forensic Auditing
— A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement
or other financial claims. In addition, an audit may be conducted to determine negligence
or even to determine how much spousal or child support an individual will have to pay.

• often mistakenly assumed to be exclusively associated with "negative"
applications, such as bankruptcy, fraud, business disputes, or matrimonial
divorce.
• may also be applied in "positive" assurance engagements such as due diligence
reviews, business valuations, audit committee advisory services and enterprise
risk management.

• Forensic accounting is applied to the evidence of first order activities, not
secondary systems of controls.
• Analysis includes the crucial aspect of recognizing the implications of evidence
that has been obtained.
• Additional protocol extensions are employed to forecast or predict future
conditions based on known past transactions or events.

What is a Forensic Accountant?
One part accountant, one part detective and one part legal expert.
Specialty practice area of accounting that describes engagement that result from
actual or anticipated disputes or litigation.
“Forensic means “suitable for use in court of law”

Objectives Differing
• Financial auditing. The auditor’s objective in a financial audit is to render an opinion on
whether the information appearing in a set of financial statements is presented fairly in
conformity with generally accepted accounting principles (GAAP).
• Fraud auditing. The objective of a fraud audit is for the auditor to assess the likelihood that
fraud will be detected or prevented in a corporate or regulatory environment.
• Forensic accounting. The objective of a forensic accounting engagement is related
specifically to the issue defined by the party engaging the accountant.
The objectives differ for each type of engagement.

Professional Standards
• AICPA - SAS No. 99 - Consideration of Fraud in a Financial Statement Audit
• PCAOB - AU Section 316 Consideration of Fraud in a Financial Statement Audit
• IFAC - International Standard on Auditing (ISA) 240
• IIA 2210.A2 - Internal auditors must consider the probability of significant
errors, fraud, noncompliance, and other exposures when developing the
engagement objectives.
• ACFE - Professional Standards for Certified Fraud Examiners

Forensic Accounting vs Financial Audit Differences
Forensic Accounting
• In response to an event
• Financial investigation
• Findings used as evidence in court
or to resolve disputes
Financial Audit
• Mandatory
• Measures compliance with
reporting standards
• Obtain reasonable assurance that
financial statements are free of
material misstatement

ETHICS - INTERVIEW WITH A FRAUDSTER
28

Equity Funding - Ethics Example
29

Forensics Accountant Profile
• Analytically-minded and inquisitive, with “street smarts”
• Ability to think creatively or “outside the box”
• Able to multitask and work well under pressure
• Able to communicate complex financial concepts in a manner that
is simple and easy to understand
• Usually hold at least the CPA and CFE (Certified Fraud Examiner) or
other forensic designations

Skill Set for Forensic and Fraud Professionals
• Forensic accountants are also referred to as fraud examiners
• Not constrained by generally accepted accounting concepts like materiality
• Background may include investigators, law enforcement or legal professionals
• Specialized certifications offered by professional associations including ACFE,
AICPA

Certified Professionals

Forensic Tools and Techniques
• Planning the audit
• The forensic audit team must carefully consider what they have been asked to achieve and
plan their work accordingly. The objectives of the investigation will include:
— identifying the type of fraud that has been operating,
— how long it has been operating for,
— how the fraud was concealed for the duration
— identifying the fraudster(s) involved
— quantifying the financial loss suffered
— gathering evidence to be used in court proceedings
— providing advice to prevent the re-occurrence of the fraud.
• The investigators should also consider the best way to gather evidence, through data-mining,
checking the transaction log systems, SWIFT for financial transaction,

Forensic Accounting Scope
• Discovery: Identifying the relevant key issues and information
• Analysis: Interpreting the discovery results
• Communication: Presenting the information verbally and in writing

The Role of Technology
• Computer forensics involves the gathering, analysis, interpretation and
reporting of evidence when a crime is suspected, or after a crime has been
committed

Using Big Data & Analytics to combat fraud and mitigate risk
36

Knowledge, Skills, Abilities: Needs
Auditor’s need KSAs to …
• Build a digital audit trail
• Collect “usable” courtroom electronic evidence
• Trace an unauthorized system user
• Recommend or review security policies
• Understand computer fraud techniques
• Analyze and valuate incurred losses

KSA’s Continued
• Understand information collected from various computer logs
• Be familiar with the Internet, web servers, firewalls, attack methodology,
security procedures & penetration testing
• Understand organizational and legal protocols for incident handling
• Establish relationships with IT, risk management, security, law enforcement

Data Analytic Tools for Detecting Anomalies
• The following software is used by auditors, accountants, fraud examiners,
compliance and other professionals to facilitate data analysis
• ACL
• IDEA
• Excel
— TopCaats
— ActiveData
• Arbutus

Forensic data mining
• Use of sophisticated procedures and technologies to identify concealed
patterns in financial, nonfinancial and textual data that would not otherwise
be detectable due to the size and complexity of the data.
40

Equity Funding Brainstorming Scenario
41

Patterns identified with data mining
• Numeric Patterns – fictitious invoice numbers, fictitiously-generated
transaction amounts…
• Time Patterns – Transactions occurring too regularly, activity at unusual times
or dates…
• Name Patterns – Similar and altered names and addresses…
• Geographic Patterns – Proximity relationships between apparently unrelated
entities…
• Relationship Patterns – Degrees of separation…
• Textual Patterns – Detection of “tone” rather than words…
• Unknown Patterns – Things you haven’t thought of…
42

Leading Edge
• Non-Obvious Relationship Association (“Link Analysis”)
• Linking items that are related but removed by several degrees of separation to
mask their relationship.
• Latent Semantic Analysis
• Concept searching based on tone, recurring themes and communication
nuances
43

Social Media Forensics and Fraud
• Using Social Media for Investigations
—Personal injury and workmen’s compensation (pictures
posted on Facebook)
—Unused vacation payouts – matching business travel with
online postings
—Living beyond means – photos of extravagant items (cars,
vacations etc.)
44
The Internet’s not written in pencil… It’s written in ink.
The Social Network

Subscription Based Services
• CCH's Accounting Research Manager® is the most timely
and comprehensive online database of expert-written
analytical accounting, auditing, governmental, internal
controls and SEC information as well as primary source
data. Updated daily, it provides current, complete and
objective resource for your financial reporting needs.

Online Tools and Resources Forensics & Fraud
• AuditNet®
— Templates and fraud checklists, workbooks and matrices
(subscription required)
• Association of Certified Fraud Examiners
• Protiviti KnowledgeLeader
— Fraud Prevention and Detection Audit Work Program
(subscription required)
• Corporate Executive Board
— Audit Director’s Roundtable (subscription required)
• Forensic Accountant & Fraud Examiner Tool Kit (available
free from AuditNet®)

Other Suggested Tools
• Google Alerts Monitor the web for interesting new content
https://www.google.com/alerts
• ACFE
— The FraudInfo blog provides updates on the biggest fraud stories in the news. Or, you
can have theFraudInfo e-newsletter delivered to your inbox.
— ACFE Insights provides news, analysis and commentary on the global fight against
fraud.
— The ACFE Report to the Nations on Occupational Fraud and Abuse, based on data
investigated by CFEs around the world, is one of the most thorough and oft-cited
studies on fraud in the workplace.
• White Collar Crime Fighter Newsletter – http://fraudresourcenet.com
47

Interview with a Fraudster
48

Tour of Resources
• Join me as we take a tour of the resources mentioned.

Navigation Tour
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auditors including links to audit sites, aids and resources for small
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What’s New?
• Now that you have had a tour of AuditNet®
here are the latest updates and enhancements:
— Available as apps on iOS, Android, Windows
devices and tablets.
— Adding new industry related content
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— Translating AuditNet® content and site
into other languages
— Surveys on leveraging technology to
support moving auditors and audit
departments up the audit technology
maturity curve
— Partnered with FraudResourceNet – new
content rich site offering free subscription
to White-Collar Crime Fighter Newsletter

Keyword Analytics Survey
December 3 Using Key Word Analysis of an Organization’s Big Data
for Error and Fraud Detection
Survey Link: https://www.surveymonkey.com/s/KeyWordAnalytics
Take the survey and join us. 2 CPE (NASBA approved sponsor)
Page
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Ticket Link to Register:
https://www2.gotomeeting.com/register/928325250
You must take the survey to attend the event at no charge!

Equity Funding – The End
61

Forensic Accounting and Fraud What You Need to Know

Forensic accounting session

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