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FORENSIC MEDICINE AND MEDICOLEGAL. Clinical Skill Lab Forensic Medicine-Medicolegal. Medical Faculty of Hasanuddin University. Makassar. Description. FRAUD AUDITING AND FORENSIC ACCOUNTING. With the responsibility of detecting and preventing fraud falling heavily on the accounting . cittadelmonte.info_textbook-forensik-mudah-membuat-visum-et-repertum-luka-buku- hitam (1).pdf - Download as PDF File .pdf), Text File .txt) or read online.
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Emeritus Professor of Forensic Pathology, University of Wales College of Medicine, UK. Formerly Consultant Forensic Pathologist to the Home Office, UK. Computer Hacking Forensic Investigator (CHFI) from EC-Council . Informasi Elektronik adalah satu atau sekumpulan data elektronik, termasuk tetapi. FFIRS 07/01/ Page 2 FFIRS 07/01/ Page 1 Fraud Auditing and Forensic Accounting FFIRS 07/01/ Page 2 FFIRS.
Looks like you are currently in Ukraine but have requested a page in the Chile site. Would you like to change to the Chile site? Tommie W. Providing valuable information to those responsible for dealing with prevention and discovery of financial deception, Fraud Auditing and Forensic Accounting, Fourth Edition helps accountants develop an investigative eye toward both internal and external fraud and provides tips for coping with fraud when it is found to have occurred. Completely updated and revised, the new edition presents: Brand-new chapters devoted to fraud response as well as to the physiological aspects of the fraudster A closer look at how forensic accountants get their job done More about Computer-Assisted Audit Tools CAATs and digital forensics Technological aspects of fraud auditing and forensic accounting Extended discussion on fraud schemes Case studies demonstrating industry-tested methods for dealing with fraud, all drawn from a wide variety of actual incidents Inside this book, you will find step-by-step keys to fraud investigation and the most current methods for dealing with financial fraud within your organization. Written by recognized experts in the field of white-collar crime, this Fourth Edition provides you, whether you are a beginning forensic accountant or an experienced investigator, with industry-tested methods for detecting, investigating, and preventing financial schemes.
Aaron has published articles related to fraud and forensics in journals including the Information Security Journal and the Journal of Corporate Accounting and Finance.
Aaron earned his master's of accountancy from Bowling Green State University, and bachelor's degrees in accounting and management from the University of Alabama at Birmingham. Permissions Request permission to reuse content from this site.
Chapter Undetected country. NO YES. Selected type: Added to Your Shopping Cart. Singleton ISBN: Table of contents Preface xi Acknowledgments xiii Chapter 1: The acts of and essentially created the demand for financial auditors and the CPA profession that exists to this day.
During this period, high-dollar frauds reached all types of industries. For example, Waste Management in trash services, Phar-mor in pharmacy, Sunbeam in manufacturing, Enron in energy, WorldCom in telecommunications, Adelphia in media, Fannie Mae in government, and HealthSouth in health services all occurred during this time. Several of these frauds were among the largest ever, and they occurred during a short period of time.
Although the cost of the WorldCom fraud was far greater, the most notable fraud, as far as impact on the business community, is probably Enron.
In , Enron filed bankruptcy after disclosing major discrepancies in revenues and liabilities in its financial reports. The audit firm Arthur Andersen came to an end as a result of the ramifications of the Enron scandal by In , the U. Perhaps nothing has brought more attention to fraud audits and forensic accounting than the Enron scandal and SOX.
More recently, the housing and real estate boom of the s has led to increased fraud particularly in the area of mortgage fraud. SARs from financial institutions indicated an increase in mortgage fraud reporting.
SARs increased 31 percent to 46, during fiscal year FY The total dollar loss attributed to mortgage fraud is unknown. Are all of these events merely historical flukes? Did media attention create them? Media attention may have created the original public awareness, but the frauds and corruption were there all the time, and there exists no real way of measuring or comparing them.
Part of the problem during the period of time when such large frauds occurred was the mind-set of the regulators and auditors, which has since turned around completely. Claims by management and others are less likely to be accepted at face value, and the financial well-being of the general public is more of a concern to antifraud and audit professions.
Suspicion fell on industries, professions, and various areas of government. The undivided attention of auditors, regulators, management, and employees then led to wholesale charges of fraud, theft, and corruption.
After , the pendulum was close to an extreme end, one that entailed ultraconservatism on the part of companies, and auditors as well, and the stiffest requirements and enforcement by regulators and legislators.
After swinging toward a more balanced position, the recent economic crisis has moved the pendulum back toward the extreme of This cycle pendulum swing is a natural result of human nature, business cycles, and the nature of legislation and regulation.
The cycle can certainly be influenced and controlled to some extent, but it will probably never cease. Fraud auditing literature discloses a common theme: Fraud is endemic and pervasive in certain industries, locales, companies, and occupations at partic- ular points in history. For example, railroad promoters in the s raised more capital from less informed investors than ever before and the railroad industry had numerous frauds exposed.
During the s, more doctors were involved in more income tax frauds than ever before or since. Food franchisers, in the late s, are another example of the fraud phenomenon. Some fast-food franchisers sold unwary small investors on untested restaurant concepts at overvalued prices. These half-baked concepts led to the bankruptcy of many of the franchisees. During the Watergate era of the early ls, politicians were involved in corruption and fraud against taxpayers, and corporations were involved in political and commercial bribery, leading to the Foreign Corrupt Practices Acts of Once committed, the fraudster converts the asset to cash, if necessary, and conceals the fraud.
A fraud investigation is of necessity based on legal factors, because any fraud may end up in a court of law. The immediate facts to determine are whether a fraud has occurred and whether there is: The six basic steps in the fraud investigation are: Acquire all available details and documents relating to the allegation.
Assess the allegation against the available documentation. Assess the corporate environment relative to the person in question. Ask whether a theory of fraud can be developed at this stage. Is there motive and opportunity?
Determine whether the available evidence makes sense. Does it meet the test of business reality? Communicate with appropriate parties on the details and status of the fraud. After performing these steps, two possibilities exist. Either one has identified the fraudster and knows who she is, or one has not. If not, more investigation is necessary. But if one does identify the fraudster, the process becomes critical to what is no longer an investigation, rather a pursuit of legal action.
Evidence gathered may consist of the testimony of witnesses, documents, items means and instruments, or fruits of the crime , and possibly the confession of the perpetrator. Experienced fraud investigators know what evidence is needed to prove the crime and how to attain that evidence. Typically, interviewing the alleged, or known, fraudster is done only after competent and sufficient data have been gathered, assessed, and reasoned.
If prosecution of a civil or criminal charge is sought, evidence must be presented in court—which is where the expert witness skill of a forensic accountant or fraud auditor is valuable.
The court, trier of fact, then resolves the charge of fraud ending the fraud cycle. This book provides readers with insight into each of these phases of the fraud life cycle. It also delves into the mind and behavior patterns of fraud perpetrators, their schemes, and the evidence they leave behind—from which their crimes can be reconstructed.
Every fraud has its own unique wrinkles. They tend to be opportunists. Given a set of circumstances that allow them to steal, they take the easiest way, usually weighing risks and rewards carefully. Culprits usually leave trails and sometimes make mistakes. Auditors must learn to look for these signs, or red flags, as they will be referred to in this book.
While each fraud is different in some ways, they all have some similarities. The savings and loans scandals of the early s led to the National Commission on Fraudulent Financial Reporting commonly known as the Treadway Commission, named after the chair of the Commission , which carried on its work as the Committee of Sponsoring Organizations COSO , which is still functioning today.
According to Treadway Commission findings, the most effective way to prevent financial scandals, such as the savings and loan ones, is for companies to have a strong set of internal controls. It focuses on five key areas of internal controls: Risk assessment 2. Control environment 3.
Information and communication 4. Monitoring 5. The COSO Report was becoming a widely accepted framework for evaluating internal controls, and its acceptance and use was expected to grow. As a result, SAS No. The result was a serious shock to the economy and to society as a whole. Public concern over fraud, in general, erupted to new and seemingly endless heights. Although concern over fraud has decreased some a natural pendulum effect , the mentality toward fraud has clearly changed and for the better.
Another positive result is that these large scandalous frauds have created a greater awareness of the need to further develop the discipline of fraud auditing. In the current environment, there is an extremely heightened expectation for businesses, auditors, investigators, and regulators to stop fraud. In order to control fraud, the response spurred by legislation must equal or exceed the energy exerted by fraudsters, which appears to have pervasively infiltrated society.
SOX in particular has greatly affected the awareness of and attention to fraud. The bottom line is, management of public companies has to accept responsibility for fraud per SOX and financial auditors have to be active in detecting fraud to comply with SAS No. SAS No. One is for auditors to exercise professional skepticism; that is, auditors are to be constantly mindful of the potential for fraud.
The other is that fraud assessment must be included in audit steps from planning to reporting findings. The audit team must identify, assess, and respond to fraud risks. Subsequently, the audit team must evaluate the findings of the audit tests and report to an appropriate level of management usually the audit commit- tee. Documentation must exist for all of these audit steps. This section also forces management to state their respon- sibility for internal controls. The internal control evaluation report and certain financial reports have to be signed by the chief executive officer CEO and chief financial officer CFO , providing a legally enforceable claim.
SOX also brought about these changes: AS 5 adopts many SAS 99 requirements. As part of that adoption, AS 5 via SAS 99 notes the audit of internal control and the financial statement audit are connected, should be risk-based, and requires the nature, timing, and extent of financial statement audit procedures to be adjusted according to the results of the internal control audit.
Results here certainly include any findings regarding fraud. Yet the need for fraud-auditing talents is not related solely to compliance with new governmental regulations. One of the key points to under- stand about forensic accountants is the difference and roles of financial audits versus fraud audits. This section will discuss some of the issues and differences. It includes preventing frauds and analyzing antifraud controls.
Forensic accounting would include the audit of accounting records in search for evidence of fraud; a fraud audit. A fraud investigation to prove or disprove a fraud would be part of forensic accounting. It also includes the gathering of nonfinancial information, such as interviews of all related parties to a fraud, when applicable. Forensic accounting includes writing a report to management or court. Serving as an expert witness and litgation support are part of forensic accounting.
Although relatively new to the accounting profession, the role of a forensic expert in other professions has been in place for some time. Forensic accounting evidence, therefore, is oriented to a court of law.
Financial Auditors, Fraud Auditors, and Forensic Accountants In the lexicon of accounting, terms such as fraud auditing, forensic accounting, fraud examination, fraud investigation, investigative accounting, litigation sup- port, and valuation analysis are not clearly defined. Some distinctions apply between fraud auditing and forensic accounting.
Fraud auditing involves a specialized approach and methodology to discern fraud; that is, the auditor is looking for evidence of fraud. The purpose is to prove or disprove a fraud exists. Historically, forensic accountants, however, have been called in after evidence or suspicion of fraud has surfaced through an allegation, complaint, or discovery. Forensic accountants are experienced, trained, and knowledgeable in all the different processes of fraud investigation including: The ACFE refers to this definition of forensic accounting as fraud examination.
In recent years, the broadest of these terms in the antifraud profession is forensic accounting, which typically refers to the incorporation of all the terms involved with investigation, including fraud auditing; that is, fraud auditing is a subset of forensic accounting. So fraud investigation includes fraud audit but goes beyond it in gathering non- financial forensic evidence.
Litigation support refers to a forensic accountant assisting attorneys in prosecuting or defending a case in the legal system. That support can take on a variety of skills but ultimately is intended to conclude with the forensic accountant offering an opinion in a court of law as an expert witness on whether a fraud occurred. Valuation is a cottage industry of its own that overlaps with fraud.
Financial auditing is a wholly different term that needs to be distinguished from forensic accounting and fraud auditing. Financial auditing typically refers to the process of evaluating compliance of financial information with regula- tory standards, usually for public companies, by an external, independent entity.
The well-publicized SOX incorporates concepts and procedures to deter and to catch fraud in audits of internal controls over financial reporting. However, the focus of financial audits and financial reporting ultimately is concerned with providing reasonable assurance that a material misstatement to financial statements has not occurred, regardless of the reason.
Financial Auditors The term financial auditor broadly applies to any auditor of financial information or the financial reporting process. The largest classification of financial auditors is those who work for public accounting firms and perform audits of financial statements for public companies. This classification is the most commonly used in this book when referring to financial auditors. As expressed in the GAAS literature, the most important financial auditing attributes are independence, objectivity, and professional skepticism.
Financial auditors traditionally have been seen as, and to an extent have been, numbers oriented, and their processes have been driven by the audit trail. The financial audit procedures are designed to detect material misstate- ments, and thus financial auditors focus on misstatements that singularly or in the aggregate are large enough to be material. Fraud auditors and forensic accountants are not constrained by materiality.
The discipline of financial auditing has been thought to be almost a checklist of items to complete.
In reality, judgment is crucial in financial auditing and has progressively increased in the direction of more dependence on auditor judgment. Additionally, auditors are to consider environmental, including soft, intangible, factors in that evaluation.
Fraud Auditors Fraud auditors are generally accountants or auditors who, by virtue of their attitudes, attributes, skills, knowledge, and experience, are experts at detecting and documenting frauds in books of records of accounting and financial transactions and events.
Their particular attitudes include these beliefs: The skills fraud auditors require include all of those that are required of financial auditors, plus the knowledge of how to gather evidence of and document fraud losses for criminal, civil, contractual, and insurance purposes; how to interview third-party witnesses; and how to testify as an expert witness.
They also need both general and specific kinds of experience. Fraud auditing is creating an environment that encourages the detection and prevention of frauds in commercial transactions. In the broadest sense, it is an awareness of many components of fraud, such as the human element, organizational behavior, knowledge of fraud, evidence and standards of proof, an awareness of the potentiality for fraud, and an appreciation of the red flags.
Some of the functions of a fraud auditor follow. In short, fraud auditing is the process of detecting, preventing, and correcting fraudulent activities. While completely eliminating fraud is the goal, it is simply not feasible. The concept of reasonableness is applicable here, and this concept is often associated with the fraud-related fields of financial accounting and auditing.
Fraud auditors should be able to thwart a reasonably preventable fraud. Accounting-type frauds are usually accompanied by the modification, alteration, destruction, or counterfeiting of accounting evidence. But account- ing records can be either intentionally or accidentally modified, altered, or destroyed, by human error or omission.
The first objective for the fraud auditor, then, is to determine whether a discrepancy in accounting records is attribut- able to human error. If it is, there may be no actual fraud.
If the discrepancy missing records, destroyed records, modified records, counterfeit records, errors, omissions cannot be attributed to accidental or human error, further investigation should follow at an appropriate level. Forensic Accountants Forensic accountants may appear on the crime scene a little later than fraud auditors, but their major contribution is in translating complex financial transactions and numerical data into terms that ordinary laypersons can understand.
That is necessary because if the fraud comes to trial, the jury will be made up of ordinary laypersons. Areas of expertise of forensic account- ants are not only in accounting and auditing but in criminal investigation, interviewing, report writing, and testifying as expert witnesses. They must be excellent communicators and professional in demeanor. The involvement of the forensic accountant is almost always reactive; this distinguishes forensic accountants from fraud auditors, who tend to be actively involved in prevention and detection in a corporate or regulatory environment.
The ACFE refers to this person as a fraud examiner. The forensic accountant draws on various resources to obtain relevant financial evidence and to interpret and present this evidence in a manner that will assist both parties. Ideally, forensic accounting should allow two parties to more quickly and efficiently resolve the complaint, statement of claim, rumor, or inquiry, or at least reduce the financial element as an area of on- going debate.
Objectivity and independence of the forensic auditor are paramount for these purposes. Differences among the Three Forensic accountants, fraud auditors, and investigative auditors measure financial transactions in relation to various other authorities, such as the Criminal Code, an insurance contract, institutional policies, or other guidelines for conduct or reporting.
In the investigation, one does not reject evidence as being immaterial; indeed, the smallest item can be the largest clue to the truth. The process of forensic accounting is also sometimes more intuitive than deductive, although both intuition and deduc- tion play important parts.
Financial auditing is more procedural in many regards and is not intended to work as effectively in detecting frauds as the tenets of fraud auditing and forensic accounting. When a questionnaire was circulated among the staff members of Peat Marwick Lindquist Holmes, a Toronto-based firm of chartered accountants responsible for the forensic and investigative accounting practice, responses were insightful and should be of interest to the reader.
How would you distinguish forensic accounting, fraud auditing, and investigative auditing from financial auditing? The financial statements upon which the opinion is rendered are always the repre- sentations of management.
The auditor is primarily concerned with qualitative values hence the concept of materiality comes into play and generally is not concerned about whether the financial statements communicate the policies, intentions, or goals of management.
Forensic accounting is a general term used to describe any financial investigation that can result in a legal consequence. Fraud auditing is a specialized discipline within forensic accounting, which investigates a particular criminal activity, namely fraud. Investigative auditing involves reviewing financial documentation for a specific purpose, which could relate to litigation support and insurance claims as well as criminal matters.
The materiality level of an investigative auditing engagement is much lower and more focused than that of the normal financial auditing engagement. How would you define what you do as a forensic accountant? I think of myself as one who seeks out the truth. I would define my forensic accounting responsibilities as follows: My role is that of an objective observer or expert. The final report that is issued as a result of my work will be used to negotiate some sort of settlement, be it financial or be it imprisonment.
My role as a forensic accountant extends beyond the particular financial circumstances and seems to be one of an objective individual who provides the buffer between, in civil instances, the client and counsel, and, in criminal instances, the investigator and the prosecutor. Therefore, I am consid- ered an integral member of the team of professionals assigned to any given case.
Related to the specific work that I do, it has been described to me, and I agree, that the makeup of a given forensic accountant is one- third business person, one-third investigator, and one-third accountant. As with any other pursuit, a healthy mind in a healthy body is a solid foundation. Beyond that, one should have generous proportions of common sense, inquisitiveness, skepticism, and an ability to avoid the natural tendency to prejudice—that is, to be fair and indepen- dent.
In addition, because forensic work ultimately can lead to court appearances, good posture, grooming, vocal projection, and stamina can all be valuable attributes. The foremost quality a forensic accountant requires is independence, because a forensic accountant is often forced to balance conflicting opinions about the same piece of documentation.
The second major quality is an intense sense of curiosity coupled with a sense of order—a desire to put the puzzle back together. The forensic accountant needs to be calm, cool, and collected; have good business judgment; and have a mind that can deal logically with esoteric issues and precise matters.
A forensic accountant involved in litigation must be physically fit to withstand the long days and long nights of investigation and preparation for trial and the trial itself.
Forensic accountants need to have a pleasant appearance and de- meanor so that they will not be offensive when in the witness box. What skills are most important to the successful practice of forensic accounting? Even the best-planned and executed assign- ment can fail if you are unable to clearly and concisely present your findings. A forensic accountant needs to be precise, pay attention to detail, and be a broad thinker; that is, not suffer from tunnel vision.
When looking at a given forensic accounting engagement, there are two major areas that come to mind in the completion of a given case. First, there is the investigative aspect, and second, the communica- tion aspect. I feel that investigative skills would include areas such as the ability to assimilate large volumes of information, general orga- nization and administrative skills, use the microcomputer or under- stand the abilities of the microcomputer, and interpersonal skills.
Communication skills would include the ability to write a compre- hensive report understandably.
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Communications skills: Congress, have questioned why financial auditors do not detect more fraud. The truth, however, is that the procedures for financial audits are designed to detect material misstatements, not immaterial frauds. While it is true that many of the financial statements and frauds could have, perhaps should have, been detected by financial auditors, the vast majority of frauds could not be detected with the GAAS of financial audits.
The latter is simply resource prohibitive in terms of costs and time.
Fraud auditors look behind and beyond the transactions and audit trail to focus on the substance of the transactions instead. Another difference is the current status of technical guidance combined with research on frauds.
Frauds can be divided into three main categories: Financial frauds are typically perpetrated by executive management and average millions of dollars in losses. Generally speaking, therefore, financial frauds are likely to be material, and thus financial audit procedures have the potential to detect them—because they would be a material misstatement, due to a material fraud.
Cynthia Cooper argues that at WorldCom she was thwarted from doing her job as internal auditor, but she eventually did uncover the financial fraud being perpetrated there. Because of the scope of fraud, the fact that fraud occurs in a lot of different arenas, there are a lot of different groups who could benefit from the services of a forensic accountant. The increased business complexities in a litigious environment have enhanced the need for the forensic accounting discipline.
It is possible to summarize the range of application into the following general areas: Companies react to concerns that arise through a number of sources that might suggest possible wrongdoing initiated from within and without the corporate environment. From the anonymous phone call or e-mail from disgruntled employees and third parties, these problems must be addressed quickly and effectively to permit the company to continue to pursue its objectives.
More specifically, the forensic accoun- tant assists in addressing allegations ranging from kickbacks and wrongful dismissals to internal situations involving allegations of management or employee wrongdoing. At times, a forensic accountant can meet with those persons affected by the allegations, rumors, or inquiries; they may view the accountant as an independent and objective party, and thus be more willing to engage in discussion. Litigation support includes assisting counsel in investi- gating and assessing the integrity and amount relating to such areas as loss of profits, construction claims, product liability, shareholder disputes, bankruptcies, and breach of contract.
Obviously, litigation support is initiated by an attorney responding to some kind of legal action, whether criminal or civil.
Efforts to prevent white-collar crime have consistently used accountants and auditors in attempts to sort out, assess, and report on financial transactions related to allegations against individuals and com- panies in a variety of situations such as arson, scams, fraud e.
In criminal matters, accountants and audi- tors as expert witnesses are increasingly important in court cases. The preparation and assessment of insurance claims on behalf of the insured and insurers may require the assistance of a forensic accountant to assess both the integrity and the quantum of a claim.
The more significant areas relate to the calculation of loss arising from business interruption, fidelity bond, and personal injury matters. Whereas certain of these cases require financial projections, many need historical analysis and other accounting and auditing-oriented services.
Forensic accountants can assist enti- ties to achieve regulatory and contractual compliance by ensuring that companies follow the appropriate legislation, law, or contract terms. Grant and subsidy investigations and public inquiries form a part of this service to government. Forensic Accountant: Required Knowledge, Skills, and Abilities Many of the aspects of forensic accounting fall outside the traditional educa- tion, training, and experience of auditors and accountants.
Many times, the fraud investigation begins with minimal knowledge of the specifics of a potential fraud. The forensic accountant needs to be able to identify the possible scheme i. Throughout the course of seeking evidence and informa- tion, the forensic accountant becomes involved in interviewing. For the forensic accountant, this function is another art to master. There are many things about interviewing, including what is the best order in which to interview parties of interest, that the forensic accountant must know.
Most important, the forensic accountant must be prepared to handle a confession in such a way that the process ensures the evidence is admissible in a court of law. One of the critical success factors of forensic accountants, and one of the hardest to define or measure, is mind-set. A successful forensic accountant has a certain mind-set that includes several abilities.
He or she is able to think like a crook. This attribute is basically counter to the average auditor who has lived a life with integrity and believes strongly in honesty. This person has a healthy skepticism at all times, neither fully trusting people nor fully distrusting them.
They also know, and have, the following mind-set factors: It requires innovative and creative thinking as well as the rigors of science. It is imperative that a forensic accountant understand the rules of evidence in court and how to conduct the investigation from the beginning as if all evidence will make it to a court of law.
If these rules are ignored, evidence could be compromised and found inadmissible if it does get to court. The forensic accountant must have the ability to clearly communicate the findings resulting from the investigation in a fashion understandable to the layperson.
The presentation can be oral or written and can include the appropriate demonstrative aids. The role of forensic accountants in the witness box is the final test of the findings in a public forum.
By its nature, however, accounting and financial infor- mation is difficult for the average person to comprehend. Therefore, the forensic accountant as an expert witness must have above-average communication skills in distilling financial information in a manner that the average citizen can understand, comprehend, and assess to reach a sound conclusion. When the issues have been identified, it is imperative that further information and documentation be acquired to obtain further evidence to assist in either supporting or refuting the allegation or claim.
It is a question of knowing not only where the relevant financial documentation exists but also the intricacies of GAAP, financial statement disclosure, and systems of internal control, and being aware of the human element involved in frauds. Forensic accountants usually apply investigative skills at the appropriate time during the course of their investigations. For example, in dealing with criminal matters, the primary concern is to develop evidence around motive, opportunity, and benefit.
Of equal concern is that the benefit of doubt is given to the other side to ensure that proper interpretations are given to the transactions. Other concerns, such as the question of method of operation and the issue of economic risk, must also be addressed. Similarly, investigative skills are needed in litigation support. The forensic accountant must ensure that: Along with their accounting knowledge, forensic accountants develop an investigative mentality that allows them to go beyond the bounds set out in either GAAP or GAAS.
The following three tenets in forensic accounting are driven by the necessity to prove intent in court in order to prove there was a fraud. The investigative mentality develops in the search for best evidence, for competent and sufficient evidence, for forensic evidence.
For example: The investigative mentality is best developed by continued experi- ence as a forensic witness. When forensic accountants are presented with a situation generated by a complaint, allegation, rumor, inquiry, or statement of claim, it is important that they clearly identify the financial issues significant to the matter quickly.
They base their decisions on experience and knowledge, and any resulting recommendations must reflect both common sense and business reality. For example, if documents are needed from a foreign jurisdiction, although the most obvious recom- mendation would be to obtain these records, it is usually not practical to do so.
Other alternatives must be considered. It is unusual for a transaction or a series of events to have only one interpretation. The forensic accountant must be extremely conscious of a natural bias that can exist in the interpretation process. It is important that transactions be viewed from all aspects to ensure that the ultimate interpretation of the available information fits with common sense and the test of business reality.
Fraud Auditing and Forensic Accounting, Fourth Edition
A proper interpretation of information can be assured only when one has looked behind and beyond the transaction in question without any scope limitations. In particular, a forensic accountant who is called as an expert witness must be aware of alternative accounting or financial formulas, rules, and interpretations.
FRAUD AUDITORS Just as forensic accountant services are needed by a variety of groups, fraud audits also have a number of groups who could potentially benefit from their services, although it is somewhat less in scope than forensic accountants. The scope is less because fraud audits involve only a limited phase of the fraud cycle. Who Needs Fraud Auditors?
The need for fraud-auditing talent is not related solely to compliance with new governmental regulations. Police authorities on the state and local levels have few audit resources at their disposal; as a consequence, their ability to investigate certain white-collar crimes is limited.
There is a need for fraud auditing in both public and private sectors of the economy. Public accounting firms and other organizations in the private sector are developing fraud audit expertise. Although relatively few public accountants and internal auditors are specifically trained and experienced in this discipline, their numbers are rapidly increasing.
Fraud Auditor: Required Knowledge, Skills, and Abilities More broadly, fraud auditing focuses on creating an environment that encour- ages the detection, prevention, and correction of intended or executed fraud. The main thrust of this book is to provide auditors, investigators, and other persons in the fraud environment with the ability to establish and influence forces that effectively counter attempts at fraud.
Ability comes from insight, knowledge, and experience in viewing fraud as an economic, social, and organizational phenomenon. Fraud auditors should know the aspects of the common body of knowledge regarding fraud.
That knowledge includes: The fraud auditor, of course, needs to be able to apply that knowledge in the fraud environment. The personal attributes of fraud auditors include self-confidence, persist- ence, commitment to honesty and fair play, creativity, curiosity, an instinct for what is out of place or what is out of balance, independence, objectivity, good posture and grooming for courtroom testimony , clear communication, sen- sitivity to human behavior, common sense, and an ability to fit pieces of a puzzle together without force or contrivance.
Inevitably, accounting and investigative legal skills cross over and are inextricably tied together in the context of a forensic audit. As for accounting skills, an effective fraud auditor should be able to do the following competently: A couple of notes with regard to these skills should be made. Transactions are suspect if they are too high, too low, too often, too rare, too close, at odd times, in odd places, and so forth.
Beyond these skills that also relate to investigation, fraud auditors should be reasonably able to: The skills of a criminal investigator are in some respects similar to those of an auditor. An auditor and a detective both seek the truth: Both should have inquisitive minds and challenge things that appear to be wrong, knowing that many times, the opposite of what one would logically expect is the logical place to start.
Auditing for fraud is as much of an intuitive process as it is a formal, analytic methodology. It is as much of an art as it is a science. As a con- sequence, it is difficult to teach and more difficult to learn. Skill depends on the right mind-set thinking like a thief, probing for weaknesses and practice. But it is not technique that one should master; rather, it is mental disposi- tion: One seeks relevant information without assumption, organizes it in some meaningful way, and then sees the pattern it creates.
One goes behind and beyond those transactions to reconstruct what may have led to them and what has followed from them. Investigative Intuition Laypersons call this gift investigative intuition. Investigators call it professional judgment—judgment derived from knowledge, education, training, acquired skills, and experience. No one is wholly born with it, although certainly some are born more capable and some learn better. Intuition is learned mainly by trial and error. It is not a formula, and it cannot actually be taught.
The hunch of a trained investigator is worth much more, because it is based on experience, knowledge, and training. Even when auditors or investi- gators say they have discovered a fraud in accounting records by accident, it may be no accident; their trained eyes and ears can discern the truth. Police detectives also attribute some of their investigative insights to accident, chance, or good luck. It is not black magic or fortuitous circumstances.
Unfortunately, not all investigators or auditors have such know-how. The investigative mentality comes with age, training, self-discipline, experience, and a mind-set that understands that crime and fraud are possible in any environment, at any time, by anyone, if the circum- stances are ripe.
Applicable Laws and Regulations Fraud auditors should be familiar with applicable legislation, standards, and other requirements. These laws, together with the increase in fraud in public companies, waste and abuse in government contracting, and the current public concern over white-collar crime, create a greater need for further development of the discipline of fraud auditing.
Thinking Like a Fraud Auditor: Mind-Set Investigating fraud requires the combined skills of a well-trained auditor and a criminal investigator. However, finding these skill sets in one person is rare. Part of the mission of this book is to better acquaint auditors with criminal- investigative rules, principles, techniques, and methods and to provide criminal investigators with some knowledge of accounting and auditing rules, princi- ples, techniques, and methods.
The result is, it is hoped, an ability to think more like a fraud auditor. Financial auditors tend to use the inductive approach, whereas investiga- tors tend to use the deductive approach.
Fraud auditors may have to use both approaches in developing their investigative mentality. Fraud involves so many variables in terms of fraud types, defrauder types, victim types, crime methods, techniques, tools, means, and instruments that any effort to unify them into a comprehensive theory of causation or solution seems impossible.
This fact is why intuition, experience, and training are so vital to fraud auditing. Thinking like a fraud auditor means being perceptive, using inductive logic based on perception, and knowing how fraud plays into audits and criminal investigations.
This goal means that the fraud auditor within a company should have in place, and communicated to all employees, an effective corporate code of conduct, which should also include conflict-of- interest policy guidelines signed by employees to provide a clear understanding of the intent of management and the level of expectations. Effective Corporate Governance In many ways, SOX is an attempt to mandate good corporate governance tenets, or best practices, for publicly-traded companies.
Fraud auditors need to be familiar with best practices of corporate governance as they relate to fraud. Of particular importance would be the audit committee of the board of directors having oversight of a strong antifraud program or set of programs. Therefore, fraud auditors should be able to contribute to an effective antifraud program as a part of overall corporate governance. Principles of Fraud Audits Many principles of fraud audits should be understood by all auditors.
They are: It is more a mind-set than a methodology. Fraud auditors mostly focus on exceptions, oddities, accounting irregularities, and patterns of conduct. Financial auditors mostly focus on the audit trail and material misstatements. Learning to be a fraud auditor means learning to think like a thief: From a fraud-audit perspective, fraud is an intentional misrepresentation of material financial facts. Of the five, the economic motive is the most common.
Input frauds entering false and fraudulent data are the most common. Tips and accidents make up over 65 percent of frauds detected. Only about 10 percent of frauds are detected by financial auditors, and only about 23 percent of frauds are detected by internal controls, which is the highest of any proactive measures. In terms of organizational fraud, the objective is to determine whether a fraud has occurred or is occurring and to determine who the fraudster is. In litigation support, the objective is determined by the client.
Predication is necessary to initiate the fraud investigation. Predication is the set of circumstances that would lead the prudent, reasonable, and profession- ally trained individual to believe that a fraud has occurred, is occurring, or will occur.
In litigation support, however, predication is a call from a lawyer. If the specific fraud is not known, or if there is limited information on the fraud, then the next step would be the fraud theory approach. In this approach, the forensic accountant, probably in a brainstorming setting, would propose the most likely fraud scheme if not previously known , and the manner in which that fraud scheme could have been perpetrated on the victim organiza- tion.
This latter substep is often necessary even in litigation support. Obviously, the forensic accountant needs to be familiar with fraud schemes and red flags associated with each see Chapters 3 and 4. The theory then serves as the basis for developing a fraud investigation plan. This step is where the fraud auditor is particularly applicable see Chapters 4 through 13 for various concepts in gathering evidence. In this step, an examination is made of accounting records, transactions, documents, and data if applicable to obtain sufficient evidence to prove or disprove that the fraud identified earlier has occurred.
Issues of importance include custody of evidence and other legal matters see Chapter It is important to note that the last step in the process of the investigation is to approach the suspect.
That can happen intentionally and accidentally. The intentional approach should be easy enough to avoid, but the accidental requires some extra effort. The reason for this caution is often when an auditor unwittingly has evidence of a fraud in hand, she goes to a party responsible for the fraud and asks for an explanation for the anomaly. At this point, the investigation at best has been severely hampered and at worst has been compromised for obtaining a confession or conviction in court.
For example, an internal auditor notices on performance reports that actual expenses are exactly twice the budget. The natural inclination is to go to the person responsible for authorizing checks in that business unit and ask for an explanation. However, if that person is using an authorized maker fraud scheme combined with forged endorsement, he could be cutting two checks for a single invoice—one for the vendor and one for the fraudster to forge an endorsement and convert to cash.
If the auditor does approach that person, either he will come up with a viable excuse, or the auditor could unknowingly offer one. That is what I did. Had the auditor assumed it could be fraud, then he would have had the opportunity to gather evidence to determine whether it was error or fraud, and possibly would have found the fraud. But by going to the fraudster, he gave her an undetectable exit strategy to the fraud.
After gathering accounting evidence, the forensic accountant will at- tempt to gather evidence from eyewitnesses, using interviews. This process goes from people the greatest distance from the fraud not involved but possibly knowledgeable , to an ever-narrowing circle of people close to the fraud firsthand knowledge , and, as said before, interview the suspect last.
Finally, the forensic accountant writes up the findings in a report to the party who hired him. If the case goes to court, this report, or a similar one, may be necessary during the trial. As in other areas of accounting and audit, certification is a key differentiator. It was the dream of Donald Cressey and Edwin Sutherland, two pioneers in white-collar crime, which was made a reality by Wells.
The ACFE is a global, professional organization dedicated to fighting fraud and white-collar crime, with over 30, members in over countr- ies. Since its inception, the ACFE has been a major resource for fraud information and training. The Certified Fraud Examiner CFE program is an internationally recognized accrediting process for individuals who possess the specialized skills required to detect, investigate, and deter fraud.
Some have said that the ACFE is the premier financial sleuthing organization in the world today. Obviously, the CPA designation is deemed a qualification in order to serve as an expert witness on fraud. Business valuation is a profession of its own, and plays a common role in the fraud profession. The domains of the exam include: The domains for the exam include: This certification is experienced based. The ACFEI is an independent, scientific, and professional society that is multidisciplinary in its scope, covering a large number of forensic-related disciplines or areas including forensic accounting.
Forensic accountants may be involved in both litigation support providing assistance on a given case, primarily related to the calculation or estimation of economic damages and related issues and investigative accounting looking into illegal activities. Thus the Cr. FA program provides advanced education and training to cover the wide range of skills, abilities, and knowledge necessary in forensic engage- ments.
FA certification. Those in this specialized field tended to be experienced in financial auditing, either in public accounting or fraud auditing in government agencies, before they ventured into private practice.
But beginning with , training for fraud auditors and forensic accountants has changed. For instance, prior to , there were very few courses in fraud, and no degree with 18 hours or more of fraud education.
Now there are a few college degree programs in fraud auditing or forensic accounting, and the number of these courses or degrees is growing rapidly. Also, many professional associations now provide fraud training. The ACFE offers many seminars and training, featuring its weeklong course known as fraud boot camp. In fact, it is hard to find an accounting or auditing professional organization that does not offer training for fraud today. Subjects that could be or should be covered by training for fraud auditors include: First, fraud can happen anywhere.
Second, fraud is pervasive and continues to grow in terms of losses and perhaps in frequency—no one knows how much fraud has gone undetected. What can be learned from reviewing the history of fraud? First, that a certain percentage of humanity will always be drawn to white-collar crimes and fraud, just as a certain faction of humanity is drawn to crime in general.
There will always be fraudsters willing to take the risk in order to gain the ill- gotten gains of fraud. Second, financial statement frauds across history have been associated with stock prices throughout history. Last, fraudsters are sometimes quite intelligent, sometimes charming personalities, and sometimes just plain stupid. The fraud cycle describes the necessary phases of resolving fraud, and the need to understand and incorporate legal factors in all aspects, all steps, in the fraud life cycle.
The technical literature related to forensic accounting describes the role of accountants and auditors, and their responsibilities related to fraud. The forensic accountant has a relatively large scope of the fraud cycle in terms of role and responsibility. For example, it is the forensic accountant, generally speaking, who becomes the expert witness in the resolution stage of fraud. That being said, a fraud auditor may be required to serve as a fact witness or possibly an expert witness.
But both of these roles require skills, knowledge, and abilities beyond the traditional financial auditor. There is the requirement of predication before begin- ning an investigation, and the need to make sure no accusation is made during the investigation, written or oral.
The fraud theory approach is an effective way to provide strategic direction to a fraud investigation. But perhaps the most important key to a successful investigation is to approach the suspect later in the investigation.
The following chapters will expand on many of these ideas hopefully to provide valuable information to those with responsibilities to prevent or detect fraud. NOTES 1.
(PDF) Fraud Auditing And Forensic Accounting Fouth Edition | Ishraax I Mahamed - cittadelmonte.info
Some of the information in this section comes from Dr. Robert E. David R. Frazier and L. According to the ACFE Report to the Nation, the number one method of detection is tip and the number three method is accident.
A proper understanding of these definitions and models is fundamental to preventing and detecting fraud. The fraud principles are the building blocks of an effective antifraud program, or of effective prevention and early detection of fraud.
First, it is important to establish a definition for fraud both for the profession and for an entity devising an antifraud program. Understanding effective models such as the fraud triangle is useful in understanding why fraud occurs. There are numerous classifi- cation models taxonomies for fraud schemes, but it is important to pick one that can be effectively applied in fraud prevention and early detection.
Lastly, an understanding of the profile of the white-collar criminal is helpful as well. Fraud means different things to different people under different circumstances.
For instance, fraud can be perceived as deception. One might say that fraud in the form of intentional deception including lying and cheating is the opposite of truth, justice, fairness, and equity.
Despite that rationale for deception, deception by current standards of behavior is generally considered mean and culpable, but deception can be intended for a benevolent purpose, too.
Benevolent deceivers in society are not looked on as harshly as are those whose intentions and motives are impure. Those who act out of greed, jealousy, spite, and revenge are not so quickly excused or forgiven. Fraud can also be associated with injury. One person can injure another either by force or through fraud. The use of force to cause bodily injury is frowned on by most organized societies; using fraud to cause financial injury to another does not always carry the same degree of stigma or punishment.
Fraud is a word that has many definitions. Some of the more notable ones are: Fraud is a generic term, and embraces all the multifarious means that human ingenuity can devise, which are resorted to by one individual, to get an advantage by false means or representations. No definite and invariable rule can be laid down as a general proposition in defining fraud, as it includes surprise, trick, cunning, and unfair ways by which another is cheated.
The only boundaries defining it are those that limit human knavery. Corporate fraud is any fraud perpetrated by, for, or against a business corporation. Management fraud is the intentional misrepresentation of corporate or unit performance levels perpetrated by employees serving in management roles who seek to benefit from such frauds in terms of promotions, bonuses or other economic incentives, and status symbols. Lying, the willful telling of an untruth, and cheating, the gaining of an unfair or unjust advantage over another, could be used to further define the word fraud because these two words denote intention or willingness to deceive.
The U. Supreme Court in provided a definition of fraud in the civil sense as: That the defendant has made a representation in regard to a material fact; Second: That such representation is false; Third: That such representation was not actually believed by the defendant, on reasonable grounds, to be true; Fourth: That it was made with intent that it should be acted on; Fifth: That it was acted on by complainant to his damage; and Sixth: That in so acting on it the complainant was ignorant of its falsity, and reasonably believed it to be true.
The first of the foregoing requisites excludes such statements as consist merely in an expression of opinion of judgment, honestly entertained; and again excepting in peculiar cases, it excludes statements by the owner and vendor of property in respect of its value. Of all the definitions of fraud just listed, the legal one is preeminent in antifraud.
The reason for that ranking is that any fraud has the potential to end up in court and the definition for fraud determined by the U. Supreme Court in will be the one a victim needs to prove in a court of law. The legal definition of fraud also matters at the beginning of a fraud investigation. For instance, it was said that intent is the most difficult aspect of the legal definition to prove. Basically, one has to establish a sufficient pattern of fraudulent transactions or activities in order to prove intent, or the courts often see shredding of documents as self-incriminating.
Guilty parties can use the excuse of an accident or carelessness as the cause of the incident, rather than a deliberate intent to steal or commit the fraud, along with a plethora of other viable excuses. Likewise, it is incumbent on entities to define fraud, make the definition part of its ethics or fraud policy, and have employees sign their acknowledg- ment of understanding and agreeing to abide by it.
Without a signed policy statement on the definition, certain kinds of frauds would be difficult to prove to a jury of peers e. Thus it is in the best interest of the entity to provide a definition for fraud, e.