FORENSIC ACCOUNTING: A COMPREHENSIVE GUIDE TO CONDUCTING FINANCIAL FRAUD INVESTIGATIONS FOAC/14/01

Transcription

1 FORENSIC ACCOUNTING: A COMPREHENSIVE GUIDE TO CONDUCTING FINANCIAL FRAUD INVESTIGATIONS FOAC/14/01

2 Table of Contents Fundamentals of Forensic Accounting... 1 Public Records and Other Information Sources... 2 Interviews and Interrogations... 3 Observational Evidence... 4 Link Analysis and Related Tools... 5 Paper and Electronic Evidence... 6 Data Analytics... 7 Fraud Responsibilities, Independence Issues, and Investigative Reports... 8 This product is intended to serve solely as an aid in continuing professional education. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any tax and accounting opinion or return position, and must be supplemented for such purposes with other current authoritative materials. The information in this manual has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Surgent McCoy CPE, LLC, its authors, and instructors are not engaged in rendering legal, accounting, or other professional services and will not be held liable for any actions or suits based on this manual or comments made during any presentation. If legal advice or other expert assistance is required, seek the services of a competent professional. Revised February 2014 Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

3 Fundamentals of Forensic Accounting I. Overview 1 II. Introduction to fraud 1 A. Definition 1 B. AU 240 categories 1 1. Fraudulent financial reporting 1 2. Misappropriation of assets 1 C. ACFE categories 2 III. Introduction to forensic accounting 2 A. Definitions 2 1. According to a firm 2 2. According to a professional committee 2 3. According to an academic 2 B. Skills 3 C. Scope of services 4 IV. Procedures in forensic accounting 4 A. Scientific method 4 1. Ask a question 5 2. Do background research 6 3. Construct a hypothesis 7 4. Test the hypothesis 7 5. Analyze data and draw a conclusion 7 6. Communicate results 8 B. Asking a question -- revisited 8 C. Documenting the amount of the loss 9 D. Recouping the stolen assets 10 E. Improving internal control 10 V. Introduction to forensic evidence 12 A. Observations including surveillance 12 B. Documents 12 C. Physical evidence 12 D. Interviews and interrogations 13 E. Public records 13 F. Link analysis 13 G. Data and other analysis 13 1-i Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

4 Public Records and Other Information Sources I. Public records 1 A. Overview 1 B. Background reports 2 1. Overview 2 2. Choosing a background check service: preliminary questions 2 3. Choosing a background check service: other features 2 4. Comparison chart 3 C. Tips on searching for a person or entity by name 5 1. Common trip-ups 5 2. Name variations 5 3. Additional information 6 4. Ambiguous entity names 6 D. Choosing what tools to use 6 E. Databases for legal information 7 1. CourtLink 7 2. PACER 7 F. Databases for individual and business searches 7 1. CLEAR 7 2. ACCURINT 8 G. Social media 8 H. Other sources of information 9 1. About businesses 9 2. About financial and legal status Traditional media 10 I. Case studies Uncovering collusion and a fake vendor Narrowing a pool of suspects 11 J. Public research limitations Red tape Unavailable formats Out-of-date information 13 II. Appendix: Online resources 14 A. Search engines 14 B. Locators of individuals and their contact information 14 C. Map providers 14 D. Public records sources 14 E. Legal resources 15 F. Government and criminal justice sites 15 G. Guidance for auditors 16 2-i Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

5 Interviews and Interrogations I. Overview 1 II. Interviews 1 A. Interviewer qualities 1 B. Preparation 1 1. Interview plan 2 2. Physical environment 2 3. Number of interviewers 2 C. Interview phases 2 1. Introduction 2 2. Establishing rapport 3 3. Questioning 3 4. Summarization 3 5. Closing 3 III. Effective listening 3 A. Active listening 3 1. Eye contact 4 2. Caution 4 B. Avoiding interruption 4 C. Feedback checks with the interviewee 4 1. For clarification 4 2. For understanding of content 4 D. Distinguishing facts, opinions, and hearsay 5 1. Definitions 5 2. Verbal indicators 5 E. Probing 6 1. When to probe 6 2. How to probe 6 F. Avoiding mistakes 7 1. Behaviors that have negative effects on the interviewee 7 2. Keeping emotions positive 8 3. Expressing your needs 8 4. Using soft questions 8 IV. Body language 9 A. Overview 9 B. Frequently observed body language patterns Facial indicators Bodily indicators Verbal indicators 11 C. Limitations and exceptions 11 V. Materials in writing 12 A. Taking notes 12 B. The signed statement 12 VI. Basic questioning techniques 13 A. Overview 13 B. Free narrative (open-ended) 13 C. Direct questions Tips for interviewers asking direct questions 13 D. Cross-examination Definition Tips for cross-examiners 14 E. Question techniques to avoid Leading questions Negatively phrased questions Compound questions Overly complex questions 15 3-i Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

6 F. Question charts 15 VII. Information specific to interrogations 19 A. As follow-ups to interviews 19 B. Findings on timing 19 C. Typical interrogation failures 19 3-ii Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

7 Observational Evidence I. Overview 1 A. When peer observation is not enough 1 1. Exploitation of trust 2 2. Collusion and lax oversight 2 II. Observation techniques 3 A. Dumpster diving 3 B. Video devices 3 C. Devices placed on possessions 4 III. Surveillance 5 A. Categories of surveillance 5 1. Overt or covert 5 2. Mobile or fixed 6 3. Loose, close, or both 6 B. Surveillance tips 6 1. Before the operation 6 2. On the scene 7 IV. Undercover operations 8 A. Recent example 8 V. Electronic eavesdropping technologies 8 A. Computer data 8 1. Digital forensics 8 2. Deep packet inspection 9 3. Backdoor Trojans 9 4. Webmail interception 9 B. Phone interception IMSI catcher Mobile phone monitoring 10 4-i Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

8 Link Analysis and Related Tools I. What is link analysis? 1 A. Social network analysis 2 B. Data mining 2 C. Potential relationship mappings 2 1. Trust network 2 2. Task network 2 3. Cash/financial resources network 2 II. Phases 2 A. Association matrix 2 B. Conversion into a diagram 3 1. Diagram construction process 3 III. Details of link analysis 4 A. Types of links 4 1. Explicit links 4 2. Aggregate links 4 3. Inferred relationships 5 B. Common tasks 5 1. Variable creation 5 2. Simple and complex searches 5 3. Network analysis 5 C. Applications 6 IV. Sample charts 6 A. Association matrix 6 B. Relationship network diagram 7 C. Telephone frequency analysis chart 8 D. Commodity flowchart 9 E. Timeline event flowchart 10 V. Predicting financial criminal behavior 11 A. Important concepts Risk scoring tools Fuzzy logic 12 B. Software Algorithms Geolocation 13 C. Data issues Available products 14 5-i Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

9 Paper and Electronic Evidence Learning Objectives 1 I. Overview 1 A. Introduction to the electronic format 1 B. Information specific to the paper format 2 1. Paper forgery 2 II. The Federal Rules of Evidence 4 A. Evidence that satisfies the authentication requirement 4 B. The business record exception 5 1. Determining reliability 5 2. Determining authenticity 6 C. Self-authenticating documents 6 1. Definition 6 2. Examples 6 D. Chain of custody 7 1. What to document 8 E. Best evidence rule 8 F. Admissibility of electronic evidence 9 G. Authentication of certain types of electronic evidence s and text messages Computer-generated records Public records Proving content 11 III. Recent developments in ESI readiness 11 A. Relevant cases Swofford v. Eslinger Tango Transport, LLC v. Transport International Pool, Inc Magana v. Hyundai Motor Am. 12 B. In-depth example: Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co. Inc The case The findings Later trouble 15 C. Effective strategies 15 IV. Electronic crime scene investigation 16 A. Overview 16 B. Electronic devices: types, descriptions, and potential uses as evidence Computer system Storage devices Handheld devices Peripheral devices Computer networks Other potential sources of digital evidence 18 C. Materials for collecting digital evidence 18 D. At the crime scene 19 E. Documenting the electronic crime scene 20 F. Handling of electronic evidence 20 G. Other forms of evidence 21 H. Packaging, transporting, and storing digital evidence Packaging procedures Transportation procedures Storage procedures 22 I. Case-specific evidence suggestions Counterfeiting investigation Problem gambling investigation Online or economic fraud investigation 23 6-i Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

10 Data Analytics I. Overview of unstructured and structured data 1 A. Unstructured data 1 B. Structured data 2 C. Analysis of both structured and unstructured data 2 II. Forensic analysis -- Deloitte s four-step methodology 2 A. Data identification 2 1. Mapping of electronically stored information 2 2. Identification of structured and unstructured data 3 3. Identification of relevant third-party data 3 B. Forensic collection 3 1. Standard-conscientious collection 3 2. Data integrity check 3 C. Data fusion 3 D. Forensic analytics 4 1. Detection 4 2. Modeling 4 III. Data mining 5 A. Definition 5 B. Tasks 5 1. Anomaly detection (Outlier/change/deviation detection) 5 2. Association rule learning (Dependency modeling) 5 3. Clustering 5 4. Classification 6 5. Regression 6 6. Summarization 6 IV. Tools 6 A. Overview 6 B. Duplicate payment detection 6 C. Benford s law 7 1. In fraud detection 7 D. Fraud, error, or neither: Red flags that can be identified 8 1. Payments 8 2. Invoices 8 3. Vendors 9 V. Case study 10 7-i Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01

11 Fraud Responsibilities, Independence Issues, and Investigative Reports I. Responsibility for the prevention and detection of fraud 1 A. Management s responsibility 1 1. Professional standards 1 2. Anti-fraud program 1 B. External auditor s responsibilities 5 1. Overview 5 2. Auditor s inability to complete the audit 5 3. Communications concerning identified or possible fraud 5 II. Independence and forensic accounting services 6 A. Overview 6 1. AICPA Code of Conduct: Independence, Section (General Requirements for Performing Nonattest Sevices) 6 B. Nonattest services 7 1. Litigation services 7 2. Investigative services 8 III. Forensic accountant s report 9 A. Overview 9 B. Characteristics of a good investigative report 9 1. Effective writing 9 2. Style and tone 9 C. Evidence-related issues 9 1. Possibly extraneous evidence 9 2. Questionable facts 10 D. Sections of the report Introduction Background Presentation of allegations Findings Discussion Conclusions Other matters Recommendations 12 E. Cautionary note 12 8-i Copyright 2014 Surgent McCoy CPE, LLC -- FOAC/14/01