Forensic Accounting: Fraudulent Reporting and Concealed Assets

• Chapter 0 - Overview
  • Course Objectives
  • Introduction
  • Action Page: Important Points to Remember
• Chapter 1 - The Unique Role of a Forensic Accountant
  • Learning Objectives
  • Introduction
  • Definition of Forensic Accountant
  • Selection Criteria
  • Questions
• Chapter 2 - Engagement of the Forensic Accountant
  • Learning Objectives
  • Introduction
  • Testifying Expert
  • Consultant
  • What Role Do I Fill in This Situation?
  • Engagement Contract
  • Engagement Letter
  • Case 2-1
    • Phase 1
    • Questions
• Chapter 3 - Analytical and Investigative Techniques
  • Learning Objectives
  • Introduction
  • Beginning the Examination Process
  • The Methodical Unmasking of Fraudulent Activity
  • Understanding the Industry and Operations
  • Financial Analysis
  • Discovery Sampling
  • Computer-Assisted Analytical Techniques
  • Data Mining Software
  • Considering Internal Controls
  • Investigations about Lifestyles, Integrity, and Financial Status
  • Flowcharting and Other Matrix Techniques
  • Lapping
  • "Asset Flip Transactions"
  • Check Kiting
  • Ponzi Schemes
  • Prevention of Fraud by Short-Shipment of Inventory
  • Prevention of Embezzler's "Phony Vendor" Fraud
  • Prevention of "Ghosts" in the Payroll
  • Continuation of Case 2-1
    • Phase 2
    • Questions
  • Appendix . Discovery Sampling Table
• Chapter 4 - Scams, Schemes, and SAS No. 99
  • Learning Objectives
  • Introduction
  • SAS No. 99, Consideration of Fraud in a Financial Statement Audit
  • Concentrate the Search for Evidence
  • Characteristics of Mortgage Fraud/Real Estate Fraud
• Chapter 5 - Collection and Examination of Documents and Other Corroborating Data
  • Learning Objectives
  • Introduction
  • Chain of Custody
  • Corroborate the Hypothesis from Independently Obtained Documents
  • Conduct a Thorough Analysis of All Documents and Statements
  • Questions
  • Continuation of Case 2-1
    • Phase 3
    • Questions
• Chapter 6 - The Written Report
  • Learning Objectives
  • Introduction
  • No Written Notes to Be Prepared
  • No Formal Written Report
  • Preparation of a Detailed Written Report
  • Discuss the Written Format Prior to the Preparation of a Report
  • Objectively Present Both Sides of the Issue
  • Consider the Use of Charts, Graphs, or Multi-Media
  • Double Check All Documents for Thoroughness and Accuracy
  • Keep It Simple
• Chapter 7 - The Deposition Phase
  • Learning Objectives
  • Introduction
  • Be Prepared
  • Strategy Session with Counsel
  • Rehearse Testimony
  • The Opposing Counsel Is Not a Friend
  • Think Before Speaking
  • Be Candid and Truthful in Responses
  • Carefully Review the Written Deposition
• Chapter 8 - The Witness Stand
  • Learning Objectives
  • Introduction
  • Review Reports, Computations, and Graphs for Accuracy
  • Conduct an In-Depth Strategy Session with Legal Counsel
  • Dress Conservatively and Arrive Early
  • How Does Each Side of the Conflict View the Testifying Expert?
  • Direct Testimony
  • Cross-Examination
  • Hesitate before Speaking
  • Be Consistent in Answers
  • Maintain Your Composure
  • Redirect and Recross
  • Do Not Speak to Jurors before, during, or after the Testimony
  • Questions
• Chapter 9 - Alternative Solutions
  • Learning Objectives
  • Introduction
  • Mediation
  • Arbitration
  • Challenge to the Forensic Accountant
  • Dialogue with Law Firms
  • Be Responsive to the Client's Concern for Cost Containment
  • Periodic Billing Keeps the Client Informed
  • Communicate Often with the Client
• Chapter 10 - Latest Developments
• Appendix A - Engagement Letter for Litigation Services
• Appendix B - Curriculum Vitae (Your name)
• Appendix C - Forensic Accountant Checklist
• Appendix D - Group Study Session

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Chapter 1 - The Unique Role of a Forensic Accountant

Learning Objectives

After studying this chapter you should be able to

• Understand what role a forensic accountant can accomplish or not accomplish

• Identify new fields for the marketing of forensic accounting practice

• Understand the technical qualifications of a forensic accountant

• Prepare a curriculum vitae

Introduction

During the past few years, the task of providing technically proficient experts on accounting matters has become a critical element in matters of litigation. The role of stepping onto the witness stand to provide expert testimony is hazardous for the poorly prepared CPA and stressful for even the most experienced.

The forensic accountant must be prepared for a scrutiny of credentials, education, and background seemingly bordering on an invasion of privacy. Being unprepared for this close analysis can prove to be professionally damaging to the unsuspecting accountant or client.

Definition of Forensic Accountant

The definition of forensic accountant results from the breakdown of the two distinctly different fields within the term – Forensic and Accountant.

The word forensic is generally defined as "belonging to the courts of justice." An accountant is generally defined as an "expert in the field of accounting." Accounting is described as a method for preparing a financial record of business transactions and the preparation of statements concerning the assets, liabilities, and operating results of a business.

By combining these two concepts, a forensic accountant becomes an expert in accounting theories and application in relation to legal principles and cases. The forensic accountant applies generally accepted accounting, auditing, or tax standards to an issue being litigated in the court system of a particular governmental jurisdiction.

The approach of a forensic accountant generally differs from that of a typical CPA in methodology and scope of work. The financial accountant's approach to a project is to review all available data and documents as they relate to a particular time frame (year end, fiscal year). The goal is to provide an overall financial picture of the entity as it relates to accepted accounting principles.

The forensic accountant, however, typically makes an intense analysis of one particular incident or series of events in an effort to completely dissect the transactions. The forensic accountant attempts to gain a full and complete understanding of this particular activity, to determine if it can be supported by generally accepted accounting principles, and to defend or refute this transaction (or series of transactions/events) in an advocate arena such as the courtroom.

Although a forensic accountant may be a necessary tool in many varied arenas of business, much of the work appears to be concentrated in certain fields. Forensic accounting engagements often result in the accountant being involved in highly controversial and adversarial situations.

• Business Valuations – The issue may arise as a result of a sale, purchase, or liquidation of a business. The controversy may surround the method of valuing certain unique assets, factors that may affect the viability of the entity, or the intentional concealing of assets.

• Property Valuation in Divorce Issues – This issue sustains conflicts similar to those in business valuation concerns. Many times one of the parties may attempt to intentionally inflate or devalue assets or liabilities.

• Personal Injury – Wrongful death or serious injury damage calculations may be worth significant dollars earned or saved for the client.

• Fraud, Deception, or Intentional Manipulation of Records – The confirming of clandestine activity within a business environment is one of the most difficult assignments for a forensic accountant.

The work product of a forensic accountant may ultimately lead to an appearance on a witness stand in a court of law. You then face a tremendous responsibility to do and say the right things. You, as a testifying expert, must remember that there are distinct and important differences between you and everyone else in that courtroom, including the lawyer that hired you. They are as follows:

• You are on the witness stand, not someone else – What does this mean? It means you cannot blame someone else for an error, a mistake, or a “lapse in judgment.” From the witness stand the forensic expert witness will rise, or fall, based upon his/her own merits.

• You are under oath to tell the truth, not others in the courtroom – There is a tremendous responsibility while under oath to say, and do, the correct thing. The jury takes that seriously and expects all witnesses, especially an expert witness, to also take seriously the oath for truthfulness.

• The jury or the court relies on your testimony, not the comments of the attorneys – You are there to educate the “trier of the facts” on complex issues; again, the jury looks to the expert to give an honest, unbiased and professional opinion.

• You are the one being questioned, intimidated, and pressured rather than the attorneys – Never forget, you are on the witness stand, not the attorney – it is your testimony that is important in the eyes of the jury. There is great pressure on the other side of the litigation to discredit or minimize your testimony. In their minds, you may be the one great obstacle that is preventing the other side from prevailing with the jury.

While being employed by one side or the other, the goal of the forensic accountant/expert witness is to explain some complex transaction, or series of events, to the “trier of the facts,” whether it is the judge or a jury panel. The expert must remain objective and base the opinion on good, solid factual data. The expert opinion will most likely coincide with the case theory of the side that hired the expert, but not always in all facets of the case. Fairness, objectivity, and blunt truthfulness are all positive characteristics that an experienced forensic accountant-expert must continually display.

Because of the key factors, accountants who decide to enter a legal dispute as an expert for one side or the other must be prepared to zealously defend their opinion and their own integrity. This can be accomplished, in part, by a cautious entry into a legal dispute and by being well prepared throughout the process.

Selection Criteria

The selection of a forensic accountant receives the same care and consideration as that shown for any other professional position. The experience, education, and professional competence of the forensic accountant is crucial to the selection process. Additional factors that must be evaluated are the confidence level, verbal skills, and courtroom experience, which may become a major factor in the engagement process.

The forensic accountant can be virtually guaranteed to be placed in a position of defending every element of professional education, training, and experience. The client, therefore, should proceed along similar lines to ensure that the selected expert will be able to stand firm under intense scrutiny or cross examination in these areas. This is best accomplished by a thorough screening process, including independent verification of qualifications, prior to the contractual agreement.

Education

The level of education beyond a bachelor's degree becomes more critical in order to demonstrate academic excellence in a particular specialized field. Experts with less than an exemplary academic record may find themselves in an embarrassing situation on the witness stand. Education should complement the particular area of expertise in which the forensic accountant claims to be an expert.

Professional Designation and Association

Testifying experts should be able to display a level of competence in their field that extends beyond the classroom. Except in the most unusual of cases, it could be hazardous to place an accounting expert on the witness stand who does not possess a CPA certificate. The forensic accountant should display additional qualifications in his/her chosen field, whether it is tax related issues, economic damage expertise, or fraud related issues. The affiliation with professional associations provides added confidence that the expert maintains the latest techniques, receives updated training, and associates with individuals from the same field.

Continuing Education

The forensic accountant/expert witness should demonstrate a pattern of continual professional training in a chosen field. This allows each to remain competent in evolving technology or evaluation techniques. It could prove disastrous for a testifying expert to demonstrate limited knowledge of new, yet widely accepted, techniques or theories, while testifying as an expert in that field.

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