CSI with the Numbers:Forensic Accounting

Presentation by: Mike Rosten

February 18, 2012

Presented at:

Western Regional Conference

Beta Alpha Psi

Las Vegas, Nevada

Outline of Presentation:1. Introductory Information.

2. Organizations & Credentials.

3. Thoughts on Forensic Accounting.

4. Typical Assignments / Duties / Skills & Abilities.

5. Type/source of Records.

6. Forensics – Accounting, Investigation (vs. Auditing).

7. Representative Cases.

8. Questions & Answers.

Introduction:

Mike Rosten – CPA/CFF, CFE, CVA, CFFA

• Cal State Bakersfield, BS in Accounting – 1985

• CPA Certificate – 1988

• CFE Credential - 1997

• Forensic Accountant (full-time) – Since ~ 1998

• Previous to forensics – Audit/Tax/Small Business

Organizations / Designations:

CPA – License granted by individual states.

Other designations – Merely certifications from the sponsoring organizations.

1. AICPA – CFF (Certified in Financial Forensics)

2. ACFE – CFE (Certified Fraud Examiner)

3. NACVA – CFFA (Certified Forensic Financial Analyst)

4. ACFEI – Cr.FA (Certified Forensic Accountant)

Forensic Accounting:

Material/opinion suitable for presentation in court.

• Work with financial information … Convey complicated information in simplified manner.

• Most large CPA firms offer forensic accounting.

• Numerous boutique consulting firms providing specialty forensics or valuation services, such as insurance defense and corporate fraud investigations.

Forensic Accounting:

• Hired by attorneys to investigate the financial trail of persons suspected of engaging in criminal activity.

• Retained by bankruptcy court when submitted financial information is suspect, including missing assets.

• Retained by divorce attorneys to find hidden assets or evaluate income/earnings.

• Calculate losses (Lost Profits, Revenue, etc.).

Forensic Accounting:

• Testify in court as an expert witness.• Prepare visual aids and summaries for use in court.• Like a crime scene investigator, with an intuitive sense

for the meaning of financial transactions.• Forensic accountants include auditors, accountants,

investigators, etc., possessing a common essential quality – the Ability to Think.

Forensic Accounting . . . Process & Methodology:

Representative Characteristics:

Assignments:

* Money Laundering * Insurance Claims

* Fraud Investigations * GAAP/GAAS Violations

* Check Kiting * Contract/Procurement Fraud

* Asset Misappropriation * Securities Fraud

* Bankruptcy Fraud * Credit Card Fraud

* Embezzlement * Financial Statement Fraud

Representative Characteristics:

Duties:

* Financial Analysis * Evidence Integrity Analysis

* Writing Reports * Testifying (Expert Witness)

* Compiling Information * Maintain Documentation

* Present Value of $$ * Regression Analysis

* Tracing Illicit Funds(a) * Locating Hidden Assets

* Due Diligence Reviews* Compute Damages

(a) Integral to combating terrorism, by addressing financing aspects.

Representative Characteristics:

Skills & Abilities:

* Accounting Procedures * Legal System & Procedures

* Oral Communication * Written Communication

* Interpersonal Skills * Summarize Results

* Research Skills * Detail Oriented

* Analytical * Professional Skepticism

* Objective * Independent * Credible

Published in US Attorneys’ Bulletin (Mar ‘05; May ‘05):

Reference Material:

• Financial Forensics I: Counterterrorism-Conventional Tools for Unconventional Warfare

• Financial Forensics II: Forensic Accounting-Counterterrorism Weaponry 

Darrell D. Dorrell, CPA/ABV, MBA, ASA, CVA, CMA, DABFA, CMC President  Gregory A. Gadawski, CPA, CVA, CFE Principalfinancialforensics®

Books & Records

Source: Dictionary for accountants by Eric Kohler

Foundation: Integrity of Management

Bank Statements (a)

Tax Returns (b)

Financial Statements & Underlying Accounting Records (a)

Standard Records Triad:

(a) Detailed transaction records.(b) Summarized information. Reported to IRS, increasing

reliability.

External DocumentsAttest Reports

Internal DocumentsOperating Reports

Control DocumentsBank Statements

Source of Records:

Accounting

Investigation

Accounting & Investigation

Focus of Procedures:

The forensic accounting process is typically oriented towards fact finding & accountability – What really happened? Who is Responsible? How much was misappropriated?

Accordingly, we have the following…

1. What happened? Prepare an Accounting.

2. Allegations founded? Investigative Accounting.

Forensic Accounting:

Objectives:• Reconstruct transactions from records, and tie to

supporting documents.• Identify anomalies and inconsistencies among

sources.

Two Distinct Processes:• With a valid control point.• Without a valid control point.

What Happened?

Forensic Investigation:

Objectives:• Determine what has happened and who is

responsible.• Quantify economic losses.

Processes:• Determine reliability and completeness of the

accounting records.• Reconstruct accounting, if necessary / cost effective.• Analyze transactions and supporting records.

How Much? Who is Responsible?

Forensic Accounting Investigation Process

|----Business Organization/Operating Entity----|

Realm of Potential Deception

Reporting

Internal & External operational and financial reports

Processing Information

• Accounting system

• Interpretation of data

• Transactional support

Environment of Business/Entity

• Organization and personal integrity and ethical values

• Operating characteristics of management

• Operating philosophy/style

• Competence of personnel

1. Allegations (Predication)

• Contained in a legal complaint

• From discussions with attorney

• From discussions with

management

2. Gain An Understanding Of

• Business goals & Objectives

• Reporting requirements

• Processing environment

• Contractual rights and obligations

4. Engagement Outcome

Allegations

+ Understanding

+ Forensic Techniques

Conclusions

3. Forensic Techniques

• Apply to financial data

Using:

• Business operating data

• Transactional support

• 3rd party information

• Background searches

Compared with Auditing:

Forensic Accounting Auditing

Focus procedures on:

(1) fraudulent accounting/reporting

(2) misappropriation of assetsSeek to confirm or refute existence

of specific problems or allegations, extent and cause.

Normally has few predetermined boundaries and greater access to executive management.

Analyst infuses process with completeness & integrity.

Perform exam in accordance with generally accepted auditing standards (GAAS).

Provide opinion on financial statements for general or limited use.

Conduct procedures in accordance with an accepted methodology & procedures w/in materiality levels.

Founded upon representations of management. (Rep Letter)

Representative Matters:

Church Daycare/School……… Skimming/EmbezzlementRegional Mall ……………………… Special Master – Allocated CostsHeavy Equipment……………….. Court Order – S/H DisputeDivorce – Family Business….. Forensic Analysis – Rev & ExpEstate & Trust……………………… Damages Analysis – TracingNationwide Distributor………. Lost Profits of Startup BusinessGaming Industry…………………. Patent/Trademark InfringementHomeowners Assoc Mgmt.... Fraud InvestigationIndustrial Printing……………….. Alter Ego (Piercing the Veil)

Questions & Answers

mrosten@pbtk.com