Forensic Accounting Fin

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Forensic Accounting:Forensic Accounting:

An IntroductionAn Introduction

AshwiniAshwini KumarKumar

Director, CBIDirector, CBI


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OverviewOverview

What is Forensic Accounting?What is Forensic Accounting?

What is fraud?What is fraud?

Who commits fraud?Who commits fraud?

How do forensic accountants search forHow do forensic accountants search forfraud?fraud?


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What is Forensic AccountingWhat is Forensic Accounting

Focus is:Focus is: the evidencethe evidence of economic transactions andof economic transactions and

reportingreporting

the legal framework which allows suchthe legal framework which allows suchevidence to be suitable to the purpose(s) ofevidence to be suitable to the purpose(s) ofestablishing accountability and/orvaluationestablishing accountability and/orvaluation

In other words:In other words: the identification, interpretation, andthe identification, interpretation, and

communication of the evidence ofcommunication of the evidence ofeconomic transaction and reporting eventseconomic transaction and reporting events


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often mistakenly assumed to beoften mistakenly assumed to beexclusively associated with "negative"exclusively associated with "negative"

applications, such as bankruptcy, fraud,applications, such as bankruptcy, fraud,business disputes, or matrimonial divorce.business disputes, or matrimonial divorce.

may also be applied in "positive"may also be applied in "positive"assurance engagements such as dueassurance engagements such as due

diligence reviews, business valuations,diligence reviews, business valuations,audit committee advisory services andaudit committee advisory services andenterprise risk management.enterprise risk management.


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Forensic accounting is applied to theForensic accounting is applied to theevidence of first order activities, notevidence of first order activities, notsecondary systems of controls.secondary systems of controls.

Analysis includes the crucial aspect ofAnalysis includes the crucial aspect ofrecognizing the implications of evidencerecognizing the implications of evidencethat has been obtained.that has been obtained.

Additional protocol extensions areAdditional protocol extensions areemployed to forecast or predict futureemployed to forecast or predict futureconditions based on known pastconditions based on known pasttransactions or events.transactions or events.


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What is Forensic Accounting?What is Forensic Accounting?

Forensic accounting is the practice ofForensic accounting is the practice ofutilizing accounting, auditing, andutilizing accounting, auditing, and

inv

estigativ

e skills to determine whetherinv

estigativ

e skills to determine whetherfraud has occurred.fraud has occurred.

It encompasses two main areas:It encompasses two main areas:

Litigation supportLitigation support

InvestigationInvestigation


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Litigation SupportLitigation Support

Is the factual presentation of economicIs the factual presentation of economicissues related to existing or pendingissues related to existing or pendinglitigation.litigation.

The forensic accountant quantifiesThe forensic accountant quantifiesdamages sustained by parties involved indamages sustained by parties involved in

legal disputes and assists in resolvinglegal disputes and assists in resolvingdisputes, even before they reach thedisputes, even before they reach thecourtroom.courtroom.


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Litigation SupportLitigation Support

Arbitration assistanceArbitration assistance

Business valuation for divorce, stockholder disputesBusiness valuation for divorce, stockholder disputes

Computation of damages resulting from personalComputation of damages resulting from personal

injuries, wrongful death, breach of contract, casualty,injuries, wrongful death, breach of contract, casualty,and fidelity lossesand fidelity losses

Determination of lost profits due to business interruptionDetermination of lost profits due to business interruption

Testifying as an expert witnessTestifying as an expert witness

Financial review of contractual obligationsFinancial review of contractual obligationsInvestigative services related to fraud and other illegalInvestigative services related to fraud and other illegal

actsacts


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InvestigationInvestigation

Is the act of determining whether criminalIs the act of determining whether criminalmatters such as employee theft, securitiesmatters such as employee theft, securitiesfraud (including falsification of financialfraud (including falsification of financialstatements), and insurance fraud havestatements), and insurance fraud haveoccurred.occurred.

Also includes searching for irregularitiesAlso includes searching for irregularities

associated with civil matters, such as aassociated with civil matters, such as asearch for hidden assets in divorce cases.search for hidden assets in divorce cases.


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What is Fraud?What is Fraud?

Fraud is an intentional misrepresentation

of a material point or issue on which avictim relies.

This reliance usually results in one or

more victims suffering damages.


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Types of FraudTypes of Fraud

OccupationalOccupational

Financial statement schemesFinancial statement schemes

Asset misappropriation (e.g., cash theft,Asset misappropriation (e.g., cash theft,fraudulent disbursements, inventory theft)fraudulent disbursements, inventory theft)

Bribery and corruptionBribery and corruption

Intellectual propertyIntellectual property


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Types of FraudTypes of Fraud

Other FraudsOther Frauds Financial institutionFinancial institution

Check and credit card fraudCheck and credit card fraud

Insurance fraudInsurance fraud

Health care fraudHealth care fraud

Bankruptcy fraudBankruptcy fraud

Tax fraudTax fraud

Securities fraudSecurities fraud

Money launderingMoney laundering

Consumer fraudConsumer fraud

Computer and Internet fraudComputer and Internet fraud

Governmental fraudGovernmental fraud


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Examples of FraudExamples of FraudFinancial Statement SchemesFinancial Statement Schemes

A publiclyA publicly--traded company engaged intraded company engaged insham transactions for more than sevensham transactions for more than sevenyears by using several shell companies.years by using several shell companies.The money transferred to the shellThe money transferred to the shellcompanies as payments for assets werecompanies as payments for assets werereturned as payments on accountsreturned as payments on accounts

receivable. The companys assets werereceivable. The companys assets wereinflated by as much as $80 million.inflated by as much as $80 million.


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Examples of FraudExamples of FraudAsset MisappropriationAsset Misappropriation

A CEO conspired with a former employeeA CEO conspired with a former employeeto sell a building to a company owned byto sell a building to a company owned bythe CEOs employer. The building wasthe CEOs employer. The building wassold for $1.2 million more than it had beensold for $1.2 million more than it had beenpurchased by the former employee. Allpurchased by the former employee. Alltransactions occurred on the same day.transactions occurred on the same day.


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Examples of FraudExamples of FraudHealth Care FraudHealth Care Fraud

Dr. X billed a patients insurance for the followingDr. X billed a patients insurance for the followingactivities:activities:

Knee arthroscopy with debridementKnee arthroscopy with debridement$1,650$1,650

Diagnostic knee arthroscopyDiagnostic knee arthroscopy 1,6251,625

Total billedTotal billed $3,275$3,275

The second procedure listed above isThe second procedure listed above is

included in the first procedure. Therefore, theincluded in the first procedure. Therefore, thecorrect amount of the bill is $1,650.correct amount of the bill is $1,650.


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Examples of FraudExamples of Fraud

Divorce FraudDivorce Fraud

John Dewey is the majority owner of a largeJohn Dewey is the majority owner of a largepublic relations firm. His wife, Mary, recentlypublic relations firm. His wife, Mary, recentlyfiled for divorce and is asking for half Johnsfiled for divorce and is asking for half Johns

assets. Prior to being served, John took someassets. Prior to being served, John took sometrips to the Cayman Islands and Switzerland.trips to the Cayman Islands and Switzerland.

During the divorce proceedings, Mary wasDuring the divorce proceedings, Mary wasshocked to learn that the value of the firm isshocked to learn that the value of the firm is$50,000. Prior to the divorce, John had given$50,000. Prior to the divorce, John had given

her $200,000 a year to cover their personalher $200,000 a year to cover their personalexpenses.expenses.


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Examples of FraudExamples of Fraud

Vendor Fraud: Defectiv

e Deliv

eryVendor Fraud: Defectiv

e Deliv

eryThe low bidder was awarded a contract toThe low bidder was awarded a contract topave a parking lot. Upon examination,pave a parking lot. Upon examination,several randomlyseveral randomly--taken core samplestaken core samplesrevealed 2 of paving whereas the contractrevealed 2 of paving whereas the contractspecified 4. Also, the parking lot had notspecified 4. Also, the parking lot had notbeen sealed as required by the contract.been sealed as required by the contract.


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Why is Fraud Committed?Why is Fraud Committed?

The Fraud TriangleThe Fraud Triangle

perceived pressure, perceived opportunities, andperceived pressure, perceived opportunities, and

rationalizationrationalization


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Perceived PressurePerceived Pressure

Employees, managers, and owners can feelEmployees, managers, and owners can feelpressure to commit fraud as a result ofpressure to commit fraud as a result of

Greed or preoccupation with being successfulGreed or preoccupation with being successful Living beyond meansLiving beyond means High personal debtsHigh personal debts Unexpected financial needsUnexpected financial needs

Expensive vicesExpensive vices FamilyFamily--imposed pressuresimposed pressures


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Perceived OpportunitiesPerceived Opportunities

Opportunities to commit fraud exist whenOpportunities to commit fraud exist whenlevels of trust in an organization are reachedlevels of trust in an organization are reachedor when controls are weak.or when controls are weak.

Inappropriate segregation of dutiesInappropriate segregation of duties Ineffective supervisionIneffective supervision Transaction authorization not requiredTransaction authorization not required

Lack of physical controlsLack of physical controls Lack of adequate audit trailLack of adequate audit trail


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RationalizationRationalization

Individuals usually dont commit fraud unlessIndividuals usually dont commit fraud unlessthey can justify their actions in relation tothey can justify their actions in relation totheir own code of ethics.their own code of ethics.

Feeling underpaid or overworkedFeeling underpaid or overworked Desire to seek revengeDesire to seek revenge Belief that taking the assets is a loanBelief that taking the assets is a loan

Belief they are helping others (family,Belief they are helping others (family,employees)employees)


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How do Forensic AccountantsHow do Forensic Accountants

Search for Fraud?Search for Fraud?

Proactive fraud detectionProactive fraud detection

Reactive fraud detectionReactive fraud detection


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Proactive Fraud DetectionProactive Fraud Detection

Inductive approachesInductive approaches

Use of DataUse of Data--mining softwaremining software

Digital analysis of company dataDigital analysis of company dataDeductive approachDeductive approach

Determine what kinds of frauds canDetermine what kinds of frauds can

occur. Search for symptoms ofoccur. Search for symptoms ofthese frauds.these frauds.


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DataData--mining Softwaremining Software

ExcelExcel

ACLACL

IDEAIDEAMicrosoft AccessMicrosoft Access


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Digital Analysis of Company DataDigital Analysis of Company DataBenfords Law (first digit frequency)Benfords Law (first digit frequency)

0

5

10

15

20

25

30

35

1 2 3 4 5 6 7 8 9

Per ent


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Deductive ApproachDeductive Approachto Detecting Fraudto Detecting Fraud

Involves a 5Involves a 5--step process:step process:

Understanding the business environmentUnderstanding the business environment

Understanding the kinds of fraud that can occurUnderstanding the kinds of fraud that can occur

in this environmentin this environment Determining the most likely symptomsDetermining the most likely symptoms

Using databases and systems to search for theUsing databases and systems to search for thefraud symptomsfraud symptoms

Following up on discoveries to determineFollowing up on discoveries to determinelikelihood fraud existslikelihood fraud exists


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Reactive Fraud DetectionReactive Fraud Detection

Fraud accountants are often engaged afterFraud accountants are often engaged aftersomeone in the entity suspects that fraudsomeone in the entity suspects that fraudhas been committed.has been committed.

Usually the area in which fraud has beenUsually the area in which fraud has beencommitted is known. Often, the entirecommitted is known. Often, the entirearea is examined.area is examined.


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Evidence CategoriesEvidence Categories

TestimonialTestimonial

EvidenceEvidence

DocumentaryDocumentary

EvidenceEvidence

PhysicalPhysicalEvidenceEvidence PersonalPersonalObservationObservation


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Testimonial EvidenceTestimonial Evidence

InterviewingInterviewing

Interrogatories (written questions that identifyInterrogatories (written questions that identifyinformation needed from opposing party)information needed from opposing party)

Honesty tests (e.g., graphology, polygraph)Honesty tests (e.g., graphology, polygraph)


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Documentary EvidenceDocumentary Evidence

Document examinationDocument examination

Public records searchesPublic records searches

AuditsAuditsComputer searchesComputer searches

Net worth calculationsNet worth calculations

Financial statement analysisFinancial statement analysis


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Physical EvidencePhysical Evidence

FingerprintsFingerprints

Tire marksTire marks

WeaponsWeaponsStolen propertyStolen property

Identification numbers or markings onIdentification numbers or markings on

stolen objectsstolen objects


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Personal ObservationPersonal Observation

InvigilationInvigilation

SurveillanceSurveillanceCovert operationsCovert operations


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Thank you!Thank you!

Documents

Forensic Accounting Fin