Presentation is loading. Please wait.

Presentation is loading. Please wait.

Fraud & Forensic Accounting

Similar presentations


Presentation on theme: "Fraud & Forensic Accounting"— Presentation transcript:

1 Fraud & Forensic Accounting
New England Graduate Accounting Studies Conference June 20, 2014

2 Agenda What is EY FIDS and what do we do? What is forensic accounting?
Why forensic accounting? Fraud and financial restatement statistics Description of investigative process Case examples

3 Tony Jordan - Bio Tony Jordan Partner
Forensic Investigation & Dispute Services Tel: Mobile: Fax: Tony Jordan is a Partner in the Fraud Investigation & Dispute Services (FIDS) practice of Ernst & Young LLP (EY). Tony’s areas of focus include forensic accounting investigations, issues surrounds Generally Accepted Accounting Principles and general business-related disputes. He has extensive litigation consulting, forensic accounting and auditing experience, is a certified public accountant, and has been providing financial consulting advice to clients for over 18 years. Tony has been involved in a variety of investigations, working on behalf of Special Committees formed by Boards of Directors, named directors and officers and / or senior management. These investigations have involved analyses of various Securities and Exchange Commission (SEC) reporting matters, including revenue recognition (for software companies, as well as for various manufacturers, distributors, retailers and healthcare providers), and accounting for promotional marketing allowances, derivative transactions, and for stock options. He has also been involved in several matters assessing the adequacy of reserves and dealing with inventory manipulations, along with various other issues around the interpretation and application of GAAP. In addition, he has participated in a variety of other litigation matters, including purchase price disputes, valuations, the preparation and analysis of damage claims, the investigation of employee improprieties and / or defalcations, and royalty audits. Prior to joining EY, Tony was a partner at StoneTurn Group LLP, a boutique litigation support firm. Before that, he held the position of Accounting Branch Chief in the Boston District Office of the SEC where he oversaw and performed numerous investigations into violations of the securities laws relating to accounting and financial fraud matters.

4 Dawn Aiello - Bio Dawn E. Aiello, CPA Manager
Forensic Investigation & Dispute Services Tel: Mobile: Fax: Dawn is a Manager in EY’s Fraud Investigation & Dispute Services (“FIDS”) Practice in Boston, Massachusetts. Dawn has extensive litigation consulting experience, which includes assisting clients in various industries and geographies with forensic accounting investigations, issues surrounding Generally Accepted Accounting Principles (GAAP), and general business-related disputes. Dawn has been involved in a variety of forensic accounting investigations, which have involved analyses of Securities and Exchange Commission matters, including software revenue recognition, and accounting for stock options. She has also been involved in matters dealing with issues around interpretation and application of GAAP. In addition, she has participated in other litigation matters, including purchase price disputes, and the preparation and analysis of damage claims. Prior to joining EY, Dawn was a Forensic Accountant at the Federal Bureau of Investigation. Before that, she was a Manager at StoneTurn Group LLP, a boutique litigation support firm. Her professional history also includes serving as a Forensic Accountant at Berman DeValerio, LLP and an Associate in the Financial and Economic Consulting practice at Huron Consulting Group.

5 EY Fraud Investigation & Dispute Services
Anti-Fraud Corporate Compliance Dispute Services Damage Analyses Purchase Price Disputes Forensic Technology and Discovery Services Cyber Security Data Analytics Fraud Investigations Financial Statement/Occupational Fraud Investigations Shadow Investigations FCPA TONY

6 Who are our clients? Lawyers and their clients Companies Individuals
EY Audit Teams DAWN

7 Who are we? CPAs and other Accountants
Certified in Financial Forensics (CFF) Certified Fraud Examiners (CFE) Finance Professionals Economists Information Technology Specialists Criminal Justice / Former Law Enforcement DAWN

8 What is Forensic Accounting?
Merriam Webster Online Dictionary – “forensic” 1 : belonging to, used in, or suitable to courts of judicature or to public discussion and debate 2 : argumentative, rhetorical 3 : relating to or dealing with the application of scientific knowledge to legal problems (i.e. forensic medicine, forensic science, forensic pathologist, forensic expert) Forensic Accounting is the application of accounting to legal problems. TONY

9 Why Forensic Accounting?
TONY

10 FINANCIAL STATEMENT FRAUD
Types of Fraud FINANCIAL STATEMENT FRAUD TONY Former Microsoft Accountant Sentenced to 2 Years in Prison for Stealing $1.1M OCCUPATIONAL FRAUD

11 ACFE 2014 Report to the Nations
What is the impact of Fraud? Typical organization loses 5% of its revenues to fraud each year. Equates to a potential projected global fraud loss of more than $3.7 trillion annually The median loss caused by occupational fraud cases is $145, % of the time losses are at least $1 million Detection Frauds schemes typically last an average of 18 months before being detected. Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees of the victim organization. TONY

12 ACFE 2014 Report to the Nations (cont.)
Who performs fraud? The median loss among frauds committed by owner/executives was $500,000; managers was $130,000; and employees was $75,000. 77% of all frauds were committed by individuals working in accounting, operations, sales, executive/upper management, customer service and purchasing. Most occupational fraudsters are first-time offenders with clean employment histories. 95% never previously convicted of a fraud-related offense 82% never previously punished or terminated for fraud-related conduct Red Flags In 92% of cases, one or more behavioral red flags exist Living beyond means (44% of cases), Financial difficulties (33%), Unusually close association with vendors or customers (22%) Control issues/Unwillingness to Share Duties (21%) TONY

13 Where does fraud occur? TONY

14 Restatements: Where have we been?
2001 to 2006 Restatements Dramatic increase in the number and size of restatements – 2001 = 617 restatements and 2006 = 1,849 restatements (a 200% increase during the period and an average of 26.2% per year) Data showed an increase in issuers filing multiple restatements Rising trend in number of periods contained in each restatement (in 2004, 40% contained at least 3 years of restated financials) 75% of restatements reported by companies w/ revenues > $500 million Increase in the # of issues per restatement (peak of 2.43 issues per restatement in 2005) 2007 to 2013 Restatements Steady decrease in the number of restatements from ‘07 to’09 (avg. decrease of 25.8% per year) Decrease in the number of periods restated (average of 1.5 years in 2013) Amount of time to restate has decreased (avg. of approximately 30 days in 2007, which dropped to a low of 4.4 days in 2010 and 5.5 days in 2013) Decrease in the # of issues per restatement from 2007 through 2012 (only 1.38 issues per restatement in 2012; up to 1.61 in 2013) TONY

15 Restatement Statistics – Total Restatements
TONY Source: “2013 Financial Restatements: A Thirteen Year Comparison”, Audit Analytics, April 2014

16 Restatement Statistics – Largest Restatements
TONY Source: “2013 Financial Restatements: A Thirteen Year Comparison”, Audit Analytics, April 2014

17 SEC Enforcement Actions
TONY Source: “Floyd Advisory: Summary of Accounting and Auditing Releases for the Year Ended December 31, 2013”

18 AAER Trends – Where are the issues?
TONY Source: “Floyd Advisory: Summary of Accounting and Auditing Releases for the Year Ended December 31, 2013”

19 Forensic Investigation Tools
Accounting discipline Forensic technology tools E-Discovery Data analytics Interview skills Use of industry specialists as required TONY

20 Forensic Investigations - Where do we start?
Start with the allegation – what is it? Who’s your audience? What are the controls and processes around the area? Who’s involved in the controls and processes? Where are the potential breakdowns? What would it look like? What other information is available for me to analyze? Business Intelligence Accounting Records Other data from the accounting system Data from third parties TONY

21 Data Analysis Trending of performance metrics Anomaly Detection
Based on internal and external metrics Identification of anomalies that may suggest further review required Anomaly Detection Targeted Analyses Additional testing (manual or electronic) used to follow up on anomalies identified from trending and data analytics Sometimes simple frauds require simple analysis TONY

22 Stages of an Investigation
Scoping Data Gathering Investigation Preliminary Findings Interviews Additional Investigation Summary of Investigation The stages of a forensic investigation are ever changing and require you to step back at each phase to consider whether the work you’ve performed and have planned will capture the alleged issues. Depending on your findings during the investigation you may have to go back to square one and start over again. Scoping and Preliminary Analyses Start with the allegation – what is it? Who’s our audience in terms of presenting the status and findings of our investigation? What are the controls and processes around the area? Who’s involved in the controls and processes? Where are the potential breakdowns? What would it look like? What other information is available for me to analyze? Data Gathering Preliminary Interviews Walkthroughs and data recovery Documentation Additional Analyses/Investigation Data Analytics review Document review Preliminary Findings Based on the work performed you will have a list of preliminary findings to cull through and interpret. For example, you may have s to a customer offering up excessive return rights or some other terms or conditions that would violate the revenue recognition rules. If the rights have yet to be exercised it would be difficult to determine what in fact was agreed to without speaking with the customer or the sales person involved. Formal Interviews Use the information gained to date to interpret, corroborate what the documents and other analyses are telling you. We’ll talk a bit about how to approach the interview on the next slide. Additional Investigatory Steps Now that you’ve performed interviews to get a clearer picture of the facts regarding your preliminary findings, what additional investigative steps need to be taken to make sure you have the full story and have identified all of the potential issues surrounding the conduct in question? For example, is it limited to this one customer? Are there other sales people doing the same thing? Are there other areas this person has their hands in where they could be performing additional schemes? Summary of Investigation – occurs periodically throughout the investigation. Board of Directors Audit Committee Legal Counsel Auditors SEC/DOJ

23 Building the Information
Good interviewing skills involve 1) preparing yourself with the knowledge necessary to perform the interview, 2) selecting the appropriate level of people to target at each stage and 3) knowing when to be a friend or an adversary As we talked about in the last example, you start by building information by going through the process, performing preliminary interviews and analyzing available documents that will provide you with a preliminary story Next stage includes speaking with neutral witnesses that may have some knowledge about the area or the fraud, but are not involved in the fraud Third stage includes speaking with corroborative witnesses – witnesses who are not involved, but may be able to corroborate specific facts (ex. involved with the customer relationship) Fourth Stage – co-conspirators Fifth stage - target

24 Financial Statement Fraud Example
Product ETS CUST $

25 ETS - What did they do? Investment $ Product ETS CUST $

26 Investment Certificate
ETS - What did they do? Investment $ ETS CUST Investment Certificate Product Product Payment Payment DIST

27 Financial Statement Fraud Example: ETS - Timeline
Friday, February 2, 2002 – announce they are being investigated by the SEC and they initiated an internal review Closing Price of Stock = $10.75/share Market Capitalization = $2.1 Billion Quarterly sales = $150-$200 million Monday, February 5, 2002 Closing Price of Stock = $4.13/share Market Capitalization = $816 Million Loss to Investors = 61% or $1.3 Billion in one day Tuesday, March 22, 2005 Closing Price of Stock = $1.46/share Market Capitalization = $307 Million Quarterly sales = $80-$90 million

28 Enterasys Networks - Timeline (cont.)
2/27/02 – 3 executives in Asia fired 3/2002 – 2 sales people and 3 executives in U.S. fired (including CEO) 8/12/02 – Announce sale of Aprisma (sub.) for $7.4 Million 11/26/02 – File restated financials for past 2 yrs reduction of revenue and net loss of over $200 Million Fall 2002 – CFO fired December 2002 – Mgr. Financial reporting fired 2001 – 2002 = 730 people laid off October 2003 – pay $50 Million to settle class action

29 Enterasys Networks – Timeline (cont.)
May 2004 – 7 executives charged by US Attorney’s office (3 plead guilty) November 2004 – Former exec, Hor Chang Boey, arrested in Atlanta while attempting to enter US for family vacation January 2005 – pay $10.5 Million to settle class action March 2006 – Acquired by two private equity firms for $386 million. No longer a public company April 2007 – 3 of 4 executives found guilty of securities fraud and sentenced to 5 – 14 years in federal prison

30

31 Example: Fannie Mae (FM) – Key Players
Roger Barnes - Accounting Manager & Whistleblower Franklin Delano Raines – Chairman & CEO Tim Howard – Vice Chairman & CFO Leanne Spencer – Senior Vice President & Controller

32 Example: Fannie Mae (FM) – Timeline
August 2003 – Barnes raises concerns to OFHEO re: accounting practices October 2003 – OFHEO initiated examination of FM January 2004 – Special Review Committee (SRC) formed September 2004 – OFHEO issues report and discloses certain accounting violations at FM SRC hires attorneys/forensic accountants to investigate OFHEO’s claims February 2006 – Rudman report issued outlining accounting and other issues at FM December 2006 – FM issues restated financials ($6.3B reduction in RE)

33 Example: Fannie Mae (FM) – Procedures
Over 4 million pages of hard copy & electronic documents reviewed Over 240 interviews conducted Financial modeling GAAP research and interpretation Preparation of internal report presented to BOD and Congress

34 Fannie Mae – Issues Identified
SFAS 91 - Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases 1998 – Catch-Up Adjustment (recorded only $240M of $439M) 2000 – Development and implementation of amortization policy SFAS Accounting for Derivative Instruments and Hedging Activities Corporate Governance & Internal Controls Executive Compensation Other Accounting Issues

35 Example: Fannie Mae (FM) – Excerpts from Document Review
1996 from Spencer to Howard: “What do I have up my sleeve to solve an earnings shortfall?” “I recognize (and thought about it yesterday) that we might want to show the board $2.48. I made the decision that I wanted to show you the real answer and the let you decide if you wanted me to make any adjustment.” ``KPMG has apparently forgotten about these transactions, and we have not brought the issues to their attention. They have experienced significant turnover since we originally adopted the `package' accounting, and, as a result, there is currently only one member of the audit team left from 1995.'' (undated memo from Howard's staff) “I have given serious thought to the many conflicts of conscience I have had over management decision-making. Again, over the past few weeks issues after issue have arisen regarding FAS133 compliance where scenarios were last month…rerun and changed multiple times until we got a result we liked.” (2002 from Barnes)

36 Fannie Mae – Report Conclusions
Accounting Methods Not GAAP-Compliant $200M in expenses pushed to future periods allowing executives to receive $27M in bonuses Amortization policy designed to avoid audit differences Inadequate Accounting Systems Unqualified Staff Tone at the Top/Corporate Culture

37 Fannie Mae – Where are they now?
Fannie Mae – Restated financials ($6.3B) Franklin D. Raines – Golden Parachute ($240M in benefits) Tim Howard – Golden Parachute ($20M in benefits) Author – The Mortgage Wars (2013) Leanne Spencer – Independent Real Estate Professional? 1 January 2014 Presentation title

38 Data Analytics Example
Fact Pattern Controller of a healthcare facility was fired for performance related issues Controller was in his position from January 2009 through July 2011 Upon review of his work management discovered some erroneous entries around A/R write-offs in Q2 2011 Company reports revenue metrics to headquarters based on revenue by healthcare program and expenses by financial statement Company reports expense metrics to headquarters based on expenses by financial statement category. Our Task Determine whether the errors were intentional or unintentional Identify any other erroneous entries Determine whether anyone else involved

39 Financial Statement Fraud Example
Fact Pattern Controller of a healthcare facility was fired for performance related issues Controller was in his position from January 2009 through July 2011 Upon review of his work management discovered some erroneous entries around A/R write-offs in Q2 2011 Company reports revenue metrics to headquarters based on revenue by healthcare program and expenses by financial statement Company reports expense metrics to headquarters based on expenses by financial statement category. Our Task Determine whether the errors were intentional or unintentional Identify any other erroneous entries Determine whether anyone else involved

40 Trending of Performance Metrics

41 Trending of Performance Metrics (cont.)

42 Trending of Performance Metrics (cont.)

43 Finding: Intentionally Inflated Rates
Rate Charged per Procedure Formula Used to Determine Rate

44 Example: Canopy Financial – Success Story?
Developed software for banks and healthcare providers to manage health savings accounts As of 2009 was one of the fastest growing private companies in the U.S. Reported a cash balance of $9 million Raised $75 million from outside investors Reported that they had 1,012,002 customers

45 Canopy Financial - Fraud Uncovered
Fraud identified through identification of a fake audit opinion

46 Canopy Financial - Reality
Two co-founders engaged in fraud that resulted in theft of $93,125,918 over only a one year period Stole monies from investors and the health savings accounts of their customers Had only $800k in cash versus the $9 million reported Had only 81,618 customers versus the 1 million reported Funds were used to: Operate the company Purchase of exotic automobiles Use of a private jet Purchase of a home for one of the co-founders’ parents Home renovations Sports tickets Jewelry Credit card purchases

47 Canopy Financial - Automobiles
20 Cars purchase in total, including: 2010 Range Rovers (2) 2008 Lamborghini 2009 Rolls Royce Phantom 2009 Aston Martin DBS 2009 Bentley Continental 2009 Ferrari 430

48 Canopy Financial - Where are they now???
Anthony Banas – Chief Technology Officer Sentenced to 13 years in federal prison Jeremy Blackburn – President and COO Sentenced to 15 years in federal prison Both men ordered to pay restitution and forfeit assets totaling $93 million

49 Example: Occupational Fraud - Lars Bildman
CEO of Astra Pharmaceutical USA Salary = $1.1M per year “Supplemental Income” $4 Million of construction on his homes Family vacations Prostitutes Sexual harassment of numerous female employees (cost company $10 million) Sentenced to 21 months in prison for tax evasion

50 Example: Occupational Fraud – Bradford Bleidt
Full-service investment advisor w/ businesses in Boston including a radio station Performed fraud over a period of 20 years Stole in excess of $30 million from clients Many clients elderly and their life savings were gone Currently serving a 13 year sentence in federal prison

51 Questions


Download ppt "Fraud & Forensic Accounting"

Similar presentations


Ads by Google