1. Forensic Accounting: Its Role in Discovery and Dealing with Fraud Copyrighted D. Larry Crumbley, CPA, Cr.FA KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA Fax
Dr. Crumbley is the editor of the Journal of Forensic Accounting: Auditing, Fraud, and Taxation, former chair of the Executive Board of Accounting Advisors of the American Board of Forensic Accountants, member of the Fraud Deterrence Board, and on the AICPA’s Fraud Task Force.
A frequent contributor to the Forensic Examiner, Professor Crumbley is a co-author of CCH Master Auditing Guide, 2nd Edition, along with more than 45 other books. His latest book entitled Forensic and Investigative Accounting is published by Commerce Clearing House ( ). Some of his 12 educational novels have as the main character a forensic accountant. His goal is to create a television series based upon the exciting life of a forensic accountant and litigation consultant.

2. Forensic Accounting Factors
Time: Forensic accounting focuses on the past, although it may do so in order to look forward (e.g., damages, valuations).
Purpose: Forensic accounting is performed for a specific legal forum or in anticipation of appearing before a legal forum.
Peremptory: Forensic accountants may be employed in a wide variety of risk management engagements within business enterprises as a matter of right, without the necessity of allegations (e.g., proactive).
With a single clue a forensic accountant can solve a fraudulent mystery.

3. One Small Clue
A former Scotland Yard scientist tried to create the world’s biggest fraud by authenticating $2.5 trillion worth of fake U.S. Treasury bonds.
When two men tried to pass off $25 million worth of the bonds in Toronto in 2001, a Mounty noticed the bonds bore the word “dollar” rather “dollars.”
Police later raided a London bank vault and discovered that the bonds had been printed with an ink jet printer that had not been invented when the bonds were allegedly produced.
Zip codes were used even though they were not introduced until 1963.
Sue Clough, “Bungling Scientist Is Jailed for Plotting World's Biggest Fraud,” News.telegraph.co.uk, January 11, 2003.

4. Definition of Forensic Auditor
Someone who can look behind the facade--not accept the records at their face value--someone who has a suspicious mind that the documents he or she is looking at may not be what they purport to be and someone who has the expertise to go out and conduct very detailed interviews of individuals to develop the truth, especially if some are presumed to be lying.
Robert G. Roche, a retired chief of the IRS Criminal Investigation Division of the IRS [D.W. Yockey, “So You Want to Be a Forensic Accountant,” Management Accounting, November 1988, pp ]

5. Forensic Accounting Areas
Investigative Auditing
Litigation Support
Forensic: Latin for “forum,” referring to a public place or court.
Black’s Law Dictionary: Forensic, belonging to the courts of justice.
Note: Corporate spooks are used to check on competitors.

6. Forensic Auditing
Forensic auditing is a type of auditing that specifically looks for financial misconduct, and abusive or wasteful activity.
It is most commonly associated with gathering evidence that will be presented in a court of law as part of a financial crime or a fraud investigation.
Source: B.L. Derby, “Data Mining for Improper Payments,” Journal of Government Financial Management, Winter, 2003, pp
Like a competitive game of tennis, forensic accounting skills require practice.

7. Top Niche Services 1. Business Valuations 78% 2. Estate Planning 77%
3. Litigation Support
73%
4. Mergers & Acquisitions
61%
5. Business Mgt. Wealthy clients
56%
6. Forensics/fraud
55%
7. Employee benefits
8. Computer systems/consulting
53%
Source: J.M. Covaleski, “Many Top 100 Growth Areas Revolve Around Synergy of CPA/Attorney Relationship,” Accounting Today, March 18-April 7, 2003, p.1.

8. Forensic Accounting vs. Fraud Auditing
Fraud Auditor: An accountant especially skilled in auditing who is generally engaged in auditing with a view toward fraud discovery, documentation, and prevention.
“Economic crimes and fraud often do not involve obvious evidence like the smoking gun. Forensic accountants look behind the deals and handshakes and probe beyond the numbers to uncover the reality of financial situations.”
Source: D.W. Squires, “Problems Solved with Forensic Accounting: A Legal Perspective,” Journal of Forensic Accounting., Vol. IV (2003),. P. 131.

9. Find It, or I’ll Sue
Accountants must be attuned to detecting fraud at every level of service, including standard accounting services, compilations, reviews, and bank reconciliations. If there is fraud and you don’t detect it, you are going to be sued, and you will likely lose, as the public perception is the accountant is the watchdog.
Robert J. DiPasquale, Parsippany, N.J.
Source: H.W. Wolosky, “Forensic Accounting to the Forefront,” Practical Accountant, February 2004, pp

10. Forensic Accounting Knowledge Base
LAW
Investigative auditing
Accounting
Criminology
Forensic Accountant

11. Be like

12. Fictional Hero
“Forensic accounting is turning up more frequently in the world of fiction, too. The financial intrigue of fraud and the investigative process of forensic accounting are a natural fit with mystery of suspense novels. Add exotic locations, colorful characters and a murder or two, and you have all the elements of a classic thriller.
There is a selection of books featuring forensic accountants as the heroes of their own stories, as well. Lenny Cramer, perhaps the most prominent of this fictional group, is the star of a series of novels written by I.W. Collett and various co-authors.
In one of these novels, Cramer tracks forged receipts to uncover a plot to steal Burmese religion treasures. Another features Cramer, while conducting an audit at Coca-Coca, uncovering a scheme to steal the company’s secret formula. In yet another, Cramer uses his forensic accounting skills to solve a series of murders in the New York art world.”
Source: “Book ‘em! Forensic Accounting in History and Literature,”The Kessler Report, Vol. 1, No. 2.

13. Forensic-Type Organizations
American College of Forensic Examiners (2750 E. Sunshine, Springfield, MO 65804; ; DABFA and Cr.FA; 2000)
Certified Fraud Examiners (Association of CFEs, The Gregor Bldg., 716 West Avenue Austin, TX 78701; ;
Certified Insolvency and Reorganization Accountant. Accountants, lawyers, consultants included in insolvency and bankruptcy matters. 3-part exam. 4,000 hours AIRA, 221Stewart Avenue, Suite 207, Medford, Or
Forensic Accounting Society Of North America (FASNA, 8712 W. Dodge Road, Suite 200, Omaha, NE, 68114; ). About 9 firms. Insurance.
Certified Forensic Financial Analyst (NACVA, Salt Lake City, Utah 84106; ). Also, Certified Fraud Deterrence (CFD) analyst.
National Litigation Support Services Association (NLSSA, III East Wacker Drive, Suite 990, Chicago, IL 60601; ). Not-for-profit. About 20 firms. $1,825.
Canadian Institute of Chartered Accountants (CICA) – CA.IFA – Alliance for Excellence in Investigative Accounting.
Certified Forensic Investigator (CFI) – Canada Early 1980’s.
Certified Fraud Specialist (CFS), not-for-profit, educational anti-fraud corporation located in Sacramento, Calif., for those dealing in white-collar crime, fraud, and abuse issues. Association of Certified Fraud Specialists.

14. Some accountants believe that ethics is a place in England.
Fraud
Some accountants believe that ethics is a place in England.
Essex, U.K.
A statement made by Mark Twain about New England weather applies to fraud and corruption:
“It’s hard to predict, but everyone agrees there’s plenty of it.”
As Sherlock Holmes said, “the game is afoot.”

15. Fraud is Possible The motto of a fraudster:
Anything is possible. The impossibility simply takes longer.
Biggleman’s Safe – a safe builder wrote blueprints of a unbreakable safe and locked the blueprints inside the safe.
Internal controls can be broken, often by top executives.

16. White-Collar Crime: Rich People Steal
Edwin Sutherland coined the term “white-collar crime.” [Indiana University sociology professor.]
Sutherland believed that white-collar crime is a learned behavior, a consequence of corporate culture where regulations are regarded as harassment, and profit is the measure of the man.
“White-collar crime violates trust and thus create distrust, and this lowers social morale and produces social disorganization on a large scale.
Cynthia Crossen, “A Thirties Revelation: Rich People Who Steal are Criminals, Too,” Wall Street Journal, October 15, 2003, p. B-1.

17. Tyco Prosecutor’s Closing Argument
“Remember, these are two very, very smart men; they are not charged with being stupid men,” she said of Mr. Kozlowski and Mr. Swartz. “These crimes have an element of sophistication so you can be sure that when they were committing them they built in an element of deniability.”
She added: “Every good scheme has it. That is how white-collar criminals work.”
Mistrial on April 2, 2004.
Source: A.R. Sorkin, “Talk of Greed and Beyond at Tyco Trial,” N.Y. Times, March 17, 2004, p. C-1.

18. Michael Comer’s Types of Fraud
Corruptions (e.g., kickbacks).
Conflicts of interest (e.g., drug/alcohol abuse, part-time work).
Theft of assets.
False reporting or falsifying performance (e.g., false accounts, manipulating financial results).
Technological abuse (e.g., computer related fraud, unauthorized Internet browsing).
Comer’s Rule: Fraud can happen to anyone at anytime.
Source: M.J. Comer, Investigating Corporate Fraud, Burlington, Vt.: Gower Publishing Co., 2003, pp. 4-5.

19. Starwoods Hotels Poll of Executives
Starwoods Hotels interviewed 401 top executives who golf. The results are surprising.
Consider themselves to be honest in business
99%
Played with someone who cheats at golf
87%
Cheated themselves at golf
82%
Hated others who cheated at golf
Believe that business and golf behaviors are parallel
72%
Source: Del Jones, “Many CEOs Bend The Rules (of Golf),” USA Today, June 26, 2002, p. A-1.

20. The Cost of Fraud
Organizations lose 6 percent of annual revenue to fraud and abuse.
Fraud and abuse costs U.S. organizations more than $600 billion annually ($4,500 per employee).
The average organization loses more than $12 a day per employee due to fraud and abuse.
Source: 2002 Wells Report

21. The Cost of Fraud (cont.)
Over 80% of occupational frauds involve asset misappropriations.
Average length of a fraud scheme is 18 months.
Most common way of detecting occupational fraud is by tips from employees, customers, vendors, or anonymous sources.
Second most common detection: accident.
The most targeted asset is cash.
Source: 2002 Wells Report

22. Fraud Multiplier Employee Fraud = $ for $ reduction in net income
Suppose $100,000 bottom line reduction.
Suppose 20% profit margin
How much new revenue needed to offset the lost income?
$100,000 = $500,000
20%
So ACFE says $600 billion lost per year.
$600 billion = $3 trillion needed revenue

23. Advantage of Compliance Spending
General Counsel Roundtable says that each $1 of compliance spending saves organizations, on the average, $5.21 in heightened avoidance of legal liabilities, harm to the organization’s reputation, and lost productivity.
Source: Jonny Frank, “Fraud Risk Assessments,” Internal Auditor, April 2004, p. 47.

24. Scienter Necessary
To prove any type of fraud, prosecutors must show that scienter was present.
That is, the fraudster must have known that his or her actions were intended to deceive.

25. Fraudulent Disbursements
Fraudulent disbursements account for three-quarters of the losses, and the most expensive tend to be fraudulent disbursements through billing schemes (45%).
Therefore, internal auditors seeking to get the biggest bang for their investigative bucks should begin by making sure company vendors are for real.
Check tampering (30%).
Source: J.T. Wells, “An Unholy Trinity,” Internal Auditor, April 1998, p. 33.

26. The Methods
Asset misappropriation accounted for more than four out of five offenses (80%).
Bribery and corruption constituted about 13 % of offenses.
Fraudulent statements were the smallest category of offense (most costly). $4.25 million per scheme.
Source: 2002 Wells Report

27. Cynthia Cooper’s Suggestions
Improve the tone at the top (e.g., a fish rots from the top).
Robust Codes of Conduct.
Training on Ethics/Internal Controls.
Holistic approach to Risk Assessment/Internal Controls.
Fraud Hotlines.
Control self-assessment.
Control repositories.
Source: Cynthia Cooper, L.S.U., November 24, 2003.

28. The Perpetrators First-time offenders.
Losses from fraud caused by managers and executives were 3.5 times greater than those caused by non-managerial employees.
Losses caused by men were 3 times those caused by women. [53% males; 47% females]
Losses caused by perpetrators 60 and older were 27 times those caused by perpetrators 25 or younger.
Losses caused by perpetrators with post-graduate degrees were more than 3.5 times greater than those caused by high school graduates.
Source: 2002 ACFE Report

29. Other Characteristics of Occupational Fraudsters:
Egotistical
Risk taker
Hard Worker
Greedy
Disgruntled or a complainer
Overwhelming desire for personal gain
Pressured to perform
Inquisitive
Rule breaker
Under stress
Financial need
Big spender
Close relationship with vendors / suppliers
Source: Lisa Eversole, “Profile of a Fraudster,” Some Fraud Stuff,

30. “Finding fraud is like trying to load frogs on to a wheelbarrow.”
Larry Crumbley
H.R. Davia suggests that for every three fraud events which are detected, two remain undetected, and that conclusions drawn from studying those that are detected do not necessarily apply to those whose existence has not been revealed.
Source: Davia, H.R., “Fraud Specific Auditing,” Journal of Forensic Accounting,” June 2002.

31. Fraud Catching D. Larry Crumbley
Finding fraud is like trying to herd cats and chickens.
There is a chicken catching machine (150 chickens per minute),* but there is no perfect fraud catching machine.
D. Larry Crumbley
* PH2000 mechanical chicken harvester. Scott Kilman, “Poultry in Motion: Chicken Catching Goes High Tech,” Wall Street Journal, June 4, 2003, p. A-1. Human can catch about 1,000 an hour. $200,000 cost.

32. How Fraud Is Detected Tips from employees (26.3%).
By accident (18.8%).
Internal audit (18.6%).
Internal controls (15.4%).
External audits (11.5%).
Tips from customers (8.6%).
Anonymous tips (6.2%).
Tips from vendors (5.1%).
Therefore, 46.2% from tips.
Source: 2002 Wells Report.

33. Difficult Task
More forensic techniques should become a part of both external and internal auditing. But Stephen Seliskar says that “in terms of the sheer labor, the magnitude of effort, time and expense required to do a single, very focused [forensic] investigation -- as contrasted to auditing a set of the financial statements -- the difference is incredible.” It is physically impossible to conduct a generic fraud investigation of an entire business.
Source: Eric Krell, “Will Forensic Accounting Go Mainstream?” Business Finance Journal, October 2002, pp

34. Stealth
Once a forensic accountant (e.g., Cr.FA, CFE, CFFA) is engaged, Michael Kessler says that they should not be disruptive. Most employees are not aware that an investigation is taking place. We go in as just another set of auditors, favoring a Columbo-esque investigative style. “We don’t wear special windbreakers that say ‘forensic accountant.’”
Source: Eric Krell, “Will Forensic Accounting Go Mainstream?” Business Finance Journal, October 2002, pp

35. Kessler Survey (2001)
About 13% of employees are fundamentally dishonest.
Employees out-steal shoplifters.
About 21% of employees are honest.
But 66% are encouraged to steal if they see others doing it without repercussion.
Source: “Studies Show 13% of employees are fundamentally dishonest,” KesslerNews, November 1, 2001,
30% of people in U.S. are dishonest.
30% situational dishonest.
40% are honest all of the time.
Source: R.C. Hollinger, Dishonesty in the Workplace, ParkRider, N.Y.: London House Press, 1989, pp. 1-5.

36. Fraud Pyramid Motive Opportunity Rationalization
Excessive spending to keep up appearances of wealth.
Other, outside business financial strains.
An illicit romantic relationship.
Alcohol, drug or gambling abuse problems.
Opportunity
Lack of internal controls.
Perception of detection = proactive preventative measure.
Rationalization
“Borrowing” money temporarily.
Justifying the theft out of a sense of being underpaid.(“I was only taking what was mine”)
Depersonalizing the victim of the theft. (I wasn’t stealing from my boss; I was stealing from the company.”)

37. Greed
“I don’t see many ways to eliminate greed; it is an inherent part of the human character. So antifraud measures must be aimed at educating people on the risks and the type of technical controls that they can implement.”
Alan Oliphant
Source: David G. Banks, “The Fight Against Fraud,” Internal Auditor, April 2004, pp

38. Materiality Unimportant
“Auditing is governed by materiality. In investigative accounting, it is the opposite. I am looking for one transaction that will be the key. The one transaction that is a little different, no matter how small the difference, and that will open the door.”
Lorraine Horton, owner of L. Horton & Associates in Kingston, R.I.
“Fraud usually starts small. It begins with little amounts, because the perpetrator is going to test the system. If they get away with it, then they keep on increasing and increasing it.”
Robert J. DiPasquale
Source: H.W. Wolosky, “Forensic Accounting to the Forefront,” Practical Accountant, February 2004, pp

39. Forensic Accounting v. Auditing
“Forensic accounting is very different from auditing in that there is no template to use. There are no set rules. You don’t know when you go into a job how it is going to be.”
Lorraine Horton, Kingston, R.I
“Forensic accounting “is a very competitive field. What is interesting is that you may be a good accountant, but not a good forensic accountant. The training and the way you look at transactions are different.”
Robert J. DiPasquale, Parsippany, N.J.
“Unlike auditing, lower-level staff often can’t be used for an engagement. They normally will not spot anything out of the ordinary, and an experienced person should be the one testifying as well as doing the investigative work.”
Lorraine Horton, Kingston, R.I.
Source; H.W. Wolosky, “Forensic Accounting to the Forefront,” Practical Accountant, February 2004, pp

40. Steps Toward Forensic Audit
Traditional audit [forensic techniques & fraud prevention program].
If suspect fraud, bring in-house forensic talent into the audit.
If no in-house talent or fraud complex, engage an outside forensic accountant (e.g., Cr.FA, CFFA, or CFE).
As audit moves toward forensic investigation, auditor must comply with litigation services standards (consulting).

41. Types of Forensic Engagements
Determine if fraud is occurring.
Support criminal or civil action against dishonest individuals.
Form a basis for terminating a dishonest employee.
Support an insurance claim.
Support defense of an accused employee.
Determine whether assets or income were hidden by a party to a legal proceeding (such as a bankruptcy or divorce).
Identify internal controls to prevent it from happening again.
Source: D.R. Carmichael, et. al, Fraud Detection, 5th, Fort Worth: Practitioners Publishing, 2002, p. 2 – 4.

42. Two Major Types of Forensic Investigations
Reactive: Some reason to suspect fraud, or occurs after a significant loss.
Proactive: First, preventive approach as a result of normal operations (e.g., review of internal controls or identify areas of fraud exposure). There is no reason to suspect fraud. Second, to detect indicia of fraud.
Source: H.R. Davia, “ Fraud Specific Auditing,” Journal of Forensic Accounting, Vol. 111, 2002, pp

43. Thinking as a Forensic Auditor
The Iceberg Theory of Fraud
Overt Aspects Hierarchy Financial Resources Goals of the Organization Skills and Abilities of Personnel Technological State Performance Measurement
Structural Considerations
Water line
Covert Aspects Attitudes Feelings (Fear, Anger, etc.) Values Norms Interaction Supportiveness Satisfaction
Behavioral Considerations
Source: G.J. Bologna and R.J. Lindquist, Fraud Auditing and Forensic Accounting, 2nd Edition, New York: John Wiley, 1995, pp

44. Fraudsters Should Be Prosecuted
Although large frauds may be reported to law enforcement agencies, smaller frauds are often not reported.
This failure to report fraud incidents and the reluctance of police to aggressively tackle the issue only empowers the perps and diminishes the victims. Ultimately, these unreported incidents are precursors to larger and larger acts of violence. If we do not deal with simple crimes, we will eventually have to deal with homicide.
Source: Stephen Doherty, “How Can Workplace Violence Be Deterred,” Security Management, April 2002, p. 134.

45. Top-Side Entries: Smoking Gun
An Oct. 14, 2002, New York Times article by Joel Brinkley stated that “auditors studying the financial records of federal government departments find may of them so disorganized, even chaotic, that the agencies cannot account for tens of billion of dollars.” So how did the agencies make their books balance? Through the magic of top-side balancing entries.
The Forest Services, a division of the U.S. Department of Agriculture, tried to balance its books at the end of the 2001 fiscal year. It booked more than 15,337 adjusting entries, debits, and credits totaling more than $11 billion gross. Auditors determined that 73 percent of these adjustments, totaling $7.9 billion, were unsupported.
The U.S. Department of Defense alone entered an unsubstantiated balance adjustment totaling $1.1 trillion in 2000, down from $2.3 trillion the prior year.
Source: Scott Green, “Fighting Financial Reporting Fraud,” Internal Auditor, December 2003, pp

46. Industry Specific Investigations: IRS’s Audit Technique Guides (ATGs)
Market Segment Specialization Program produces ATGs.
At least 74 different ATGs.
Length: 13 to 237 pages.
58 ATGs on IRS website.
See CCH Internet Tax Research Network.
60 more under study.
Usually contain:
Common and unique practices.
Industry terminology.
Examination techniques (e.g. interview questions).
Other information.

48. The End Is Here