1. Forensic Accounting & Fraud Case Studies Main Line Association For Continuing Education 6-18-15 David E. Goss, CPA/CFF/CGMA,CIA,CFE North American Forensic Accounting PC 901 Dawn Avenue, Suite A, Ephrata, PA 17522 717-466-6800 dave@naforensics.com

2. NORTH AMERICAN FORENSIC ACCOUNTING PC 2 CONTACT INFORMATION David E. Goss CPA/CFF/CGMA, CIA, CFE North American Forensic Accounting PC 901 Dawn Avenue Suite A Ephrata, PA 17522 717-466-6800 dave@naforensics.com

3. NORTH AMERICAN FORENSIC ACCOUNTING PC 3 TODAY’S DISCUSSION Forensic Accounting Considerations Fraud Theories and The Trust Factor Regular Audits vs Fraud Investigations Case Studies Check Preparation Questions ?

4. NORTH AMERICAN FORENSIC ACCOUNTING PC 4 Forensic Accounting Encompasses both Litigation Support and Investigative Accounting. Forensic accounting engagements often result in the accountant being involved in highly controversial and adversarial situations.

5. NORTH AMERICAN FORENSIC ACCOUNTING PC 5 Forensic accounting From Wikipedia, the free encyclopedia Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means “suitable for use in a court of law”, and it is to that standard and potential outcome that forensic accountants generally have to work.forensic accountancyaccountancylitigation “suitable for use in a court of law”

6. NORTH AMERICAN FORENSIC ACCOUNTING PC 6 INCREASING DEMAND FOR FORENSIC ACCOUNTANTS Greed Opportunity Economic factors  Layoffs  Recession fueled bankruptcies  Underemployment

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8. NORTH AMERICAN FORENSIC ACCOUNTING PC 8 Extensive travel: (2 to 3 weeks per month – 16 years)  49 of the 50 states  Brazil  Australia  Canada  England Have been threatened – multiple locations Items thrown at me Endured physical hardships at various locations Moved from hotel to hotel in the middle of the night Wheel lugs loosened on rental car Harassed by unmarked vehicle – Canada Ticked / harassed by police – Canada Individual who assisted me in one case – tires slashed / brake line cut / serious accident Protection order from suspect

9. NORTH AMERICAN FORENSIC ACCOUNTING PC 9 FRAUD TRIANGLE

10. NORTH AMERICAN FORENSIC ACCOUNTING PC 10 FRAUD TRIANGLE Opportunity – weaknesses in internal controls Pressure – personal financial problems, unrealistic performance goals Rationalization – justification for fraudulent activities

11. NORTH AMERICAN FORENSIC ACCOUNTING PC 11 The “Trust” Factor “People are going to trust one another right up to the time they are caught.”

12. NORTH AMERICAN FORENSIC ACCOUNTING PC 12 REPORT TO THE NATIONS REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE (ACFE)

13. NORTH AMERICAN FORENSIC ACCOUNTING PC 13 ACFE 2014 Report Estimated $3.7 Trillion in fraud losses (worldwide) averaging 5 percent of revenues in the study. 85% of occupational fraud incidents is through misappropriations 54% of frauds perpetrated by males and $ amount is significantly higher than females 33% of the frauds are perpetrated by accounting or operations personnel Frequently committed by perpetrators aged 31 to 45, dollar amount increases significantly for fraud committed by individuals over 60 (trust factor) #1 detection method – employee tips – 42%

14. NORTH AMERICAN FORENSIC ACCOUNTING PC 14 DIFFERENCES: AUDITS vs. FRAUD AUDITS 2008 ACFE Report to the Nation on Occupational Fraud & Abuse

15. NORTH AMERICAN FORENSIC ACCOUNTING PC 15 KEY ELEMENTS IN FRAUD SCHEMES All occupational fraud schemes have four key elements in common. The activity: 1. Is clandestine 2. Violates the perpetrator’s fiduciary duties to the victim organization 3. Is committed for the purpose of direct or indirect financial benefit to the perpetrator 4. Costs the employing organization assets, revenue or reserves

16. NORTH AMERICAN FORENSIC ACCOUNTING PC 16 OUTSIDE INFLUENCES An organization cannot control what affects an individual outside of the work environment

17. NORTH AMERICAN FORENSIC ACCOUNTING PC 17 EXTERNAL AUDITORS Long term analysis of frauds from 1998 through 2010 (Reuters): a)Auditors sometimes did not question documents that appeared to be fabricated b)Auditor trusted managements’ word that no fraud had occurred

18. NORTH AMERICAN FORENSIC ACCOUNTING PC 18 EXTERNAL AUDITORS - continued c) Most common auditor failings were lack of competence and diligence. Lack of professional skepticism, and failure to assess and respond to fraud risks. d) Time and budget constraints, fear of alienating clients

19. NORTH AMERICAN FORENSIC ACCOUNTING PC 19 BARRY WEBNE - STORY Question – would you hire someone as your CFO who previously embezzled $1.0 million and spent time in prison?

20. NORTH AMERICAN FORENSIC ACCOUNTING PC 20 WHY DO THEY STEAL? Unspeakable problem (usually financial) that can be resolved by “borrowing” the money Economic distress Elaborate lifestyle Compulsive behavior – substance abuse/gambling problem

21. NORTH AMERICAN FORENSIC ACCOUNTING PC 21 ADDITIONAL CONSIDERATIONS Thefts by embezzlers are rarely detected If detected, the crimes are seldom prosecuted Sentences are usually light

22. NORTH AMERICAN FORENSIC ACCOUNTING PC 22 QUANTIFYING THE IMPACT OF FRAUD Considerations: The effect of fraud on the management of the organization can be a devastating distraction from the normal operations of running the business Depending on the size of an organization, fraud can cripple the financial structure and jeopardize the future operations of a business Many companies carry inadequate levels of insurance coverage for employee dishonesty

23. NORTH AMERICAN FORENSIC ACCOUNTING PC 23 UNDERSTANDING THE FRAUD CYCLE

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27. NORTH AMERICAN FORENSIC ACCOUNTING PC 27 CASE STUDIES Fraud Case Studies Criminal Defense - Bookkeeper Family Business Insurance Agency Construction Company Legal Association Community Bank Manufacturer

28. NORTH AMERICAN FORENSIC ACCOUNTING PC 28 CRIMINAL DEFENSE – BOOKKEEPER DA charged theft $180,000 IRS also charged bookkeeper personally for back taxes not paid by business Original premise - 100% innocent Paying workers under the table Discovery of records QuickBooks – The “devil” in the details DA offer

29. NORTH AMERICAN FORENSIC ACCOUNTING PC 29 FAMILY BUSINESS

30. NORTH AMERICAN FORENSIC ACCOUNTING PC 30 FAMILY BUSINESS Background - External accountant - Long term relationship - Family run business – 275 employees - IRS issues / questions Discovery - Meeting with new CPA firm -Start of the investigation

31. NORTH AMERICAN FORENSIC ACCOUNTING PC 31 FAMILY BUSINESS (continued…) Discovery - Meeting with new CPA firm -Start of the investigation - Offer by suspect Investigation - Transfers from business checking account - Paper vs. electronic records

32. NORTH AMERICAN FORENSIC ACCOUNTING PC 32 FAMILY BUSINESS (continued…) Investigation - Checks drawn to pay “payroll taxes”  Credit card companies  US Treasury  PA Dept. Revenue  Encoding

33. NORTH AMERICAN FORENSIC ACCOUNTING PC 33 FAMILY BUSINESS (continued…) Investigation - Quantification - Insurance claim Outcome - Sentencing - Restitution

34. NORTH AMERICAN FORENSIC ACCOUNTING PC 34 BANK ELECTRONIC TRANSFER

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36. NORTH AMERICAN FORENSIC ACCOUNTING PC 36 CHECK - MEMO LINE

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39. NORTH AMERICAN FORENSIC ACCOUNTING PC 39 INSURANCE AGENCY

40. NORTH AMERICAN FORENSIC ACCOUNTING PC 40 INSURANCE AGENCY Background - Insurance agency - Sole shareholder - 10 to 15 employees - Bookkeeper tenure 7 months Discovery - Income tracking - Meeting with the bookkeeper

41. NORTH AMERICAN FORENSIC ACCOUNTING PC 41 REMITTANCE REPORT

42. NORTH AMERICAN FORENSIC ACCOUNTING PC 42 AUDIT TRAIL

43. NORTH AMERICAN FORENSIC ACCOUNTING PC 43 VOIDED/DELETED TRANSACTIONS

44. NORTH AMERICAN FORENSIC ACCOUNTING PC 44 INSURANCE AGENCY (continued…) Investigation - Fraud theory - Insurance receipts/income - Software tracking - Documents - Chain of custody - Quantification - Insurance claim

45. NORTH AMERICAN FORENSIC ACCOUNTING PC 45 INSURANCE AGENCY (continued…) Status - Civil complaints - Sale of business lines - Loss of business - Sale of building - IRS issues Outcome - Did justice prevail?

46. NORTH AMERICAN FORENSIC ACCOUNTING PC 46 CONSTRUCTION COMPANY

47. NORTH AMERICAN FORENSIC ACCOUNTING PC 47 CONSTRUCTION COMPANY Background - Electrical contractor - Vice President Discovery - Red flags - Compelling evidence or sloppy recordkeeping? - Cost accounting records – journal entries

48. NORTH AMERICAN FORENSIC ACCOUNTING PC 48 CONSTRUCTION COMPANY (continued…) Investigation - Fraud theory - Inventory - Outside vendor - Invoice template - Dumpster diving - Interviews - Quantification

49. NORTH AMERICAN FORENSIC ACCOUNTING PC 49 CONSTRUCTION COMPANY (continued…) Investigation continued - Personal bank records Motive - Greed / girlfriend Outcome - FBI – DOJ report - Sentencing - Full restitution

50. NORTH AMERICAN FORENSIC ACCOUNTING PC 50 LEGAL ASSOCIATION

51. NORTH AMERICAN FORENSIC ACCOUNTING PC 51 LEGAL ASSOCIATION Background - 600+ attorneys - Bookkeeper - Audited financial statements Discovery - Red flags – bank statement - Forgery – checks and notary signature

52. NORTH AMERICAN FORENSIC ACCOUNTING PC 52 LEGAL ASSOCIATION (continued…) Opportunity - Trust and “Family” - Lunch breaks - Position Investigation - Fraud theory - Bank statements - Bank reconciliation

53. NORTH AMERICAN FORENSIC ACCOUNTING PC 53 BANK STATEMENT

54. NORTH AMERICAN FORENSIC ACCOUNTING PC 54 ALTERED TRANSACTIONS

55. NORTH AMERICAN FORENSIC ACCOUNTING PC 55 ACTUAL BANK STATEMENT

56. NORTH AMERICAN FORENSIC ACCOUNTING PC 56 ACTUAL BANK STATEMENT

57. NORTH AMERICAN FORENSIC ACCOUNTING PC 57 LEGAL ASSOCIATION (continued…) Investigation continued - Interview - Quantification - Theft duration – 4 years Motive - Financial pressures

58. NORTH AMERICAN FORENSIC ACCOUNTING PC 58 LEGAL ASSOCIATION (continued…) Outcome - Full restitution - No prosecution - Subsequent events

59. NORTH AMERICAN FORENSIC ACCOUNTING PC 59 LEGAL ASSOCIATION (continued…) Outcome - Full restitution - No prosecution - Subsequent events

60. NORTH AMERICAN FORENSIC ACCOUNTING PC 60 COMMUNITY BANK

61. NORTH AMERICAN FORENSIC ACCOUNTING PC 61 COMMUNITY BANK Background - Small town - VP Bookkeeping / IT – 25 year employee - Audited financial statements - FDIC audits Discovery - FDIC audit – sample selection - Confession

62. NORTH AMERICAN FORENSIC ACCOUNTING PC 62 COMMUNITY BANK (continued…) Opportunity - Position and Trust - Knowledge of internal controls - FDIC bank examiner 2003 Investigation - Fraud theory - Audit trail documentation - Quantification

63. NORTH AMERICAN FORENSIC ACCOUNTING PC 63 COMMUNITY BANK (continued…) Investigation continued - Credit card cash advances - Theft – 4 years - Credit history checks Motive - Financial pressures - QVC

64. NORTH AMERICAN FORENSIC ACCOUNTING PC 64 COMMUNITY BANK (continued…) Outcome - FBI prosecution - Federal prison sentence - Full restitution

65. NORTH AMERICAN FORENSIC ACCOUNTING PC 65 MANUFACTURER

66. NORTH AMERICAN FORENSIC ACCOUNTING PC 66 MANUFACTURER Background - Blackmail scheme - Outside trucking firm - Inside transportation supervisor Discovery - Excel spreadsheets - “The bookcase”

67. NORTH AMERICAN FORENSIC ACCOUNTING PC 67 MANUFACTURER (continued…) Investigation continued - Trucking invoices - Imbedded kickbacks Motive - Financial pressures ?

68. NORTH AMERICAN FORENSIC ACCOUNTING PC 68 MANUFACTURER (continued…) Investigation continued - Trucking invoices - Imbedded kickbacks Motive - Financial pressures ?

69. NORTH AMERICAN FORENSIC ACCOUNTING PC 69 MANUFACTURER (continued…) Outcome - $2.7 million - Insurance claim - Death

70. NORTH AMERICAN FORENSIC ACCOUNTING PC 70 FRAUD TRIANGLE

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72. NORTH AMERICAN FORENSIC ACCOUNTING PC 72 TO BE CONTINUED

73. NORTH AMERICAN FORENSIC ACCOUNTING PC 73 CHECK PREPARATION

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77. Main Line Association For Continuing Education 6-18-15 David E. Goss, CPA/CFF/CGMA,CIA,CFE North American Forensic Accounting PC 901 Dawn Avenue, Suite A, Ephrata, PA 17522 717-466-6800 dave@naforensics.com www.naforensics.com www.facebook.com/northamericanforensicaccountingllc