1. FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Today’s Topics n Transparency Barriers n Financial Fraud Overview

2. FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Barriers to Transparency n Transparency defined n WYSIWYG n Management bias n Measurement bias

3. FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Financial Fraud Statistics n Key players n COSO n The Treadway Comm.-NCFFR n SEC’s AAERs n Accounting & Auditing Enforcement Releases n Treadway Commission: 1987 n Infrequent but costly n COSO Update: 1999 n 300 AAERs 1987-1997

4. FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Drivers of 2000’s Meltdown 1. Booming economy 2. Moral decay 3. Incentives 4. Analysts’ expectations 5. Debt 6. Rules versus principles 7. Auditor independence issues 8. Greed 9. Educator failure 10. Failure to forecast

5. FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Financial Fraud Motivation 1. Greed 2. Fear of failure 3. Lack of accounting expertise 4. Scope of operations—too broad

6. FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 18 Key Tidbits n Average period: 23.7 months n Revenue frauds were #1 n Asset misstatement-spread around n Mean misstatement = $25 M n CEO involved in 72% of the cases n Last audit was unqualified in 55% of the cases n Mean assets = $532 M; revenues = $232 M n S/W and manufacturing involved in 12% of the cases n NASDAQ had 78% n 36% filed for bankruptcy n Non-existent or uninvolved audit committees n Insiders on Boards of Directors n Family relationships were common n Financial pressures were high n 56% of auditors were Big 6 n Auditors named in 30% of cases n 25% changed auditors after the fraud n Relatively few executives went to prison

7. FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Financial Fraud Detection n KTT is the key n Use the Fraud Exposure Rectangle n Management & Directors n Background, motivation & influence n Company relationships n Obligations, related party transactions & compliance n Nature of organization & industry n Financial results & operations n GAAP, attitude