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Published on April 24, 2008

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Forensic Accounting: Some Strategies for Detecting & Preventing Fraud D. Larry Crumbley, CPA, Cr.FA, CFD, FCPA KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA 70803 225-578-6231 225-578-6201 Fax dcrumbl@lsu.edu :  Forensic Accounting: Some Strategies for Detecting & Preventing Fraud D. Larry Crumbley, CPA, Cr.FA, CFD, FCPA KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA 70803 225-578-6231 225-578-6201 Fax dcrumbl@lsu.edu Dr. Crumbley is the Editor of the Journal of Forensic Accounting: Auditing, Fraud, and Risk, Former chair of the Executive Board of Accounting Advisors of the American Board of Forensic Accountants, Member of the NACVA’s Fraud Deterrence Board, and On the AICPA’s Fraud Task Force (2003-2004). A frequent contributor to the Forensic Examiner, Professor Crumbley is a co-author of CCH Master Auditing Guide, along with more than 50 other books and 350 articles. His latest book entitled Forensic and Investigative Accounting is published by Commerce Clearing House (800-224-7477). 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. Forensic Report:  Forensic Report TALLY STICKS:  TALLY STICKS Glimpse Forward:  Glimpse Forward Overview of Forensic Accounting Persuasiveness/ Costs of Fraud/ Abuse COSO’s Model After FRA: Detection and Investigation Misappropriation of Assets/ Cooking the Books Detection, Investigation, and Deterrence Types of Misappropriations Procurement Frauds Developing Fraud Interviewing Skills Best Fraud Auditing Techniques ----------------------------------------------------------- Now John at the bar is a friend of mine. He gets me my drinks for free. Sing us a song, you’re the piano man. “Piano Man” Billy Joel Some Fraud Figures:  Some Fraud Figures Australia’s annual fraud, 2003, $5.8 billion or 1.147% of GDP. Malaysia’s telecom operators lose 3% of revenue to fraud each year. A KPMG Malaysian survey found that more than a third of the polled companies lost over RM 1 million from fraud in 2 years. Fraud and abuse in U.S. is $652 billion to $1 trillion annually. The quantity of corruption crimes has continued to rise in China after the market liberalizations in 1978 (because so much more money involved). An employee at the Australian mint stole $100,145 over ten months by hiding bills and coins in his lunch box and boots. He carried away on an average 150 coins in each boot every day. Fannie Mae Forensic Probe:  Fannie Mae Forensic Probe BOD hired investigators who cleared the current management of Fannie Mae of knowingly participating in any wrongdoing. The report took 17 months; 616 pages plus 2,000 plus pages of supporting documents. Cost of $60 million to $70 million. The fraud was estimated to be $11 billion. Former N.H. Senator Warren Rudman used The Huron Consulting Group. Definition of Forensic Auditor:  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 Narrow vs. Broad Definition:  Narrow vs. Broad Definition Narrow: Fraud detection is major area. Broad: Employed to seek, interpret, and communicate transactional and reporting event evidence in an objective, legally sustainable fashion, not only in situations where there are specific allegations of wrongdoing, but also in situations where interested parties judge that the risk of loss from wrongdoing is such that proper prudence requires legally sustainable evidence to support the conclusion that no wrongdoing is occurring (James Edwards). Narrow Approach:  Narrow Approach U.S. Dept. of Justice, Education and Training in Fraud and Forensic Accounting: A Guide for Educational Institutions, Stakeholder Organizations, Faculty and Students, Draft Copy, December 23, 2005. Broad Approach:  Broad Approach “I liken it to ‘CSI’ or ‘Law & Order,’ but instead of figuring out the trajectory of a bullet, you’re trying to find out how a transaction occurred.” Terry McCarthy Slide11:  Definition of Forensic Accounting Forensic accounting is the application of accounting, tax, auditing, finance, quantitative analysis, investigative and research skills, and an understanding of the legal process for the purpose of identifying, collecting, analyzing, and interpreting financial or other data or issues in connection with: Litigation services: providing assistance for actual, pending or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of disputes between parties, or Non-litigation services: performing analyses or investigations that may require the same skills used in 1, above, but may not involve the litigation process. Slide12:  Definition of Forensic Accounting Litigation Service Forensic accounting litigation services are the professional assistance accountants provide related to the litigation process. These services may involve accounting, financial, auditing, tax, quantitative analysis, and investigative and research skills, as well as an understanding of the legal process to provide assistance for actual, pending, or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of a dispute between parties. Slide13:  Definition of Forensic Accounting Non-Litigation Services Forensic accounting non-litigation services are the professional assistance accountants provide not related to the litigation process. These services may involve accounting, financial, auditing, tax, quantitative analysis, and investigative and research skill as well as an understanding of the legal process to provide assistance in connection with matter or issues not involving the litigation process. “You’re trying to piece together a puzzle where you do not have the picture on the box to know what it’s going to look like. The facts are not settled, and actually it’s the facts that are in dispute.” Andrew Bernstein Slide14:  Puff Adder “What the use of finger prints was to the 19th century and DNA analysis was to the 20th, forensic accounting will be to the 21st century.” - Gordon Brown, Chancellor of the Exchequer, 10 October 2006. Slide15:  Short History Late 1800’s – Find fraud 1930’s- Puff Adder –encyclopedia 1933-1934-independent audits 1950’s-Eighth edition Montgomery auditing reduced formal stress on fraud detection. January 1957- H.W. Bevis, AR, questioned the benefit of discovering minor employee thefts. 1960s-auditors claimed no responsibility. Financial audits: Consistency. Audit surveillance: test of details (disappeared). Stock market bubble Panel on Audit Effectiveness (2000) Enron/ WorldCom/ Parmalat/ HealthSouth Sarbanes-Oxley/ PCAOB SAS No. 99 Why Growth in Forensic Accounting:  Why Growth in Forensic Accounting Increase in fraud. Less loyalty to organization. Employee mobility. Change in societal values. Break-up of family unit. Less religious. Less ethics. Computers replacing accounting functions. External accountants are looking for new jobs. Higher insurance premiums for auditing. Auditors became sales people. Grade inflation/coursework deflation. Enron/WorldCom/Xerox. SOX/ SAS No. 99. Transparency International Corruption Perceptions Index 2006:  Transparency International Corruption Perceptions Index 2006 The Bubble Deception:  The Bubble Deception There are 14,000 publicly traded companies in the United States. Expecting all of them to be honest is unrealistic. Like any town of 14,000, the market is bound to have its share of grafters and shoplifters. By January 2001, all manner of companies were abusing accounting rules to mislead their investors, seemingly without fear of being caught. A strange madness had gripped the market. Even its most solid citizens were running red lights and breaking windows. And the police were nowhere in sight. Alex Berenson, The Number, Random House, 2003, p. xxiii. Enriching Insiders :  Enriching Insiders I know that sounds crazy, but the stock market has gone from a place where investors actually own part of a company and have a say in their management to a market designed to enrich insiders by allowing them to sell shares they buy cheaply through options. Companies continuously issue new shares to their managers without asking their existing shareholders. Those managers then leak that stock to the market a little at a time. It’s unlimited dilution of existing shareholders’ stakes, dilution by a thousand cuts. If that isn’t a scam, I don’t know what is. Individual shareholders have nothing but the chance to sell their shares to the next sucker . A mutual fund buys one million shares of a company with your and your coworkers’ money. You own 1 percent of the company. Six weeks later you own less, and that money went to insiders, not to the company. Alex Berenson, The Number, Random House, 2003, p. xviii. Forensic Accounting Factors:  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. One Small Clue:  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 Mountie 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. Forensic Accounting Defined:  Forensic Accounting Defined Forensic accounting is the action of identifying, recording, settling, extracting, sorting, reporting, and verifying past financial data or other accounting activities for settling current or prospective legal disputes or using such past financial data for projecting future financial data to settle legal disputes. Source: Forensic and Investigative Accounting (CCH) -------------------------------------------------------- When the death of a company occurs under mysterious circumstances, forensic accountants are essential. Other accountants look at the charts but forensic accountants actually dig into the body. Douglas Carmichael Forensic Accounting Areas:  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. Forensic Auditing:  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. 10-13 ---------------------------------------------------------------- “ Forget the stuffed white shirt, forensic accountants are more parts Philip Marlowe than Casper Milquetoast. They open the books and crack the code, transforming a dull science of numbers into a suspenseful mystery with a logical, even riveting resolution.” Cory Johnson Top Niche Services:  Top Niche Services Source: Accounting Today. Forensic Accounting vs. Fraud Auditing:  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. Forensic Accounting vs. Fraud Auditing:  Forensic Accounting vs. Fraud Auditing Forensic Accountant: A forensic accountant may take on fraud auditing engagements and may be a fraud auditor, but he or she will also use other accounting, consulting, and legal skills in broader engagements. In addition to accounting skills, he or she will need a working knowledge of the legal system and excellent communication skills to carry out expert testimony in the courtroom and to aid in other litigation support engagements. Crumbley, Heitger, Smith, Forensic and Investigative Accounting (CCH) AICPA’s Position:  AICPA’s Position Does not require auditors to carryout specific forensic procedures, but rather provide guidance on how to include forensic techniques within processes outlines in SAS 99. This combination will enhance the detection and prevention of fraudulent financial statement reporting and misappropriation of assets; thus protect investors and financial statement users. Public accounting firms could use forensic accountants to help revise their approach to planning and fieldwork on all audits, while requiring forensic accountants only on high risk audit clients to aid in the interpretation of forensic testing results and preventive control enhancements. The inclusion of audit procedures focused towards detecting misappropriation of corporate assets may lead to the identification of weaknesses within corporate governance or control weaknesses. Frauds that are identified which represent a material misappropriation of assets could significantly impact public perception. AICPA’s Position (cont.):  AICPA’s Position (cont.) Professional forensic accountants can best be used by ensuring such procedures are properly developed and executed in-line with internal audit and audit committee concerns. Forensic accountants could then be engaged in high-risk situations, or when a fraud is suspected. Companies should not use the forensic services of their outside audit firm, unless it pertains to the annual audit. Putting a price on a substantive test or forensic auditing procedure may be smart for business; however, the inherent risk is that short-cuts geared towards reducing audit costs may eventually cause investors to question the companies’ true financial position. AICPA – Discussion Memo Question Responses Big-Six's Position:  Big-Six's Position A forensic audit is akin to a police investigation. All public companies should have a forensic audit on a regular basis. Companies would be required to have such an audit every three or five years or face these audits on a random basis. Forensic auditors scrutinize all records of companies, including emails, and would be able, if not required, to question all company employees, and to require statements under oath. Might be necessary for an audit network or a specialized forensic auditor to complete a forensic audit with the aid of independent attorneys (not these who have represented the audit client in the other engagements). Source: “Serving Global Markets and the Global Economy: A View from the CEOs of the International Audit Networks, November 2006, p. 13. Catch Me If You Can:  Catch Me If You Can Numbers Don’t Lie. Criminals are another story. Money talks. But more often it whispers. When shady characters are up to no good, they often leave a trail of questionable financial transactions. Use your skills and smarts to trace the money trail back to the crooks in the all-new version of Catch Me If You Can. Now more interactive and exciting than ever. You could win up to $2,000 in cash or other prizes. And have a lot fun doing it. Register to play at www.CatchMeGame.com/college Forensic vs. Fraud Audit:  Forensic vs. Fraud Audit Google result, February 11, 2007 Forensic Audit, 208,000 hits Fraud Audit, 64,500 hits Fraud Examination, 74,800 hits Fraud Accounting, 45,200 hits Forensic Accounting, 1,050,000 hits Fraud Investigation, 932,000 Forensic Investigation, 512,000 Fraud Auditing, 83,500 ---------------------------------------------- I don’t care what they say, but [forensic accounting] is here to stay. Danny & the Juniors ----------------------------------------------------------------------------------- I see skies of blue and clouds of white, and I think to myself, what a wonderful world. Louis Armstrong Specialties Within Forensic and Investigative Accounting:  Specialties Within Forensic and Investigative Accounting Employee Crime Specialist. Asset Tracing Specialist. Litigation Services Specialist and Expert Witness. Insurance Claims. Valuation Analysis. False Claims Act Violations. Due diligence investigations. Asset Tracing:  Asset Tracing Three Italian lawyers said in a filing to be presented to a bankruptcy court that they had traced $7.7 billion in missing Parmalat funds. “We are preparing a filing in which we are asking for the insolvency status to be revoked because the money was robbed and not lost,” lawyer Carlo Zauli told Reuters. But he said it would be an illusion to believe proof of electronic transfers of the funds could be found and the lawyers representing the Parmalat Creditors Committee did not say where the money was being held or if it was recoverable. An Italian website, TGfin (www.tgfin.it), said a company linked to Parmalat founder Tanzi was holding the funds in the form of U.S. bonds in an account with Bank of America. Source: Emilio Parodi and Stefano Bernabei, “Wrap-up 2: Paramalat Fraud Probe Widens to Auditors, Ex-Banker, “forbes.com, January 8, 2004. Gross Profit Comparison:  Gross Profit Comparison In a divorce situation, a business owner claimed only about $75,000 annual income. He claimed he had borrowed and not paid back huge sums. Wife said he was spending about $400,000 per year more than his salary. Four schedules for the courtroom: What was known and alleged about husband’s expenditures. Schedule comparing income with expenditures. Amounts husband claimed he had borrowed. Gross Profit Comparison (cont.) :  Gross Profit Comparison (cont.) Company’s income statements side-by-side: New Gross Profit His Per Industry ---- ------ ---- ------ $75,000 $475,000 Husband had overstated COGS. Checks issued to vendors, into COGS. Some of the vendors cashed the checks and returned the money to husband. Mark Kohn, “Unreported Income and Hidden Assets,” Forensic Accounting in Matrimonial Divorce, Philadelphia: R. T. Edwards, 2005, pp. 49-57. Mark Kohn, “Unreported Income and Hidden Assets,” in Forensic Accounting in Matrimonial Divorce, Philadelphia: R.T. Edwards, 2005, pp. 49-57. Unreported Beer Sales:  Unreported Beer Sales Business owner reports only $50,000 business income, but has expensive cars, private schools, buying significant real estate. Subpoenaed records of local beer distributors. Then went to the club and ordered some drinks, noting the pricing of the beer, etc. 1,000 cases of Miller’s 24 bottles 24,000 x $2 $48,000 per year Found that reported sales were underreported by $500,000. Mark Kohn, “Unreported Income and Hidden Assets,” Forensic Accounting in Matrimonial Divorce, Philadelphia: R.T. Edwards, 2005, pp. 49-57. Home Improvements:  Home Improvements Massive improvements to personal home, not paid for by personal funds. Company showed many corporate payments to home remodeling contractors/landscapers. But the industrial park not owned by company. Only photocopies of invoices provided. FC demanded original documents. Finally, the original documents had white-outs of job locations and work descriptions. Could turn over the originals and read the real data from the back side. Mark Kohn, “Unreported Income and Hidden Assets,” Forensic Accounting in Matrimonial Divorce, Philadelphia: R.T. Edwards, 2005, pp. 49-57. Finding Unreported Income/Hidden Assets:  Finding Unreported Income/Hidden Assets Look at the lifestyles. Look at the expenses. Look at the cash flow. Look at the business operations. Look at the industry ratios. Consider using private investigators. Use the net worth method. Mark Kohn, “Unreported Income and Hidden Assets,” Forensic Accounting in Matrimonial Divorce, Philadelphia: R.T. Edwards, 2005, pp.49-57. Fiction v. Reality:  Fiction v. Reality The main difference between fiction and reality is that instead of using mask and gun, today’s villains use mouse and keyboard. Instead of hiding behind a lamppost in a trench coat and fedora, today’s forensic accountants are more likely to be hiding behind their own computers, searching for clues amid mountains of data. Source; “Book ‘EM! Forensic Accounting in History and Literature,” The Kessler Report, Vol.1, No. 2. ------------------------------------------------------------------------------------ “Every investigation I did as a prosecutor, you have a particular target, but it always branches off because something else gets your attention. And that’s what is going to happen with a forensic accountant.” Tom Carlucci: E-library Rueter Library September 20, 2002 Forensic Techniques Become Popular:  Forensic Techniques Become Popular “In many of the large accounting blow-ups, auditors knew what was happening,” says Charles Niemeir, “but they were willing to look the other way.” There is a need to provide “incentives for people finding problems,” says Douglas Carmichael. “Right now there are no incentives for finding problems, and one who does is treated as a trouble maker.” Source: Cassell Bryan Low, “Accounting Firms Attempts to Dispel the Cloud of Fraud,” Wall Street J., May 27, 2003. Doug Carmichael, Chief Auditor for Peek-uh-boo, faults auditors for not adopting forensic techniques. Carmichael wishes more “test of details,” not relying on test of controls. He wishes more shoe-leather work. Shoe-leather work is what we do! Kris Frieswick, “How Audits Must Change,” CFO July 2003, p.48 Popular (cont.):  Popular (cont.) E&Y’s forensic accounting team is comprised of 350 practitioners in the U.S. alone, and focuses on strategies to mitigate and manage conflict in bankruptcy disputes, financial and economic damages, fraud and investigations, government contracts and grants, insurance claims, intellectual assets, and legal technology. Deloitte’s forensic accounting expertise includes anti-money laundering, the Foreign Corrupt Practices Act, purchase price disputes, arbitrations, construction fraud, health care fraud, construction oversight, intellectual property theft, and misdirected royalty revenues, to name just a few. They have forensic labs in nine major cities across the U.S. and an additional 18 cities around the world, including Hong Kong, London, Amsterdam, Frankfurt, Cape Town and Melbourne.” All FAS labs meet the FBI’s chain of custody requirements. “They are secure, state-of-the-art, and house advanced systems for storing and accessing data, including dedicated servers and fire-resistant safes. Stuart Kahan, “Sherlock Holmes Enters Accounting,” WebCPA, February 11, 2007. This need for the forensic accountant is demonstrated by this passage from The CBS Murders::  This need for the forensic accountant is demonstrated by this passage from The CBS Murders: Margaret Barbera was very good with numbers. She could take a balance sheet, a set of account books, invoices, bills, and more, juggle and manipulate the figures and, presto, thousands become millions, losses become profits, profits become losses, sales soared or fell, whatever her employer desired, and it would take an expert auditor knowing precisely where to look and what to look for to figure out what she’d done, and even then, it still might slip by. Professor Cramer was in front of the auditing class quoting a passage from The CBS Murders, by Richard Hammer. [p. 67 in Trap Doors]. Forensic Accountants:  “Rather than combing torn clothing,” forensic accountants “comb through corporate books, looking for oddities that could signal swindles,” says Bruce Dubinsky. Investigations can be extremely complex, with crates and crates of documents and thousands of computer files. Investigators look for flags or patterns that would not normally occur. Source: Mark Maremont, “Tyco Is Likely to Report New Woes,” Wall Street Journal, April 30, 2003, p. C-1. Forensic Accountants Potpourri:  Potpourri Deutsche Bank is being sued for $1.3 billion by Bruce Winston (one of the heirs of Harry Winston diamond dynasty) for priceless gems disappearing from a trust under their control. A Burlington, Kentucky city finance director is accused of embezzling more than $1.2 million to support his estranged wife and his girlfriend. Martin Frankel vanished with between $200 million in cash and diamonds one day. He accomplished this insurance fraud by buying poorly capitalized insurance companies, cooking the books to show increased premium value, and by including non-existing real estate and leases on the balance sheet. Bank of China’s Mr. Wu allegedly embezzling up to $18 million from a bank branch, using improper bills of exchange. BoC has a number of cases involving the embezzlement of $737 million from branches in the Southern Guangdong Province. A U.S. Lime officer embezzled nearly $2.2 million by forging signatures of other company officers on checks, and falsifying the company’s check register to create the impression that the amounts he received went to U.S. Lime creditors. Potpourri (contd …):  Potpourri (contd …) The Chairman of Hyundai Motor, Chung Mong-Koo, was sentenced in February 2007, to 3 years in prison for embezzlement ($100 million) and breach of trust at South Korea’s largest carmaker. Spanish authorities shut down Afinsa’s Forum stamp-investing programs with several hundred thousand of small investors. Alleged investments in overvalued stamps and suspected pyramid scheme. Eight officials jailed. In 2000, Rent Way’s CAO artificially reduced the company’s expenses by $127 million. WorldCom’s external auditors missed about $11 billion improperly booked items. Ahold NV, a Dutch company, said a U.S. unit had overstated revenues by $880 million by booking more discounts from suppliers than actually received. One Philippine peso coin has the same size as 1 dirham, but worth only 7 fils. Thus, dispense machine fraud. Definition:  A forensic accountant has extensive experience in investigations to determine solutions to disputed accounting matters, to write expert reports on their investigation, and to appear in court as expert witnesses. Zeph Telpner and Michael Mostek A normal accountant is like a guarddog (e.g., a bulldog); a forensic accountant is like a bloodhound; an internal auditor is like a seeing-and-eye dog (e.g., monitoring and guiding management), a corporate accountant is a mix breed, and a governmental accountant is an afghan. D. Larry Crumbley Definition Auditors Blamed: Deep Pockets:  Trustee for United Companies (UC) said that Deloitte and Touche was guilty of negligence, malpractice, misrepresentation, breach of duty, and fraud. D & T failed to warn United Companies of all of the losses it would absorb if the people who took out the loans defaulted, because the accounting firm was making millions and millions of dollars in fees. Loan practice called securitization or bundled high-interest loans. $685 million in liability damages. Plaintiff’s Attorney: Role of auditors is to act as watchdogs for companies. “A good watchdog barks when somebody comes into the yard. D & T is supposed to bark when there is a problem.” Defendant’s Attorney: “The problem was much larger than a watchdog could handle. Can a watchdog stop your house from getting hit by a hurricane? Of course not.” Source: Adrian Angelette, “Auditors Blamed, “Baton Rouge Advocate, October 23, 2003, pp. A-1 and a-8 Auditors Blamed: Deep Pockets Auditors Blamed (cont.):  As part of the securitization agreement, UC agreed to pay the principal and interest on defaulted loans. Creditors contend that UC failed to account for the interest it was paying, and D&T should have caught the mistake earlier. After UC wrote off $605 million in debt, the company filed for bankruptcy. Confidential mid-court settlement. Source: Adrian Angelette, “United Companies Settlement Reached,” Baton Rouge Advocate, October 31, 2003, pp. A-1 and A-12 Auditors Blamed (cont.) 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. 23-28. Find It, or I’ll Sue Forensic Accounting Knowledge Base:  Forensic Accounting Knowledge Base Silk, Silk, Silk Threads of Forensic Accounting:  Threads of Forensic Accounting Forensic accounting (or at least accounting expert witnessing) can be traced as far back as 1817 to a court decision. [Meyer v. Sefton] In 1824, a young accountant by the name of James McCleland started business in Glasgow, Scotland and issued a circular that advertised various classes of expert witness engagements he was prepared to undertake. In 1856 in England, the audit of corporations became required. Investigative Accountants:  Investigative Accountants Initially called investigative accounting, many of the forensic techniques, such as the net worth method, were developed by IRS agents to detect tax evaders. Infamous mobster, Al Capone, was caught when Special Agents of the IRS stepped in and charged him with tax evasion. Accountants caused the crime czar’s career to come to an end. Al Capone Caper:  Al Capone Caper “Perhaps the most celebrated case of an accountant nailing a famous criminal was the case of Al Capone. For all of Capone’s colorful history of violent crime, the FBI could never gather enough evidence to convict him until FBI agent Eliot Ness had an idea. He gathered special agents of the IRS to track the flow of cash from Capone’s illicit activities. When the mobster failed to pay taxes on those earnings, the IRS nailed him for tax evasion. Capone went to jail and was never a factor again. IRS recruitment posters boast till this day: ‘Only an accountant could catch Al Capone.’” Source: “Book ‘Em! Forensic Accounting History and Literature,” The Kessler Report, Vol. 1, No. 2. Investigative Techniques:  Investigative Techniques “You know how it goes,” I said. “You get a case. You just keep poking around, see what scurries out.” p. 144. ------------------------------------------------------------ “How,” Susan said, “on earth are you going to unravel all of that?” “Same way you do therapy,” I said. “Which is?” “Find a thread, follow it where it leads, and keep on doing it.” “Sometimes it leads to another thread.” “Often,” I said. “And then you follow that thread.” “Yep.” “Like a game,” Susan said. “For both of us,” I said. Susan nodded. “Yes,” she said, “tracking down of a person or an idea or an evasion.” pp. 270 – 271. -------------------------------------------------------------------------------- Source: R.B. Parker, Widow’s Walk, Berkley Books, 2002. Father of Forensic Accounting::  Father of Forensic Accounting: Maurice E. Peloubet (1946) Pretenders: Max Lourie (1953) Robert Lindquist (1986)* * Repeated, First sentence in N. Brennan and J. Hennessy, Forensic Accounting, 2001, p. 5. The Essence of Forensic Accounting by Maurice Peloubet (1946)::  The Essence of Forensic Accounting by Maurice Peloubet (1946): “The preparation of data for and the appearance before government agencies as a witness to facts, to accounting principles, or to the application of accounting principles is essentially forensic accounting practice rather than advocacy.” Modern Version “Let’s face it, we in the forensic profession labor in an obscure corner of the vineyard. We are the carefully selected, trusted, highly trained guardians of one of the last great secrets remaining on the face of the earth - - the $600 billion[now $652], more or less annual problem nobody knows about.” Joseph W. Koletar, Fraud Exposed, John Wiley & Sons, Inc 2003, p. 228. Be like:  Be like Fictional Hero:  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. Panel on Audit Effectiveness:  Panel on Audit Effectiveness In 1998, the Public Oversight Board appointed the Panel on Audit Effectiveness to review and evaluate how independent audits of the financial statements of public companies are performed and to assess whether recent trends in audit practices serve the public interest. In 2000, the Panel issues a 200-page report, Report and Recommendations, which includes a recommendation that auditors should perform forensic-type procedures during every audit to enhance the prospects of detecting material financial statement fraud. Did not believe a GAAS audit should become a fraud audit. In all audits the degree of audit effort in forensic- type steps should be more than inconsequential [p. 24]. AICPA Fraud Task Force Report:  AICPA Fraud Task Force Report In 2003, the AICPA’s Litigation and Dispute Resolution Services Subcommittee issued a report of its Fraud Task Force entitled, “Incorporating Forensic Procedures in an Audit Environment.” The report covers the professional standards that apply when forensic procedures are employed in an audit and explains the various means of gathering evidence through the use of forensic procedures and investigative techniques. Required Forensic Audits Coming?:  Required Forensic Audits Coming? The accounting profession may be making a strategic shift as they see that SAS No. 99 and the other rules are not protecting them from being the insurer of last resort. The Big Four along with Grant Thornton and BDO International recently released a report entitled “Serving Global Capital Markets and the Global Economy.” In the report, one of the things they are suggesting is for companies to have a forensic audit. Companies would be required to have such an audit every five years or face these audits on a random basis. “Auditing Firms Urge New Ways to Detect Fraud,” NYSSCPA.org News Staff. Posted on November 11, 2006. Fraud Strategies Differ:  Fraud Strategies Differ Forensic Accountants Internal Auditors External Auditors Fraud Examiners Certified Fraud Deterrence Analysts (CFD) or CFFAs Forensic CPA Society (FCPA) Opportunities for Forensic Accountants:  Opportunities for Forensic Accountants FAs may provide perspective in situations evaluating whether accounting information is presented fairly without GAAP – based constraints: Identification of financial issues. Knowledge of investigating techniques. Knowledge of evidence. Interpretation of financial information. Presentation of finding. Sources: G. Bologna and R. Lindquist, Fraud Auditing and Forensic Accounting, New York City: John Wiley, 1995. F. T. DeZoort and J. D. Stanley, “Fair Presentation in the SOX Era: An Assessment Framework and Opportunities for Forensic Accountants,” J of FA, Vol. 7, 2006, p. 289. Predication:  Predication The ACFE group indicates that in the private sector, a fraud investigation should not be conducted without proper predication. Examples: Anonymous tips, complaints, audit inquires, conflict of interest. Thus, predication is the basis for undertaking a fraud investigation. Who Do You Call?:  Who Do You Call? Detection v. Deterrence Proactive v. Reactive Two Major Types of Fraud Investigations:  Two Major Types of Fraud 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. 111-120 Proactive Is Beneficial:  Proactive Is Beneficial The threat of a future investigation reduces the occurrence of fraudulent behavior from 75% to only 43%. The larger the pay-off, the more likely a person will commit fraudulent behavior. Give the fox a key to the hen house and he/ she is going to eat hens. Source: S. L. Tate et. al, “The Small Fraud Paradigm: An Examination of Situational Factors That Influence the Non-Reporting of Payment Errors,” J. of Forensic Accounting, Vol.7, 2006, p. 406. Three Classes of Controls:  Three Classes of Controls Preventive controls: These controls are first in line to prevent errors, omissions, or security incidents from occurring. Examples include controls that restrict access to systems to authorized persons such as intrusion prevention systems and firewalls, and integrity constraints that are embedded within a Database Management System. Most Efficient Detective controls: These controls detect errors or incidents that have eluded the preventative controls. Examples include controls that test whether authorization limits have been exceeded, or an analysis of activity in previously dormant accounts. Important when preventive controls weak. Examples include situations where the transactions are derived from third party reports such as sales reports from franchisees, warranty claims reported by auto dealers, baggage claims reported by passengers at airports, and reports of coupons or rebates redeemed by redemption processors. Corrective controls: These controls correct errors, omissions, or incidents after detection. They vary from simple correction of data-entry errors, to identifying and removing unauthorized users from systems or networks. Corrective controls are the actions taken to minimize further losses. Sources: IIA, 2005, Global Technology Audit Guide: IT Controls, Altamonte Springs, Fl; M. J. Nigrini, “Monitoring Techniques Available to the Forensic Accountants,” J. of Forensic Accounting, Vol. 7, 2006, p. 322. Where Fraud Prevention and Security Meet:  Where Fraud Prevention and Security Meet Source: M.T. Biegelman and J. T. Bartow, Executive Roadmap to Fraud Prevention and Internal Controls, John Wiley, 2006, pp. 325-326. James Bond – Type Security:  James Bond – Type Security The TIAA-CREF’s Charlotte building is covered with green faux windows and comes with security features such as a revolving door that weighs visitors when you go in and out, cameras that track them throughout the building and security badges that won’t let them leave if they stay longer than expected. The James Bond technology protects a financial service entity’s most precious commodity: cartridges containing customer data. “These are our crown jewels.” CTO Sue Kozik said. The data center could be guarded better only if it was buried underground. Source: Rick Rothacker, “Charlotte Site Has Quickly Become the Firm’s Largest,” Charlotte Observer, December 28, 2006, p. 2D. Forensic-Type Organizations:  Forensic-Type Organizations American College of Forensic Examiners (2750 E. Sunshine, Springfield, MO 65804; 800-423-9737; www.acfei.com. DABFA and Cr.FA; 2000) Certified Fraud Examiners (Association of CFEs, The Gregor Bldg., 716 West Avenue Austin, TX 78701; 800-245-3321; www.cfenet.com). Certified Insolvency and Reorganization Accountant (CIRAs). Accountants, lawyers, consultants included in insolvency and bankruptcy matters. 3-part exam. 4,000 hours. 541.858.1665. AIRA, 221Stewart Avenue, Suite 207, Medford, Or. 97501. aira@airacira.org Forensic CPA Society (FCPA); formed in July 2005, Spokane, WA. info@fcpa.org. Certified Forensic Financial Analyst (NACVA, Salt Lake City, Utah 84106; 801-486-0600). Also, Certified Fraud Deterrence (CFD) analyst. National Litigation Support Services Association (NLSSA, III East Wacker Drive, Suite 990, Chicago, IL 60601; 800-869-0491). 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. www.homewoodave.com 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. http://acfsnet.org. Some accountants believe that ethics is a place in England.:  Some accountants believe that ethics is a place in England. Essex, U.K. ------------------------------------------------------ Fraud 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.” -------------------------------------------------------- Read My Lips; It’s The Fraud, Stupid. Termites, Rust, and Fraud:  Termites, Rust, and Fraud Just as termites never sleep, fraud never sleeps. Just like termites, fraud can destroy the foundation of an entity. -------------------------------------------------------- Like rust, fraud never sleeps. Quality Staff An Issue:  Quality Staff An Issue Bruce Dubinsky emphasizes that although forensic accounting is currently on the “hot” list of client services, there are plenty of accountants getting involved who shouldn’t be, because they don’t understand the ins and outs of the niche. “The only limit to our size is finding competent professionals.” He explains that just being an accountant is no longer enough to do this work – the person has to understand the legal system, and what the law says. How to interrogate and interview people are musts. Tracking leads and obtaining legally usable intelligence is also crucial. “Many accountants think it is simply fraud investigation and it’s not. It really is much more than dealing with the numbers. It’s no longer just basic fraud work.” Laurie Hotz admits that there are fewer and fewer people to do it: “It’s simply very hard to find qualified people.” He looks for a good auditor who has a solid background for forensic accounting. He says there must be awareness of public fraud, and notwithstanding some teeth being put into new regulations, there is still plenty of fraud going on. Stuart Kahan, “Sherlock Holmes Enters Accounting,” WebCPA, February 11, 2007. Slide76:  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. ------------------------------------------------ Just as a pitcher tries to fool batters, financial statements may be misleading or wrong (baseball or cricket). Slide77:  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 creates 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. Slide78:  White-Collar Crime By the Advantaged “Crime is the most flourishing and lucrative business in America… I speak now not only of the crime in the streets, the burglaries and the robberies, which represent tens of billions of dollars each year; I speak of the crime which we call ‘white collar’ – the crimes committed by the advantages, not the disadvantaged; the crimes committed with pen and pencil, not with gun or ‘jimmy’; under the bright lights of the executive offices, not by stealth in the dark.” Herbert Stern, from his discussion of prosecutorial philosophy in the 1973 book Tiger in the Court, by Paul Hoffman. Slide79:  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. Michael Comer’s Types of Fraud:  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. How Corruption Occurs:  How Corruption Occurs Source: 2006 Wells Report, ACFE. TRUTH:  TRUTH Given the right pressures, opportunities, and rationalizations, many employees are capable of committing fraud. Bev Harris says that fraudsters and embezzlers are the nicest people in the world: Wide-eyed mothers of preschoolers. Your best friend. CPAs with impeccable resumes. People who profess deep religious commitments. Your partner. Loyal business managers who arrive early, stay late, and never take a vacation. And sometimes, even FAMILY MEMBERS. So if you’re looking for a sinister waxed mustache and shifty eyes, you’re in for a surprise – scoundrels come in every description. Source: “How to Unbezzle A Fortune,” www.talion.com/embezzle.htm, p. 1. Starwoods Hotels Poll of Executives:  Starwoods Hotels Poll of Executives Source: Del Jones, “Many CEOs Bend The Rules (of Golf),” USA Today, June 26, 2002, p. A-1. Starwoods Hotels interviewed 401 top executives who golf. The results are surprising. The Cost of Fraud:  The Cost of Fraud Organizations lose 5 percent of annual revenue to fraud and abuse. Fraud and abuse costs U.S. organizations more than $652 billion annually (about $4,500 per employee). The average organization loses more than $12 a day per employee due to fraud and abuse. Source: 2006 Wells Report The Trillion Dollar Gorilla:  The Trillion Dollar Gorilla (in Billions) U.S. Business1 $256.32 Federal Government2 239.75 State Government3 354.21 Tax-exempts4 134.5 Local Government5 68.4 Annual Fraud (trillion) $ 1.053 2002 Statistics of Income, $1,281.6 trillion time 20%. $2.3975 trillion budget times 10% $3,542.1 million times 10% $897 billion in revenue times 15%. $684.6 billion times 10%. Fraud Multiplier:  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 $652 billion lost per year (2006). $652 billion = $3.26 trillion needed revenue 20%. ----------------------------------------------------- The FBI estimates that white collar crime is $300 billion each year in the U.S. The Cost of Fraud (cont.):  The Cost of Fraud (cont.) Over 90% of occupational frauds involve asset misappropriations. Average length of a fraud scheme is 15 to 24 months. Most common way of detecting occupational fraud is by tips from employees, customers, vendors, or anonymous sources. Second way, by accident. Third most common detection: internal audit (2nd in 2004). The most targeted asset is cash. Source: 2006 Wells Report Ernst & Young Study (2000):  Ernst & Young Study (2000) Leading companies and public bodies in 15 (82) countries More than 82% (50%) have been victims of fraud in the past year. 82% (84%) of total losses can be attributed to staff. 33% (50%) of the most serious frauds were committed by the organization’s own management. Most with company more than 5 years (25% more than 10 years). Theft of cash and purchasing schemes (i.e., employee kickbacks) constituted the majority of frauds. Reasons: Poor internal controls and finance directors had a limited knowledge of internal controls. Ernst & Young 2002 Survey:  Ernst & Young 2002 Survey More than 20 percent of the respondents were aware of fraud in their workplace. Nearly 80 percent would be willing to turn in a colleague thought to be committing a fraudulent act. Employers lose a staggering 20 percent of every dollar earned to some type of workplace fraud. More frequently committed frauds are theft of office items, claiming extra hours worked, inflating expense accounts, and taking kickbacks from suppliers. Women are more likely than men to report fraudulent activities. Older employees were more likely to report fraudulent activities than younger employees. Ernst & Young. “American Works: Employers Lose 20 Percent of Every Dollar to Work Place Fraud.” (2002) Available at http://www.ey.com/global/Content.nsf/US/Media_Release_-_08-05-02DC Put Fraud In Perspective:  Put Fraud In Perspective The Iraq War may cost as much as $200 billion. Since fraud and abuse reduce the bottom lines of businesses as much as $660 billion per year (assuming a tax rate of 30%), the federal government loses in taxes each year $198 billion. So in less than 13 months, stopping fraud and abuse would pay for the Iraqi war. Advantage of Compliance Spending:  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. Comparison of Selected Fraud Surveys:  Comparison of Selected Fraud Surveys Scienter Necessary:  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. ------------------------------------------------- The allure of numbers to most of us, is like the excitement of settling sand--a narcoleptic surety. Crafty criminals prey on this boredom. They pile on the numbers, spewing meaningless records in the false books. Cory Johnson Fraud:  Fraud Legally, Black’s Law Dictionary defines fraud as: All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth, and includes all surprise, trick, cunning or dissembling, and any unfair way by which another is cheated. The four legal elements to fraud are A false representation or willful omission regarding a material fact. The fraudster knew the representation was false. The target relied on this misappropriation. The victim suffered damages or incurred a loss. ---------------------------------------------------------------------- Institute of Internal Auditors definition: Any illegal acts characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the applications to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage. How Fraud Occurs:  Source: KPMG Fraud Study How Fraud Occurs Types of Fraud:  Source: KPMG Fraud Study Types of Fraud Certain Fraud is Increasing:  Source: KPMG Fraud Study Certain Fraud is Increasing Occupational Fraud Re Industry:  Occupational Fraud Re Industry Source: 2006 Wells Report, ACFE. COSO’s Most Common Fraud Methods:  COSO’s Most Common Fraud Methods Overstatement of earnings. Fictitious earnings Understatement of expenses. Overstatement of assets. Understatement of allowances for accounts receivables. Overstatements of the value of inventories by not writing down the value of obsolete goods. Overstatement of property values and creation of fictitious assets. COSO’s Major Motives for Fraud:  COSO’s Major Motives for Fraud Cover up assets misappropriated for personal gain. Increase the stock price to increase the benefits of insider traders and to receive higher cash proceeds when issuing new securities. Obtain national stock exchange listing status or maintain minimum exchange listing requirements to avoid de-listing. Avoiding a pretax loss and bolstering other financial results. COSO Survey (1999):  COSO Survey (1999) Financial pressures were important contributory factors for the commitment of financial statement fraud (FSF). Top executives (e.g., CEOs, CFOs) were commonly involved in FSF. The majority of alleged FSF were committed by small companies. Board of directors and audit committees of the fraud companies were weak and ineffective. Adverse consequences for fraud companies were bankruptcy, significant changes in ownership, and delisting by national stock exchanges. Cumulative amounts of FSF were relatively significant and large. More than half of the alleged FSF involved overstatement of revenues. Most FSF were not isolated to a single fiscal period. Fifty-five percent of the audit reports issued in the last year of the fraud period contained unqualified opinions. The majority of the sample fraud companies (56 percent) were audited by Big Eight/Big Five auditing firms. Business Fraud Survey (1999):  Business Fraud Survey (1999) Nearly 15 percent reported management misappropriation as the greatest fraud risk to their organization. Sixty percent of the respondent reported their department’s fraud risk analysis process as being reactive in nature. The majority of respondents (72 percent) reported that their organization did not have fraud detection and deterrence programs in place. The majority of respondents (68 percent) reported that they never felt pressured to compromise the adherence to their organization’s standard of ethical conduct. The majority of the respondents reported their organization’s external auditors as being ineffective in preventing and detecting fraud. The majority of the respondents believed that more budgets should be devoted to fraud-related activities and training in department. The Institute of Management and Administration (IOMA) and the Institute of Internal Auditors(IIA). “Business Fraud Survey.” (1999). Available at http://www.theiia.org One Piece at a Time:  One Piece at a Time Johnny Cash (1976) One Piece At A Time:  One Piece At A Time Well, I left Kentucky back in '49 An' went to Detroit workin' on a 'sembly line The first year they had me puttin' wheels on cadillacs Every day I'd watch them beauties roll by And sometimes I'd hang my head and cry 'Cause I always wanted me one that was long and black. One day I devised myself a plan That should be the envy of most any man I'd sneak it out of there in a lunchbox in my hand Now gettin' caught meant gettin' fired But I figured I'd have it all by the time I retired I'd have me a car worth at least a hundred grand. CHORUS I'd get it one piece at a time And it wouldn't cost me a dime You'll know it's me when I come through your town I'm gonna ride around in style I'm gonna drive everybody wild 'Cause I'll have the only one there is a round. So the very next day when I punched in With my big lunchbox and with help from my friends I left that day with a lunch box full of gears Now, I never considered myself a thief GM wouldn't miss just one little piece Especially if I strung it out over several years. One Piece At A Time:  One Piece At A Time The first day I got me a fuel pump And the next day I got me an engine and a trunk Then I got me a transmission and all of the chrome The little things I could get in my big lunchbox Like nuts, an' bolts, and all four shocks But the big stuff we snuck out in my buddy's mobile home. Now, up to now my plan went all right 'Til we tried to put it all together one night And that's when we noticed that something was definitely wrong. The transmission was a '53 And the motor turned out to be a '73 And when we tried to put in the bolts all the holes were gone. So we drilled it out so that it would fit And with a little bit of help with an A-daptor kit We had that engine runnin' just like a song Now the headlight' was another sight We had two on the left and one on the right But when we pulled out the switch all three of 'em come on. The back end looked kinda funny too But we put it together and when we got thru Well, that's when we noticed that we only had one tail-fin About that time my wife walked out And I could see in her eyes that she had her doubts But she opened the door and said "Honey, take me for a spin." . One Piece At A Time:  One Piece At A Time So we drove up town just to get the tags And I headed her right on down main drag I could hear everybody laughin' for blocks around But up there at the court house they didn't laugh 'Cause to type it up it took the whole staff And when they got through the title weighed sixty pounds CHORUS I got it one piece at a time And it didn't cost me a dime You'll know it's me when I come through your town I'm gonna ride around in style I'm gonna drive everybody wild 'Cause I'll have the only one there is around. (Spoken) Ugh! Yow, RED RYDER This is the COTTON MOUTH In the PSYCHO-BILLY CADILLAC Come on Huh, This is the COTTON MOUTH And negatory on the cost of this mow-chine there RED RYDER You might say I went right up to the factory And picked it up, it's cheaper that way Ugh!, what model is it? Well, It's a '49, '50, '51, '52, '53, '54, '55, '56 '57, '58' 59' automobile It's a '60, '61, '62, '63, '64, '65, '66, '67 '68, '69, '70 automobile. Missing Fraud:  Missing Fraud Auditors will continue to miss fraud because much of their work is predicted on the assumption that separation of duties prevents fraud (i.e., one person hold the money and another person keeps track of it). The Equity Funding case shakes the foundations of auditing in that so much is based on the assumption that people don’t collude very long. These people work together as an efficient team for a very long time [9 years]. Lee Seidler ------------------------------------------- “When the sun goes down, then the sneaks will play at night.” From Porter Wagoner “Sneaks Crawl at Night.” The Perpetrators:  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 White-collar criminals have these characteristics::  White-collar criminals have these characteristics: Likely to be married. Member of a church. Educated beyond high school. No arrest record. Age range from teens to over 60. Socially conforming. Employment tenure from 1 to 20 years. Acts alone 70% of the time. Source: Jack Robertson, Fraud Examination for Managers and Auditors (1997). Other Characteristics of Occupational Fraudsters::  Other Characteristics of Occupational Fraudsters: Inquisitive Rule breaker Under stress Financial need Big spender Close relationship with vendors / suppliers Egotistical Risk taker Hard Worker Greedy Disgruntled or a complainer Overwhelming desire for personal gain Pressured to perform Source: Lisa Eversole, “Profile of a Fraudster,” Some Fraud Stuff, http://www.bus.lsu.edu/accounting/faculty/lcrumbley/fraudster.html Insights on cheaters and deceivers::  Insights on cheaters and deceivers: People who have experienced failure are more likely to cheat. People who are disliked and who dislike themselves tend to be more deceitful. People who are impulsive, distractible, and unable to postpone gratification are more likely to engage in deceitful crimes. People who have a conscience (fear, apprehension, and punishment) are more resistant to the temptation to deceive. Intelligent people tend to be more honest than ignorant people. Middle- and upper-class people tend to be more honest than lower-class people. The easier it is to cheat and steal, the more people will do so. Individuals have different needs and therefore different levels at which they will be moved to lie, cheat or steal. Lying, cheating, and stealing increase when people have great pressure to achieve important objectives. The struggle to survive generates deceit. Source: Gwynn Nettler, Lying, Cheating, and Stealing, Cincinnati, Ohio: Anderson, 1982. Slide112:  To be a forensic auditor, you have to

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