ACCOUNTING TECHNIQUES USED

IN A FRAUD INVESTIGATION
Mary Anne Basilone, CPA, CFE, MMT, MA
Diane A. Matthews, PhD, CPA/CFF, CFE
Carlow University
Master of Science in Fraud & Forensics
Bachelor of Science in Forensic Accounting
Bachelor of Science in Accounting
1

TOPICS COVERED
INVESTIGATIVE
METHODS

METHODOLOGY

OF PROOF

DIRECT
INDIRECT

DIGITAL ANALYSIS

TECHNIQUES
2

METHODOLOGY
OVERVIEW
STEPS IN CONDUCTING A
COMPREHENSIVE FRAUD
INVESTIGATION
3

PROCESS MAP

Dorrell, D., Gadawski, G. (2012). Financial forensics body of knowledge.

Hoboken, New Jersey: John Wiley & Sons.
4

INVESTIGATIVE METHODOLOGY
THE PROCESS MAP

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Identify parties to the case

Correlate the matters of law
Confirm technical capabilities

AICPA/BVFLS Practice Aids

Litigation Services Handbook,
4th & Cumulative Supplements
NACVA Resources

Laboratory
Analysis

Analysis of
Transactions

Clear conflict - firm-wide database

Insure matching of expectations between counsel
and facts and circumstances of matter
Determine whether engaged as consultant or
expert
Prepare and secure engagement letter & retainer
Establish concrete timelines, e.g. discovery cutoff,
report submittal, etc.
Establish counsel communications protocol, e.g.
whether/how subject to discovery

PostAssignment

Testimony
&
Exhibits

Potential Issues

Tasks to be Performed

References

Confidential
Informants

Trial
Preparation

Undercover

Purpose of Stage

TRIAL/REPORTS

Identification of all parties

Specification of key timelines
Privilege determination
Agreement on standards

Deliverables

Entity / Party Chart

Signed engagement letter &
retainer
Retainer

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Continually define/refine
universes of data, primary and
secondary

Confidential
Informants

Trial
Preparation

Laboratory
Analysis

Analysis of
Transactions

Potential Issues

Tasks to be Performed

Initiate data collection processes

Prepare Document Request(s) as necessary
TASKS
Genogram
Entity(s)/party(s) chart
Background investigation

References

Litigation Services Handbook,

4th, (matter-specific
references)
GenoPro Gold

PostAssignment

Testimony
&
Exhibits

Undercover

Purpose of Stage

TRIAL/REPORTS

Insure that all possible data

sources are defined
Establish protocol to manage
data requested and obtained

Deliverables

Entity(s)/Party(s) Chart
Genogram
Document Request
Timeline Analysis

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Gain confidence of parties

Obtain information from parties

Confidential
Informants

Trial
Preparation

Laboratory
Analysis

Analysis of
Transactions

Potential Issues

Tasks to be Performed

For Depositions:
Prepare Deposition Matrix
Attend depositions with counsel and advise

References

Kolbs Experiential Learning

www.Reid.com ; w-z.com
Edwin T. Hall works
ACFE Fraud Examiners
Manual

For Interviews:
Background investigation on identified parties
Use interpersonal communication techniques to
analyze responses for further investigation
Proxemic communication
Kinetic communication
Expectations-based analysis
Prepare interview matrix (next slide)
Establish preliminary hypothesis using Scientific
Method

PostAssignment

Testimony
&
Exhibits

Undercover

Purpose of Stage

TRIAL/REPORTS

Veracity of parties
Hidden agendas of parties
Blind leads
Additional/unrelated matters
Communication inhibitors

Deliverables

Deposition Matrix
Updated Genogram
Updated Entity/Party Chart
Interview Matrix
Video/audio recordings
Preliminary Hypothesis

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Obtain validating data

Obtain refuting data

Internet research, e.g. Best

Websites for Financial
Professionals, Business
Appraisers, and Accountants, 2nd
TimelineXpress software InData
(Events Analysis)

Laboratory
Analysis

Analysis of
Transactions

Combine first-hand knowledge (e.g., Interviews and

Depositions) with second-hand knowledge (e.g.,
Background Research data
See Online Databases Sources of Information
See Government Sources of Information
Identify disparities for additional investigation
TASKS
Establish search protocol
Collect data for validation/corroboration

PostAssignment

Testimony
&
Exhibits

Potential Issues

Tasks to be Performed

References

Confidential
Informants

Trial
Preparation

Undercover

Purpose of Stage

TRIAL/REPORTS

Veracity of parties
Currency of information
Admissibility of data

Deliverables

Search Log
Updated Genogram
Events Analysis
Output notebook

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Define data collection plan

Obtain data / information
Surface evidence

References

IRS MSSP (Market Segment

Specialization Program) for
selected industries
IRS Indirect Methods-Intro
IRS Indirect Methods-Example

Confidential
Informants

Trial
Preparation

Laboratory
Analysis

Analysis of
Transactions

Potential Issues

Tasks to be Performed

Identify remaining data needed to

substantiate/refute positions
Develop plan to obtain data using investigatory
steps

Surveillance (Electronic / Physical)

Confidential Informants

Undercover
NOTE: All preceding activities are dependent upon
evidence admissibility counsel must advise
TASKS
Records-based expectations
Reasonableness testing

PostAssignment

Testimony
&
Exhibits

Undercover

Purpose of Stage

TRIAL/REPORTS

Non-existent data
Interpersonal data not
verifiable

Deliverables

Data collection plan

10

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Obtain data / information

Surface evidence

Investigators Little Black Book,

4th
TimelineXpress from inData
Corporation
Criminal Investigations

Laboratory
Analysis

Analysis of
Transactions

NOTE: All activities in this Stage are dependent

upon evidence admissibility counsel must advise
Mobile v. fixed surveillance
Lead, participant and covert informants
Develop the assumed identity to gather data /
information
Document all data / information gathered
Develop Lifestyle Analysis (See document)
Validate / correlate prior data obtained through
alternate techniques

PostAssignment

Testimony
&
Exhibits

Potential Issues

Tasks to be Performed

References

Confidential
Informants

Trial
Preparation

Undercover

Purpose of Stage

TRIAL/REPORTS

Missing information
Privacy laws
Unreliable informant
Inconclusive information
Entrapment
Engagement/personal risks

Deliverables

Video/audio recordings
Root tracing results
Digital photographs
Validation /correlation of prior
data and deliverables

11

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Substantiate information by
using scientific methods

Background investigation
Online sources
Government sources
Software: Genogram/
Timeline/IDEA software

Laboratory
Analysis

Analysis of
Transactions

Perform any additional indirect or direct analytical

forensic techniques as needed
Validate / correlate prior data obtained through
alternate techniques
Genogram/Entity / Party Chart
Deposition Matrix/Interview Matrix
Search Log/Background Investigation
Lifestyles Analysis
Net Worth Method

PostAssignment

Testimony
&
Exhibits

Potential Issues

Tasks to be Performed

References

Confidential
Informants

Trial
Preparation

Undercover

Purpose of Stage

TRIAL/REPORTS

Indirect analytical techniques

are inconclusive
Direct analytical techniques do
not support the indictment

Deliverables

Documented results
Validation /correlation of prior
data and deliverables

12

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Obtain sufficient relevant data

to provide credible evidence

Bragg, Steven M., Business

Ratios and Formulas (Wiley)
Benfords www.nigrini.com
IDEA software

Laboratory
Analysis

Analysis of
Transactions

Summarize and analyze the findings of all

deliverables and observations
Identify any missing information or gaps
DRAFT the Forensic Accountants Report
TASKS
Common-sizing
Horizontal analysis
Vertical analysis
Statement analysis (written)

PostAssignment

Testimony
&
Exhibits

Potential Issues

Tasks to be Performed

References

Confidential
Informants

Trial
Preparation

Undercover

Purpose of Stage

TRIAL/REPORTS

Forensic Accountants Report

does not support the
indictment
Additional techniques do not
substantiate missing gaps

Deliverables

Gap Analysis
Indictment Matrix
WPN (words/pictures/numbers)

13

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Prepare for trial

Integrate parties & information
Ensure the completeness of all
testimony and exhibits

Writing and Defending Your

Expert Report (SEAK)
The Visual Display of
Quantitative Information (Tufte)

Laboratory
Analysis

Analysis of
Transactions

Obtain counsels and oppositions DRAFT Trial Brief

Identify the presentation sequence of evidence
Identify portions of report used as exhibits
Identify items used for expert testimony
Develop tactical trial plan
TASKS
Reperform
Reverse Proof

PostAssignment

Testimony
&
Exhibits

Potential Issues

Tasks to be Performed

References

Confidential
Informants

Trial
Preparation

Undercover

Purpose of Stage

TRIAL/REPORTS

Meeting tight/changing
timelines
Presentation too complicated

Deliverables

Scripted Report

14

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Add credibility to the case by

providing expert information

Confidential
Informants

Trial
Preparation

Laboratory
Analysis

Analysis of
Transactions

Potential Issues

Tasks to be Performed

PRACTICE, PRACTICE, PRACTICE

Deliver expert witness testimony
Explain exhibits
TEACH the trier(s) of facts

References

Cross-Examination: T/he
Comprehensive Guide for
Experts (SEAK)
Kolb, Experiential Learning

PostAssignment

Testimony
&
Exhibits

Undercover

Purpose of Stage

TRIAL/REPORTS

Surprises
Extraordinary personal stress

Deliverables

Expert Witness Testimony

Transcript

15

Forensic Accounting/Investigation Methodology (FA/IM)

FOUNDATIONAL

INTERPERSONAL

DATA COLLECTION AND ANALYSIS

Surveillance
-Electronic,
Physical

Interviews
&
Interrogation

Assignment
Development

Data
Collection

Scoping

Background
Research

Obtain the results of the case

Benefit from the experience

Laboratory
Analysis

Analysis of
Transactions

Learn from the experience

Assess firms performance
TASKS
Evaluate performance of each party
Update CV
Extract show and tell as feasible
Follow-up with counsel; grading form

Potential Issues

Your previous results

Continuous professional
development

Deliverables

PostAssignment

Testimony
&
Exhibits

Tasks to be Performed

References

Confidential
Informants

Trial
Preparation

Undercover

Purpose of Stage

TRIAL/REPORTS

Verdict
Judges Ruling
Lessons Learned
Updated CV

16

METHODS OF PROOF (OF FRAUD)

FOR FINANCIAL INVESTIGATORS
DIRECT

METHODS

SPECIFIC

ITEM METHOD
FINANCIAL RELATIONSHIPS
FINANCIAL STATEMENT ANALYSIS
HORIZONTAL
VERTICAL
TREND
RATIO
CASH

FLOW
17

METHODS OF PROOF (OF FRAUD)

FOR FINANCIAL INVESTIGATORS
INDIRECT
NET

METHODS

WORTH METHOD

(AKA ASSET METHOD)

EXPENDITURES

METHOD

(AKA LIFESTYLES METHOD)

(AKA SOURCES AND APPLICATION OF FUNDS METHOD)
BANK

DEPOSIT METHOD

18

METHODS OF PROOF (OF FRAUD)

FOR FINANCIAL INVESTIGATORS
Information for specific industries

IRSs Market Segment Specialization Program

(MSSP) Audit Techniques Guides (ATGs)
Learn distinct , detailed practices in a particular industry
Examination techniques
Common & unique industry issues
Business practices
Terminology

Example of market segments:

Construction or entertainment industry
Professions: lawyers or real estate agents

19

METHODS OF PROOF (OF FRAUD)

FOR FINANCIAL INVESTIGATORS
Direct-Specific item method
Most common method
Relies on specific transactions
Uncovers specific financial transactions which relate
to illegal activity, and to the suspect

Review books, records, bank accounts directly traces a transaction

Direct (vs circumstantial) proof

Easiest to present @ trial
Most difficult for the suspect to refute
Example: Ghost employee on the payroll

20

FINANCIAL STATEMENT ANALYSIS

NEED

FOR FINANCIAL STATEMENT

ANALYSIS
COSO
REPORT

POWER

TO THE NATIONS

OF FINANCIAL STATEMENT
ANALYSIS

FINANCIAL RELATIONSHIPS
SALES

VERSUS COST OF GOOD

SOLD
SALES

VERSUS ACCOUNTS
RECEIVABLE

SALES

VERSUS INVENTORY

ASSETS

VERSUS LIABILITIES

FINANCIAL STATEMENT FRAUD

FICTITIOUS
TIMING

REVENUES

DIFFERENCES

CONCEALED

LIABILITIES AND

EXPENSES
IMPROPER

DISCLOSURES

IMPROPER

ASSET VALUATION

FINANCIAL STATEMENT ANALYSIS

PERCENTAGE

ANALYSIS:

HORTIZONAL
PERIOD

TO PERIOD
INDUSTRY STANDARDS
COMPETITORS
VERTICAL
COMMON

TREND

SIZE STATEMENTS

ANALYSIS

FINANCIAL STATEMENT
ANALYSIS CONT
RATIO

ANALYSIS

LIQUIDITY
ASSET

MANAGEMENT
DEBT MANAGEMENT
PROFITABILITY

CASH

FLOW ANALYSIS

OPERATING
INVESTING
FINANCING

INDIRECT METHODS OF PROOF

CIRCUMSTANTIAL

PROOF
ADMISSIBLE IN COURT(1954 Supreme Court Holland v. U.S.)
WHEN TO USE?
Inadequate

books/records
Suspected: books do not reflect all income
Significant increase in net worth
Gross profit % changes significantly
Expenses exceed reported income without cause
Suspected income from unidentified sources is large

26

INDIRECT METHODS OF PROOF

SOURCES OF INFORMATION

County courthouse: deeds

of ownership, titles, liens,
UCC filings
The target
Informants/associates
Real estate records
Bankruptcy records
State motor vehicle records
Loan applications

Surveillance
Credit card
applications/statements
Tax returns
Insurance records
Child support/divorce records
Employment: salary, W-2s
Cancelled checks
Deposit slips

27

INDIRECT METHODS OF PROOF (O

NET WORTH METHOD
Used to prove illicit income

4
1.
2.
3.
4.

Persons assets or expenditures exceed known

sources of income

ways to dispose income:

Save it
Buy assets
Pay off debt
Spend it

&
g
u
r
d
n
i
y
s
l
e
e
s
v
i
a
n s in g c
e
t
x
e
er
d
d
n
e
Us e y la u
mon

28

INDIRECT METHODS OF PROOF (O

NET WORTH METHOD FORMULA

cos
Assets
@
d
alue
v
s
t
Asse
-Liabilities
=Net worth
-Prior years net worth
hes es
s
i
l
b
pu
ens
S
p
L
x
B
=Increase in net worth
e
US
ing
v
i
l
l
as
ua
g
n
,
n
d
a
+Living expenses
foo
,
s
e
i
t
utili
=Income (or expenditures)
-Funds from known sources
=Funds from unknown sources
29

INDIRECT METHODS OF PROOF (O

EXPENDITURES METHOD
Sources & Application of Funds; Lifestyles Method

CLUES
Lavish residence
Expensive cars/boats
Vacation home
Private schools for children
Exotic vacations

WHEN TO USE?...WHEN TARGET

Operates mostly on a cash basis
Little or no net worth but large expenditures
Little or no change in assets or liabilities

30

INDIRECT METHODS OF PROOF (O

EXPENDITURES METHOD FORMULA
Total expenditures
(i.e., Application of funds)
-Known sources of funds
=Funds from unknown sources

31

INDIRECT METHODS OF PROOF (O

BANK DEPOSIT METHOD
WHEN

TO USE?

Assets & liabilities are fairly constant

No indications of extravagant lifestyle
Targets known income is being deposited into financial
institutions

HOW?

Analyze bank deposits, cancelled checks, currency

transactions

32

INDIRECT METHODS OF PROOF (O

BANK DEPOSIT METHOD FORMULA
Total deposits to all accounts
-Transfer and redeposits
=Net deposits to all accounts
+Cash expenditures
=Total receipts from all sources
-Funds from known sources
=Funds from unknown or illegal sources

33

DIGITAL ANALYSIS TECHNIQUES

SOFTWARE

PROGRAMS PERFORM

DATA MINING

Extracting information from databases

Comb DB for obscure patterns
Sort data to detect potential fraud
same address for two employees

DATA ANALYTICS

Statistical process used to analyze data

Identify red flags, transaction trends, patterns,
anomalies

34

DIGITAL ANALYSIS TECHNIQUES

FUNCTIONS

Sorting
Record selection
Joining files
Multi-file processing
Correlation analysis
Date functions
Graphing

Verifying multiples of a
number
Compliance verification
Duplicate searches
Vertical ratio analysis
Horizontal ratio analysis

35

DIGITAL ANALYSIS TECHNIQUES

FUNCTIONS

Data file inquiry

Random unit sampling
Calculate totals
Calculate averages
Specific criteria searches
Unusual item inquiries
Link analysis graphics

Identify gaps in sequence

Identify duplicates
Differentiate normal
patterns from suspect
patterns
Benfords Law analysis
Stratification

36

DIGITAL ANALYSIS TECHNIQUES

EXAMPLES

Identify invoices w/o PO

Look for invoices from
vendors not approved
Analyze claims paid by
insurance providers
Look for high volume
purchases from one
vendor

Match names, addresses,

phone numbers, SS
numbers between
employee and vendor
files
Identify dormant accounts
with activity
Search for large, rounded
transaction values
37

DIGITAL ANALYSIS TECHNIQUES

COMMERCIAL SOFTWARE

Excel
ACL
IDEA
ActiveData for Excel
AutoAudit
SNAP! Reporter
DataWatchs Monarch for
Windows
Oversight Systems

Case Management
SoftwareAnalysts
Notebook i2; LexisNexis
CaseMap

Organize, evaluate, explore

evidence

Timeline Software
TimelineXpress (inData
Corp)
Genogram--GenoPro
38

ACCOUNTING TECHNIQUES USED

IN A FRAUD INVESTIGATION
Mary Anne Basilone, CPA, CFE, MMT, MA
Chair, Accounting & Forensic Accounting Programs
mabasilone@carlow.edu

Diane A. Matthews, PhD, CPA/CFF, CFE

Associate Dean, School of Management
damatthews@carlow.edu

39