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Investigative
Accounting
What is Forensic Accounting?
An orderly analysis, investigation, inquiry, test,
inspection, or examination along a “paper trail” in the
search for fraud, embezzlement, or hidden assets
• Investigative accounting
Two parts:
• Litigation support
1931
World War II
Wells Report
There are 13,000 CFEs in the ACFE, compared to 2,300 just 10 years ago
What Does a Forensic Accountant Do?
Damages
Antitrust Analyses
Accounting
Valuation
General Consulting
Other Analyses
The Fraud Triangle
Motive
Rationalization Opportunity
[Source: Michael Kurland, How to Solve A Murder: Macmillan, 1995, pp. 7-8]
Proactive Fraud Auditing
Going fishing
Procedures
Reactive Fraud Auditing
Symptoms
Cost Variances
Expected Costs
Employee’s Lifestyle
Fraud vs. White-Collar Crime
“White collar crime is criminal conduct that does not involve
violence or the threat of violence and usually takes place in a
professional work place”
Antitrust.
Bankruptcy fraud.
Corporate/securities fraud.
Insurance fraud.
Money laundering.
Mortgage fraud.
Contrasting Auditing, Forensic Accounting, and
Fraud Examination
Characteristic Audit Fraud Examination Forensic Accounting
Main work product is: Audit opinion Fraud case report Forensic audit report
Look from different angles and all sides. You will get a
different revelation
Learnings from Ravana- a great Scholar and Shiva
Bhakt useful for auditors and investigators
Pro Formas • Pro formas (or cash earnings or operating earnings) are often issued with
many expenses excluded, resulting hide and seek" earnings. Accountants
Can Mislead must focus on the earnings figures that are prepared according to GAAP.
Inventory 25 percent of cost of goods sold, red flags are raised If customers are not paying
their bills and/or the company is saddled with aging merchandise, problems will
eventually arise.
• e.g. Crazy Eddie, and electronic equipment retailer, allegedly recorded sales to
Problems other chains as if they were retail sales (rather than wholesale sales). For the
fiscal year ending March 1, 1985, an accountant, Sammy Antar, falsified
inventories by $ 3 million, and by the next year, the false inventory reached
more than $ 10 million. The fraud may have unraveled because Eddie’s wife
and sister caught him with another woman on New Year’s Eve
Sales and • Sales figures may be inflated in several ways that are difficult to detect. Forensic
accountants should compare the trend in sales with the trend in net income.
Special-purpose entities present special opportunities for masking problems in
sales and expenses, offering the means to manipulate stock prices, create
Problems
item, but there were a dozen smaller instance of hiding or understating
expenses, from automobile maintenance to insurance payments. The stock
plummeted 72 percent, from $23.44 to $6.50.
Financial Statement Fraud Categories and Red Flags (Contd.)
Big Bath directly against earnings—especially large amounts. This is called the "big
bath." Profits are depressed for that year, but future earnings look much
better. If accounts receivable are written off, sales may have been inflated.
Balance Sheet • Because the balance sheet is a snapshot of a business's financial position
at one moment, management may be tempted to manipulate balance
sheet accounts to be listed.
Account • e.g. For its 1997 fiscal year, America Online, Inc. showed $ 385 million in
assets on its balance sheet called deferred subscriber acquisition costs.
Problems This amount represented new subscriber advertising costs that should
have been charged against income as an expense.
Piggy charged and handcuffed in 2002 by the SEC for allegedly looting
the cable TV provider and hiding more than $ 3.1 billion in off-
balance sheet debt from investor. These undisclosed funds were
used to buy timberland, invest in a golf course, and help run the
Bank Buffalo Sabres hockey team. The company falsified the number of
cable television subscribers and created fake management fees to
conceal the alleged fraud ( all under the watchful eyes of Deloitte
&Touche)
Using Checklists to • It is helpful to look at the fraud risk factors developed over time and
create checklists that can be used as part of the fraud fighter's arse
Help Detect Fraud
Financial Fraud Detection Tools
• Some fraud schemes cannot be effectively detected using
data-driven approaches. Searching relevant transaction
Behavioral data for patterns and unexplained relationships often fails
to yield results because the information may not be
recorded, per se, by the system. It is sometimes necessary
Approaches to inspect employees' attitudes, feelings, values, norms,
interaction, supportiveness, and satisfaction to detect
fraud.
A victim uncovered theft when his bookkeeper unexpectedly missed a few days of work and he opened a bank
statement. The simple act of thumbing through cancelled checks from one month’s bank statement prompted
a phone call to his attorney who directed him to a forensic accountant. The internal fraud was revealed, he felt
stupid for allowing it to happen and the lesson cost him several hundred thousands of dollars in uninsured
losses.
The forensic accountant uncovered evidence of a simple but effective embezzlement scheme. The bookkeeper
had set up vendors that were very similar to existing real vendors. For example, if the real vendor was ABC
Service Company then a fake vendor was established called ABC Service Co. The bookkeeper set up bank
accounts for the fake vendors. That was the hard part. The rest was easy. The business owner signed hundreds
of checks to the fake vendors thinking the checks went to legitimate business activity.
Since that worked so well, the bookkeeper began forging checks to pay the vendors, personal expenses, and
provide cash gifts to family and friends. And, since all that worked without detection by the business owner,
the bookkeeper took an unauthorized increase in salary.
It was bold. It was also easily discovered and should have been easily prevented. The bookkeeper was quickly
arrested and has spent time in jail.
Case Study II
Jim Aaron owned a successful energy service company in Baton Rouge, Louisiana for 14 years. Stacy
Oxner helps Mr. Aaron with his recordkeeping. Mr. Aaron considers Stacy to be a trusted employee,
having worked for him for eleven years. She has worked long hours, often coming in early and working
late. She is an excellent employee.
Stacy had to go to the hospital for a hip replacement. While stacy was away from work the canceled
checks came from the bank to Mr. Aaron’s home. Feeling somewhat guilty for forcing Stacy to work
such long hours, Mr. Aaron opens the bank envelope. He is surprised to find several large checks made
out to Stacy: one for $ 14,000, another for $ 17,500 and a third one for $ 11,300.
Mr. Aaron never signs blank checks. He does not have a check writing machine, and the signatures on
these questionable checks are his signature. The signatures have not been forged.
How did this fraud occur? Discuss segregation of duties. Discuss opportunity in the fraud triangle with
respect to this situation.
Fraud Prevention
Know your employee
Do a background check.
Force vacations
Technology
Lack of perseverance
Two facets which are applicable to all investigations
Test of impossibility
Vendor letterheads, bills and letter formats- all bidders’s documents and search for
common addresses, telephone numbers, fax numbers, fax/tel numbers, email addresses?
Fictitious Expense or purchase bills. Juxtapose bills from large volume vendors
Behavioral indicators- chronic late sitting, arrogance and known bad habits like gambling, alcoholic
traits etc
Cash Contras
Stock in transit
In OBC Case, upon transfer of Rs. 110 cr. by JNPT to the Bank for creating of FD, the fraudster
asked the banker to immediately transfer the amount to his accomplice’s account Padmavati
International via a F AX communication.
Immediately, that transfer was followed by another trench of Rs. 70 cr. for FD creation. The
Bank again received instructions to transfer the amount to the creation. The Bank again
received instructions to transfer the amount to the accomplice’s account via FAX message.
Meanwhile, JNPT directly contacted Bank to enquire why FD Receipts were not yet delivered
to the company. It was then, they and Bankers realised that fraud has been perpetrated on
them.
The last trench of transfer was saved, but the earlier transfer of money is yet to be
recovered.
DENA BANK – ORIENTAL BANK CASE
In DB case, the Bank received bulk deposits from Corporates and PSUs between 30 January 2014 and 5
May 2014. The modus operandi was similar.
The FDRs were subsequently pledged with the Bank bythe ‘same signatories’ against which
overdraft facilities of Rs. 223.25 cr were obtained.
The funds were then surreptitiously transferred outof bank. DB stock lost The funds were
then surreptitiously transferred outof bank. DB stock lost 5% and OBC stock lost 3.5% upon
these revelations. Bank FD scam gets bigger, 9 FIRs filed, estimated fraud atleast Rs. 700 cr.
Preliminary inquiry by EOW currently on in another 10 cases. Finance Ministry has ordered a
forensic audit in these PSU Banks. Both the banks have complained to the CBI, which is also
looking into the matter.
DENA BANK – ORIENTAL BANK CASE
RED FLAGS
MIDDLE MAN
In addition to the usual, Document forensics: Paper and ink analysis, handwriting analysis,
signature analysis.
Following regulatory channels, analyzing the email and telephone call data records. Following
regulatory channels, analyzing the email and telephone call data records. Following regulatory
channels, analyzing the email and telephone call data records. Following regulatory channels,
analyzing the email and telephone call data records.
Establishing the linkages between the fraudsters location while perpetrating fraud,
communications with people within the organization and banks, etc.
Establishing the linkages between the fraudsters location while perpetrating fraud,
communications with people within the organization and banks, etc.
Mapping the procedural role of banking officials and the PSUs-Corporates officials with their job
description and the standard operating practices / rules governing their duties. Mapping the
procedural role of banking officials and the PSUs-Corporates officials wit
• Defining safeguards is only
the first
• step of fraud control process
• Continuous risk reviews and
CONCLUSION adapting
• to changes in business
environment
• will help in mitigating the
fraud risks