TIP of ICEBERG Concept.Typically users of financial information see financial statements and other external reporting… But, only a small portion of the Books & Records.Foundation of the Books & Records is Integrity of Management.Concluding audit procedure - Get Management Representation LetterBusiness = Living Organism.Life Blood = Cash Flows.FORESNIC PROCESS - Premise that integrity may be lacking in the books & records. As a result, forensic accounting procedures are performed to enhance Integrity. In essence, the forensic accountant may ultimately take ownership of the numbers as portrayal of what happened.
Typical documents used for completeness assessments on Forensic Accounting engagement.All three sources of records should be corroborative of one another. Gaps suggest misreporting and potentially misappropriations.
It is important to identify the source of documents used.Control Documents, such as Bank Statements should have the greatest integrity. Other control documents may include customer Purchase Order/Sales purchase lists.Internal Documents will have the lowest integrity, with External Documents having higher integrity, since they are filed with IRS (Tax Returns) or prepared by external providers (Attest Rpts).Proof of cash analyses seek to reconcile transactions recorded in the accounting system with control documents (bank statements).
Allegations – What do you think?Understanding – On what can you rely?Techniques – To determine what we know. Verification to supporting documents and third-party sources.Outcome – Informed observations and conclusions, based upon procedures performed.
Foundation of Auditing – Integrity of ManagementThat is why client acceptance and retention is so very important.At end of audit, what does the CPA firm get? [Paid?] (Yes, but they also get a management representation letter!).Management accepts full responsibility for the completeness for the accounting records in the standard management representation letter, including full disclosure of contingencies and lawsuits…
Forensic Accounting:Material/opinion suitable for presentation in court.• Work with financial information … Convey complicated information in simplified manner.• Most large CPA firms offer forensic accounting.• Numerous boutique consulting firms providing specialty forensics or valuation services, such as insurance defense and corporate fraud investigations.
Forensic Accounting:• Hired by attorneys to investigate the financial trail of persons suspected of engaging in criminal activity.• Retained by bankruptcy court when submitted financial information is suspect, including missing assets.• Retained by divorce attorneys to find hidden assets or evaluate income/earnings.• Calculate losses (Lost Profits, Revenue, etc.).
Forensic Accounting:• Testify in court as an expert witness.• Prepare visual aids and summaries for use in court.• Like a crime scene investigator, with an intuitive sense for the meaning of financial transactions.• Forensic accountants include auditors, accountants, investigators, etc., possessing a common essential quality – the Ability to Think.
Representative Characteristics: Duties: * Financial Analysis * Evidence Integrity Analysis * Writing Reports * Testifying (Expert Witness) * Compiling Information * Maintain Documentation * Present Value of $$ * Regression Analysis * Tracing Illicit Funds(a) * Locating Hidden Assets * Due Diligence Reviews* Compute Damages(a) Integral to combating terrorism, by addressing financing aspects.
Representative Characteristics: Skills & Abilities: * Accounting Procedures * Legal System & Procedures * Oral Communication * Written Communication * Interpersonal Skills * Summarize Results * Research Skills * Detail Oriented * Analytical * Professional Skepticism * Objective * Independent * Credible
Published in US Attorneys’Bulletin (Mar ‘05; May ‘05): Reference Material: • Financial Forensics I: Counterterrorism-Conventional Tools for Unconventional Warfare • Financial Forensics II: Forensic Accounting- Counterterrorism Weaponry Darrell D. Dorrell, CPA/ABV, MBA, ASA, CVA, CMA, DABFA, CMC President Gregory A. Gadawski, CPA, CVA, CFE Principal financialforensics®
Books & Records Foundation: Integrity of Management Source: Dictionary for accountants by Eric Kohler
Standard Records Triad:Financial Statements & Underlying Accounting Records (a) Tax Returns (b) Bank Statements (a) (a) Detailed transaction records. (b) Summarized information. Reported to IRS, increasing reliability.
Source of Records: Control Documents Bank StatementsInternal Documents External Documents Operating Reports Attest Reports
Focus of Procedures:The forensic accounting process is typically orientedtowards fact finding & accountability – What reallyhappened? Who is Responsible? How much wasmisappropriated?Accordingly, we have the following…1. What happened? Prepare an Accounting.2. Allegations founded? Investigative Accounting.
Forensic Accounting:Objectives: • Reconstruct transactions from records, and tie to supporting documents. • Identify anomalies and inconsistencies among sources.Two Distinct Processes: • With a valid control point. • Without a valid control point. What Happened?
Forensic Investigation:Objectives: • Determine what has happened and who is responsible. • Quantify economic losses.Processes: • Determine reliability and completeness of the accounting records. • Reconstruct accounting, if necessary / cost effective. • Analyze transactions and supporting records. How Much? Who is Responsible?
Forensic Accounting Investigation Process |----Business Organization/Operating Entity----| 1. Allegations (Predication) Realm of Potential Deception •Contained in a legal complaint Reporting •From discussions with attorney 4. Engagement Outcome Internal & External operational and financial reports •From discussions with Allegations management + Understanding + Forensic Techniques Processing Information Conclusions •Accounting system •Interpretation of data •Transactional support Environment of Business/Entity •Organization and personal integrity and ethical values 3. Forensic Techniques •Apply to financial data •Operating characteristics of management 2. Gain An Understanding Of Using: •Operating philosophy/style •Business goals & Objectives •Business operating data •Competence of personnel •Reporting requirements •Transactional support •Processing environment •3rd party information•Contractual rights and obligations •Background searches
Compared with Auditing: Forensic Accounting Auditing Focus procedures on: Perform exam in accordance with (1) fraudulent accounting/reporting generally accepted auditing (2) misappropriation of assets standards (GAAS). Provide opinion on financial Seek to confirm or refute existence of specific problems or statements for general or limited allegations, extent and cause. use. Conduct procedures in accordance Normally has few predetermined boundaries and greater access to with an accepted methodology & executive management. procedures w/in materiality levels. Founded upon representations of Analyst infuses process with completeness & integrity. management. (Rep Letter)
Representative Matters:Church Daycare/School……… Skimming/EmbezzlementRegional Mall……………………… Special Master – Allocated CostsHeavy Equipment……………….. Court Order – S/H DisputeDivorce – Family Business….. Forensic Analysis – Rev & ExpEstate & Trust……………………… Damages Analysis – TracingNationwide Distributor………. Lost Profits of Startup BusinessGaming Industry…………………. Patent/Trademark InfringementHomeowners Assoc Mgmt.... Fraud InvestigationIndustrial Printing……………….. Alter Ego (Piercing the Veil)