INTRODUCTION TO FORENSIC    ACCOUNTING & LITIGATION SUPPORT               Ronald H. Burkett, CPA, CVA1               rburk...
WHAT IS FORENSIC ACCOUNTING? According to the Association of Certified Fraud  Examiners (ACFE), forensic accounting is th...
FORENSIC ACCOUNTING ENGAGEMENTS   There are several categories of possible forensic    accounting engagements:       Eco...
WHAT SKILLS ARE REQUIRED? Analytical Detail-Oriented Ethical Responsive Insightful Inquisitive Persistent Skeptici...
WHY IS THE NEED FOR FORENSICACCOUNTING SO PREVALENT?       In a word – FRAUD                               5
FRAUD   In a perfect world, employees would not steal from    their employers, so there would be no need for    fraud exa...
2010 REPORT TO THE NATIONS    Occupational fraud may be     defined as:                “The use of one’s                o...
2010 REPORT TO THE NATIONS Typical organization loses 5% of its annual  revenues to occupational fraud. Three primary ca...
2010 REPORT TO THE NATIONS                                                                        9Source: ACFE Report to ...
2010 REPORT TO THE NATIONS                                                                        10Source: ACFE Report to...
WHAT IS FRAUD EXAMINATION? Fraud means “any act, expression, omission, or  concealment calculated to deceive another to h...
THE FRAUD TRIANGLE                                                                                                    12So...
KEEPING THE FOX OUT OF THE HEN HOUSE!         Thwarting Employee Theft:         Hiring, Managing and Insuring   13
FRAUD SCHEMES AND RED FLAGS   Asset Misappropriation / Cash Fraud       Skimming = theft of assets never recorded in the...
FRAUD SCHEMES AND RED FLAGS   Inventory, Equipment and Other Assets Fraud       Inventory misuse (“borrowing”)       In...
FRAUD SCHEMES AND RED FLAGS   Credit Card Fraud       Federal statute 15 U.S.C. 1644 provides penalties for        the u...
FRAUD SCHEMES AND RED FLAGS   Vendor Fraud       Generally, “Off-book” fraud:         Bribery / Kickbacks         Over...
YOU DISCOVERED FRAUD… NOW                        WHAT?                                18
LEGAL ELEMENTS OF FRAUD   Steps in the Investigation       Investigation         Confidentiality – prevent embarrassmen...
RIGHTS AND DUTIES OF EMPLOYEES Employee duty to cooperate Predication       Each step of investigation based on suffici...
PROSECUTING EMPLOYEES   Prosecution (criminal charges) is exclusively the    right of the government, regardless of the r...
PROSECUTING EMPLOYEES   Civil claim of “common law” fraud          A representation (usually of fact0 about a material p...
ROLE OF THE EXPERT WITNESS To help triers of fact understand the impact of  different types of financial transactions or ...
UNDERSTANDING THE ENGAGEMENT   What are the issues?       In order to begin to understand where you will fit into the   ...
UNDERSTANDING CASE TIMELINE Case Filed - Pleadings, Counterclaims, Replies Discovery Period     For detriment period of...
ENGAGEMENT MANAGEMENT   Understanding the Engagement     Are you qualified as an expert in this matter?     Set reasona...
KNOW YOUR ROLE AND RULES Know your role - Will you testify? Know the rules - Every location is different Your report sh...
TESTIFYING EXPERT Your job is to have an opinion To express your opinion in clear, concise language Your standard is “r...
TESTIMONY Depositions Trial     Direct Examination     Cross Examination     Re-direct Examination     Re-cross Exam...
DEFENDANT; REPUTATION SAVED HIM   1814, Newberry                Why    County Criminal Court             Defendant had ...
31MY COUSIN VINNY
32MY COUSIN VINNY
CASE STUDIES: UPRIGHT ELEVATOR                                 33
CASE STUDIES   Upright Elevator Company: Facts:     Victim: Elevator repair company     Perpetrator: Company bookkeeper...
CASE STUDIES   Upright Elevator Company (cont’d)                        Where some stolen funds were spent:     NYS Lotto...
CASE STUDIES   Upright Elevator Company (cont’d)       Company Oversight           No applicant screening/reference che...
CASE STUDIES   Upright Elevator Company (cont’d)       Cycle of Fraud:           Pressure – Bookkeeper continued fraud ...
CASE STUDIES   Reward Electronics: Facts:     Victim: Electronics company     Perpetrator: CFO     Scheme: Misuse of A...
CASE STUDIES   Reward Electronics: Facts:       Amex Points Accumulated: 3.2 million                                  (a...
CASE STUDIES   “Good Business Practice”       “We saw it as good business practice…a new        corporation viewed as po...
CASE STUDIES   “Poor Judgment”       “AMEX gave it to me just the same as any other        corporate cardholder…these ar...
CASE STUDIES   Reward Electronics (cont’d)       Company Oversights:           Lack of appropriate oversight / authoriz...
CASE STUDIES   Reward Electronics (cont’d)       Cycle of Fraud:           Pressure – CFO’s wife pressured him into a m...
SUMMARY   An organization will only be as effective as the    sound internal controls it has in place   Know your employ...
RONALD H. BURKETT, CPA, CVA   Ronny Burkett is a Certified Public Accountant, Certified Valuations Analyst   and President...
THANK YOU             Ronald H. Burkett, CPA, CVA46            rburkett@burkettcpas.com          Burkett Burkett & Burkett...
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Session 6 Litigation support february 17, 2012 email version burkett

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Session 6 Litigation support february 17, 2012 email version burkett

  1. 1. INTRODUCTION TO FORENSIC ACCOUNTING & LITIGATION SUPPORT Ronald H. Burkett, CPA, CVA1 rburkett@burkettcpas.com Burkett Burkett & Burkett CPAs, PA 3101 Sunset Blvd. West Columbia, SC 29169 P.O. BOX 2044 West Columbia, SC 29171 803.794.3712
  2. 2. WHAT IS FORENSIC ACCOUNTING? According to the Association of Certified Fraud Examiners (ACFE), forensic accounting is the use of professional skills in matters involving potential or actual civil or criminal litigation, including, but not limited to, generally acceptable accounting and audit principles. Forensic Accounting involves both investigative accounting and litigation support 2
  3. 3. FORENSIC ACCOUNTING ENGAGEMENTS There are several categories of possible forensic accounting engagements:  Economic Damages/Profit Loss  Reorganizations  Securities Fraud  Business Valuation  Post Acquisition Disputes (Earnouts)  Family Law  Marital Asset Addendum  Financial Declarations  Fraud  Criminal and Civil Cases 3
  4. 4. WHAT SKILLS ARE REQUIRED? Analytical Detail-Oriented Ethical Responsive Insightful Inquisitive Persistent Skepticism EvaluativeSource: AICPA Characteristics and Skills of the Forensic Accountant, 2009. 4
  5. 5. WHY IS THE NEED FOR FORENSICACCOUNTING SO PREVALENT?  In a word – FRAUD 5
  6. 6. FRAUD In a perfect world, employees would not steal from their employers, so there would be no need for fraud examinations. However, this is not a perfect world and employees do steal from their employers for a variety of reasons most of which revolve around NEED or GREED. 6
  7. 7. 2010 REPORT TO THE NATIONS Occupational fraud may be defined as: “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” 7Source: ACFE Report to the Nations on Occupation Fraud & Abuse, 2010.
  8. 8. 2010 REPORT TO THE NATIONS Typical organization loses 5% of its annual revenues to occupational fraud. Three primary categories of occupational fraud:  Asset misappropriations – most frequent and least costly  Corruption schemes – bribery, extortion, or conflict of interest  Financial statement fraud schemesSource: ACFE Report to the Nations on Occupation Fraud & Abuse, 2010. 8
  9. 9. 2010 REPORT TO THE NATIONS 9Source: ACFE Report to the Nations on Occupation Fraud & Abuse, 2010.
  10. 10. 2010 REPORT TO THE NATIONS 10Source: ACFE Report to the Nations on Occupation Fraud & Abuse, 2010.
  11. 11. WHAT IS FRAUD EXAMINATION? Fraud means “any act, expression, omission, or concealment calculated to deceive another to his or her disadvantage; specifically; a misrepresentation or concealment with reference to some fact material to a transaction that is made with knowledge of it falsity or in reckless disregard of its truth or falsity and with the intent to deceive another and that is reasonably relied on by the other who is injured thereby.” We will explore the elements of fraud (commonly referred to as the “fraud triangle”) and what companies can do to prevent and detect. 11(Merriam-Webster Dictionary of Law)
  12. 12. THE FRAUD TRIANGLE 12Source: Occupational Fraud Abuse by Joseph T. Wells, CPA, CFE (Obsidian Publishing Company, 1997)
  13. 13. KEEPING THE FOX OUT OF THE HEN HOUSE! Thwarting Employee Theft: Hiring, Managing and Insuring 13
  14. 14. FRAUD SCHEMES AND RED FLAGS Asset Misappropriation / Cash Fraud  Skimming = theft of assets never recorded in the accounting records, “off-book”  Larceny = theft of assets recorded in the accounting records 14
  15. 15. FRAUD SCHEMES AND RED FLAGS Inventory, Equipment and Other Assets Fraud  Inventory misuse (“borrowing”)  Inventory theft  Unconcealed larceny  Falsified receiving reports  Fraudulent shipments  Fraudulent write-offs 15
  16. 16. FRAUD SCHEMES AND RED FLAGS Credit Card Fraud  Federal statute 15 U.S.C. 1644 provides penalties for the use of counterfeit, fictitious, altered, forged, lost, stolen, or fraudulently obtained credit cards. A violator may be fined up to $10,000 and/or imprisoned for up to 10 years. SC State law Section 16-14-60 provides penalties up to $5,000 and/or up to five years in prison for each of the following offenses:  Unauthorized use of a lost or stolen card  Company credit cards  Counterfeit cards 16
  17. 17. FRAUD SCHEMES AND RED FLAGS Vendor Fraud  Generally, “Off-book” fraud:  Bribery / Kickbacks  Overbilling  Bid-Rigging  Illegal Gratuities 17
  18. 18. YOU DISCOVERED FRAUD… NOW WHAT? 18
  19. 19. LEGAL ELEMENTS OF FRAUD Steps in the Investigation  Investigation  Confidentiality – prevent embarrassment or vulnerability to lawsuit if the case does not lead to action  Consult legal counsel, if appropriate (CFE must be hired through attorney to protect attorney/client privilege)  Documentation  Chain of custody  Confrontation / Interview  Be careful of “false imprisonment” 19
  20. 20. RIGHTS AND DUTIES OF EMPLOYEES Employee duty to cooperate Predication  Each step of investigation based on sufficient basis and reason; otherwise, employer may be liable for civil actions – defamation or invasion of privacy Invasion of privacy  Written policy – lower expectation of privacy 20
  21. 21. PROSECUTING EMPLOYEES Prosecution (criminal charges) is exclusively the right of the government, regardless of the results of the company’s internal investigation. Civil charges may be brought by an individual or the government.Source: Conducting Internal Investigations – US, ACFE, 5/5/04 21
  22. 22. PROSECUTING EMPLOYEES Civil claim of “common law” fraud  A representation (usually of fact0 about a material point which is false and intentionally and knowingly so (or, in some circumstances, recklessly so) which is believed and acted upon by the victim to the victim’s damage.  Criminal offense may be complete even if the victim does not suffer damage.Source: Conducting Internal Investigations – US, ACFE, 5/5/04 22
  23. 23. ROLE OF THE EXPERT WITNESS To help triers of fact understand the impact of different types of financial transactions or attach a measurable value to plaintiff’s jury. To ensure this, the expert must remember that the jury HAS TO believe his testimony To ensure that counsel understands the subject matter to which you are testifying 23
  24. 24. UNDERSTANDING THE ENGAGEMENT What are the issues?  In order to begin to understand where you will fit into the attorney’s strategy, it is first necessary to understand the issues in the lawsuit. Who are the parties?  What you really want to know and what the attorney wants to know is do you have any prior relationships with the parties that create conflict of interest, either real or perceived, that would preclude your offering testimony in this matter. Who is the client?  While you will be dealing primarily with the attorney, it is 24 important to know who the actual client is.
  25. 25. UNDERSTANDING CASE TIMELINE Case Filed - Pleadings, Counterclaims, Replies Discovery Period  For detriment period of time  Can take depositions, issue subpoenas Discovery Cut-off  You cannot compel any additional discovery Pretrial  Meeting with Judge to decide issues and determine procedure Trial 25
  26. 26. ENGAGEMENT MANAGEMENT Understanding the Engagement  Are you qualified as an expert in this matter?  Set reasonable expectations  Do not practice law Engagement Letters Know the case dates 26
  27. 27. KNOW YOUR ROLE AND RULES Know your role - Will you testify? Know the rules - Every location is different Your report should be in an acceptable format  Otherwise it may be thrown out despite your hard work 27
  28. 28. TESTIFYING EXPERT Your job is to have an opinion To express your opinion in clear, concise language Your standard is “reasonable degree of certainty” or “reasonable degree of accounting certainty” Is not an advocate for the client – you must have credibility To be an advocate for your position To tell the truth 28
  29. 29. TESTIMONY Depositions Trial  Direct Examination  Cross Examination  Re-direct Examination  Re-cross Examination 29
  30. 30. DEFENDANT; REPUTATION SAVED HIM 1814, Newberry  Why County Criminal Court  Defendant had a  James Gordon tried for reputation for being assault and battery such a big liar that the  Confessed his guilt on jury did not believe him the stand  Jury acquitted him 30
  31. 31. 31MY COUSIN VINNY
  32. 32. 32MY COUSIN VINNY
  33. 33. CASE STUDIES: UPRIGHT ELEVATOR 33
  34. 34. CASE STUDIES Upright Elevator Company: Facts:  Victim: Elevator repair company  Perpetrator: Company bookkeeper  Scheme: Misappropriation of $5.3 million, through manipulation of payroll  Duration: 1996 through 2003 34
  35. 35. CASE STUDIES Upright Elevator Company (cont’d) Where some stolen funds were spent: NYS Lotto $ 1,561,561 Checks to Cash $ 1,210,865 Credit Cards $ 738,988 Ticket Broker $ 323,935 Psychic $ 48,000 Dentist $ 28,965 Beauty Salon $ 12,677 Saks Fifth Ave. $ 7,305 Children’s Cancer Research $ 20 35
  36. 36. CASE STUDIES Upright Elevator Company (cont’d)  Company Oversight  No applicant screening/reference checks  No segregation of duties  No mandatory vacation policy  Lack of appropriate oversight / authorization / approval system 36
  37. 37. CASE STUDIES Upright Elevator Company (cont’d)  Cycle of Fraud:  Pressure – Bookkeeper continued fraud to satisfy gambling addiction  Opportunity – Due to lack of oversight and poor internal controls, bookkeeper was able to prolong fraud  Rationalization – Bookkeeper felt she was contributing significantly to the firm and deserved more 37
  38. 38. CASE STUDIES Reward Electronics: Facts:  Victim: Electronics company  Perpetrator: CFO  Scheme: Misuse of American Express Rewards Program Points  Duration: 1999 through 2003 38
  39. 39. CASE STUDIES Reward Electronics: Facts:  Amex Points Accumulated: 3.2 million (approx. $40k per year)  Where points were used:  Bloomingdale’s  Saks Fifth Avenue  Brooks Brothers  Smith & Wollensky’s  Toys R’ Us 39
  40. 40. CASE STUDIES “Good Business Practice”  “We saw it as good business practice…a new corporation viewed as positive to have a credit rating and establish a track record.”  “The points are mine…from AMEX’s point of view they are mine…a customer reward loyalty program, not set up as a corporate kickback to send points to an organization but to the cardholder.” November 3, 2003 – CFO, Reward Electronics 40
  41. 41. CASE STUDIES “Poor Judgment”  “AMEX gave it to me just the same as any other corporate cardholder…these are my points.”  “In retrospect, I used poor judgment. When you are exercising poor judgment you don’t realize it until it’s pointed out to you.” November 3, 2003 – CFO, Reward Electronics 41
  42. 42. CASE STUDIES Reward Electronics (cont’d)  Company Oversights:  Lack of appropriate oversight / authorization  Poor / ineffective internal controls 42
  43. 43. CASE STUDIES Reward Electronics (cont’d)  Cycle of Fraud:  Pressure – CFO’s wife pressured him into a more luxurious lifestyle  Opportunity – Due to lack of oversight and poor internal controls, CFP was able to continue fraud  Rationalization – CFP rationalized that the Amex points were for his personal use 43
  44. 44. SUMMARY An organization will only be as effective as the sound internal controls it has in place Know your employees through proper screening Ensure that there is appropriate segregation of duties Ensure that there are proper levels of authorization and approval 44
  45. 45. RONALD H. BURKETT, CPA, CVA Ronny Burkett is a Certified Public Accountant, Certified Valuations Analyst and President of Burkett Burkett & Burkett Certified Public Accountants, P.A. The firm has 3 locations, 49 employees and 2 affiliate companies. Burkett has over 30 years of experience in tax, finance, business valuations, and litigation support services. Burkett is a graduate of the University of South Carolina, Class of 1974, with a Bachelor of Science Degree in Accounting. He is the immediate past Chairman of Midlands Technical College Board of Commissioners and current Commissioner. He has presented seminars across the United States on topics such as income taxes, financial statements, business valuations and litigation support. He also coauthored two books on Business Valuations and Litigation Support 45 that were used in the early 90’s as CPE for CPAs around the country.
  46. 46. THANK YOU Ronald H. Burkett, CPA, CVA46 rburkett@burkettcpas.com Burkett Burkett & Burkett CPAs, PA 3101 Sunset Blvd. West Columbia, SC 29169 P.O. BOX 2044 West Columbia, SC 29171 803.794.3712

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