Session 6 Litigation support february 17, 2012 email version burkett
INTRODUCTION TO FORENSIC ACCOUNTING & LITIGATION SUPPORT Ronald H. Burkett, CPA, CVA1 firstname.lastname@example.org Burkett Burkett & Burkett CPAs, PA 3101 Sunset Blvd. West Columbia, SC 29169 P.O. BOX 2044 West Columbia, SC 29171 803.794.3712
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
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
WHAT SKILLS ARE REQUIRED? Analytical Detail-Oriented Ethical Responsive Insightful Inquisitive Persistent Skepticism EvaluativeSource: AICPA Characteristics and Skills of the Forensic Accountant, 2009. 4
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 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
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.
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
2010 REPORT TO THE NATIONS 9Source: ACFE Report to the Nations on Occupation Fraud & Abuse, 2010.
2010 REPORT TO THE NATIONS 10Source: ACFE Report to the Nations on Occupation Fraud & Abuse, 2010.
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)
THE FRAUD TRIANGLE 12Source: Occupational Fraud Abuse by Joseph T. Wells, CPA, CFE (Obsidian Publishing Company, 1997)
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 accounting records, “off-book” Larceny = theft of assets recorded in the accounting records 14
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
CASE STUDIES Reward Electronics: Facts: Victim: Electronics company Perpetrator: CFO Scheme: Misuse of American Express Rewards Program Points Duration: 1999 through 2003 38
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
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
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
CASE STUDIES Reward Electronics (cont’d) Company Oversights: Lack of appropriate oversight / authorization Poor / ineffective internal controls 42
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
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
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.
THANK YOU Ronald H. Burkett, CPA, CVA46 email@example.com Burkett Burkett & Burkett CPAs, PA 3101 Sunset Blvd. West Columbia, SC 29169 P.O. BOX 2044 West Columbia, SC 29171 803.794.3712