Law Finance does not have to be complex. In this session, you will learn the basics of how accountants think and work, and where investigators should begin the search for potential evidence.

1. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Financials and eDiscovery:
A Primer for Non-Accountants
Stanley D. Friedman
Assistant Dean for New Joint Ventures
Adjunct Professor of Law and Accounting
Sandra Day O’Connor College of Law
Arizona State University

3. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
What is the auditor’s responsibility to detect
fraud?
“It is true that the auditor is not responsible for the
detection of all fraud; for the auditor to have any
detection responsibility, the fraud must misstate
the financial statements, and the misstatement
must be material.”
- “Audit vs. Fraud Examination,” The CPA Journal,
March 2018

4. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Key Differences Between Auditors and Fraud
Examiners
“The ‘fraud audit’ is not a defined term or defined professional service;
what is likely meant by this term is a fraud investigation or
examination. The Association of Certified Fraud Examiners (ACFE)
explains that the term ‘fraud examination’ ‘refers to a process of
resolving allegations of fraud from inception to disposition, and it is the
primary function of the anti-fraud professional’ (2017 Fraud Examiners
Manual). Earlier (pre-2014) editions of the manual contained an oft-
cited chart comparing an audit of financial statements to a fraud
examination.”
- “Audit vs. Fraud Examination,” The CPA Journal, March 2018

5. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Accountants’ Scope of Work & Financial
Statements
• Accountants Report/Opinion
– Compilation
– Review
– Audit
• Management’s Statement on Internal Controls
• Auditor’s Statement on Internal Controls
• Balance Sheet
• Income Statement
• Statement of Changes in Equity
• Statement of Change in Cash Flows

9. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Auditor’s Report on Financials
• Opinion
– Unqualified – “Present fairly”/GAAP
– Qualified – “Subject To”
• Lack of Evidentiary Matter
• Departure from GAAP
• Material Change
– Adverse – “Do not present fairly”/Not GAAP
– Disclaimer – “The scope was not sufficient to express
opinion”

10. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Corporate Structure
Executive
Management
Middle
Management
Employees

11. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Executive
Management
A team of individuals at the highest level
of an organization, company, or
corporation, who have the responsibility
of managing the day-to-day tasks of the
organization.

12. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Middle
Management
The intermediate management level of
a hierarchical organization that is
subordinate to the executive
management and responsible for “team
leading” line managers.

13. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Employees
People below the executive level
who are hired by another to
perform a service, especially for
wages or salary and are under the
other’s control.

14. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Risk Assessment
Executive
Management
Middle
Management &
Employees

15. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Organizational Structure Risk Assessment

16. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Middle
Management
Employees
• Payroll Fraud
• Time sheet fraud
• Ghost Employees
• Work Misclassification
• Independent contractors
• 1099 Issues
• Theft
• Inventory
• Office Supplies
• Records Fraud
• Sign off completion of “%” job(s)
• Petty Cash Theft

17. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Executive
Management

18. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Fraud Hit Parade
• Equity Funding – 1973
• Phar-Mor – 2000
• Enron – 2001
– Sarbanes-Oxley
• Walmart – 2020
– FCPA
• Bernie Madoff
– House of Cards

19. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Executive
Management
• Collusion
• Whistleblower
• House of Cards - tumbles

20. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Sarbanes-Oxley Act 2002
SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.
(a) RULES REQUIRED.—The Commission shall prescribe rules requiring each annual
report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o(d)) to contain an internal control report, which shall—
(1) state the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting; and
(2) contain an assessment, as of the end of the most recent fiscal year of the issuer,
of the effectiveness of the internal control structure and procedures of the issuer for
financial reporting.
SEC. 307. RULES OF PROFESSIONAL RESPONSIBILITY FOR ATTORNEYS.
Attorneys appearing and practicing before the Commission in any way in the
representation of issuers are required to report evidence of a material violation of
securities laws to the chief legal counsel of the CEO of the company and if they do not
appropriately respond to the evidence, attorneys are required to report the evidence to
the audit committee of the board of directors.

21. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Inventory of Data
• Accounting Records – Where?
• Data Storage – Where?
• Original Source Documents – Where?
• Expertise
• Data Processing
– “Vintage” SAS-3 (1974)

22. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference

23. Ninth Annual ASU-Arkfeld eDiscovery,
Law and Technology Conference
Expertise: A Team Sport
• Experts
– Large “E” vs. small “e”
– Data Analytics Expertise
– Accounting Expertise
– Software Capability
– Resources Availability
– Independence