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Forensic Accounting BA 124. Professor Bill O’Brien. Today’s Topics. Seriousness of fraud Definition of fraud Types of fraud Criminal versus civil statutes Fraud-related careers. Today’s Topics, cont. Why Fraud? Who commits fraud The fraud triangle Pressures

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forensic accounting ba 124

Forensic AccountingBA 124

Professor Bill O’Brien

FORENSIC ACCOUNTING – BA 124 - Fall 2013

today s topics
Today’s Topics
  • Seriousness of fraud
  • Definition of fraud
  • Types of fraud
  • Criminal versus civil statutes
  • Fraud-related careers

FORENSIC ACCOUNTING – BA 124 - Fall 2013

today s topics cont
Today’s Topics, cont.
  • Why Fraud?
    • Who commits fraud
    • The fraud triangle
    • Pressures
    • Opportunity and control issues
    • Rationalization
    • Power and influence…collusion

FORENSIC ACCOUNTING - BA124 – Spring 2013

remember the p in cpa
Remember the “P” in CPA
  • The public trust is essential
  • You have only one reputation

FORENSIC ACCOUNTING – BA 124 - Fall 2013

cost of fraud
Cost of Fraud
  • Association of Certified Fraud Examiners (ACFE)
  • Close to $1.0 trillion annually in U.S.; close to $3.0 trillion worldwide
  • Over 7% of revenue…straight to the bottom line

FORENSIC ACCOUNTING – BA 124 - Fall 2013

how does fraud impact you
How Does Fraud Impact You?
  • Financially
  • Reputation of your firm
  • Opportunity cost

FORENSIC ACCOUNTING – BA 124 - Fall 2013

here s what happens
Here’s What Happens...
  • It is a dollar for dollar impact on net income
  • Dollars that have a multiplier effect on revenue in order to generate new profits

FORENSIC ACCOUNTING – BA 124 - Fall 2013

defining fraud
Defining Fraud
  • A statement
  • Which is a lie,
  • And intentionally or recklessly so,
  • About a material point,
  • Which is believed
  • And acted upon by the victim
  • To the victim’s damage
  • Let examine each highlighted term

SLIMBAD

FORENSIC ACCOUNTING – BA 124 - Fall 2013

what drives fraud
What Drives Fraud
  • Consider the Ponzi Fraud of the early 20th Century
    • See www.mark-knutson.com
  • Primary age of fraudsters--36-45 yrs.
  • Key drivers
    • Confidence earned
    • Pressures
    • Greed

FORENSIC ACCOUNTING – BA 124 - Fall 2013

classifications of fraud
Classifications of Fraud
  • Fraud versus an organization
    • Occupational fraud
  • Fraud on behalf of an organization

FORENSIC ACCOUNTING – BA 124 - Fall 2013

occupational fraud
Occupational Fraud
  • Clandestine
  • Violates fiduciary interest
  • Direct or indirect financial benefit
  • Damages the organization

FORENSIC ACCOUNTING – BA 124 - Fall 2013

fraud on behalf of an organization
Fraud on Behalf of an Organization
  • Most common…fraudulent financial reporting

FORENSIC ACCOUNTING – BA 124 - Fall 2013

a more detailed classification list
A More Detailed Classification List
  • Occupational fraud…embezzlement
  • Management fraud
  • Investment scams
  • Vendor fraud
  • Customer fraud
  • Know the table on WSA pg. 10

FORENSIC ACCOUNTING – BA 124 - Fall 2013

examples
Examples...
  • Embezzlement: CVC
  • Management: World-com
  • Investment: see scams
  • Vendor: Halliburton;
  • Customer: Florida State football player and department store; bank case

FORENSIC ACCOUNTING – BA 124 - Fall 2013

prosecution
Prosecution
  • Criminal law for public offenses
    • Bribery laws
    • Anti Kickback Act of 1986
    • Mail Fraud statutes
    • Bank Fraud statutes
    • RICO and FCPA
    • IRS and tax evasion
  • Civil law for violations of private rights
  • Note the comparative table on p. 15

FORENSIC ACCOUNTING – BA 124 - Fall 2013

fraud related careers
Fraud Related Careers
  • ACFE and CFE requirements
  • Government
    • FBI, Postal Inspectors, IRS
  • Public accounting
    • Forensic accountants
  • Corporation
    • Internal auditors
  • Consulting
    • Lawyers
    • Expert witnesses

FORENSIC ACCOUNTING – BA 124 - Fall 2013

critical skills
Critical Skills
  • Analytical
  • Communication
  • Technological
  • Accounting and law
  • Language
  • Behavioral
  • Common sense

FORENSIC ACCOUNTING – BA 124 - Fall 2013

who commits fraud
Who Commits Fraud?
  • In essence…you and I

FORENSIC ACCOUNTING - BA124 – Spring 2013

why commit fraud
Why Commit Fraud?
  • The fraud triangle
    • Situational pressures
    • Available opportunities
    • Personal integrity (rationalization)

FORENSIC ACCOUNTING - BA124 – Spring 2013

situational pressures
Situational Pressures
  • Financial
  • Vice
  • Work related
  • Other pressures
    • The thrill or challenge
  • Extraordinary circumstances

“Every man has his price, and he was getting close to mine.”

Abraham Lincoln, on throwing a lobbyist out of his office

FORENSIC ACCOUNTING - BA124 – Spring 2013

available opportunities
Available Opportunities
  • COSO’s elements of control
    • Control environment
    • Appropriate systems
    • Procedures and activities
  • Note the information in Albrecht

FORENSIC ACCOUNTING - BA124 – Spring 2013

control environment
Control Environment
  • Management example
  • Management communication
  • Hiring practices
  • Organizational structure
  • Effective internal audit department or similar oversight

FORENSIC ACCOUNTING - BA124 – Spring 2013

procedures activities
Procedures & Activities
  • Segregation of duties
  • System of authorizations
  • Independent checks
  • Physical safeguards
  • Documents and records

FORENSIC ACCOUNTING - BA124 – Spring 2013

factors that promote fraud
Factors That Promote Fraud
  • Outcomes that are difficult to evaluate
  • Failure to discipline
  • Complexity or lack of access to information
  • Apathy
  • Missing or non-existent audit trail

FORENSIC ACCOUNTING - BA124 – Spring 2013

rationalization
Rationalization
  • Pathological lying
  • “Everyone does it.”
  • See the list on page 50

FORENSIC ACCOUNTING - BA124 – Spring 2013

power and influence
Power and Influence
  • Different types…see pg. 53
  • Influences co-conspirator
  • Knowledge may protect us and assist in investigation

FORENSIC ACCOUNTING - BA124 – Spring 2013

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