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A Guide to Forensic Accounting Investigation, 2nd Edition

Book Description

Recent catastrophic business failures have caused some to rethink the value of the audit, with many demanding that auditors take more responsibility for fraud detection. This book provides forensic accounting specialists experts in uncovering fraud with new coverage on the latest PCAOB Auditing Standards, the Foreign Corrupt Practices Act, options fraud, as well as fraud in China and its implications. Auditors are equipped with the necessary practical aids, case examples, and skills for identifying situations that call for extended fraud detection procedures.

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Preface
  6. Acknowledgments
  7. Chapter 1: Fraud: An Introduction
    1. FRAUD: WHAT IS IT?
    2. FRAUD: PREVALENCE, IMPACT, AND FORM
    3. FRAUD IN HISTORICAL PERSPECTIVE
    4. TYPES OF FRAUD
    5. ROOT CAUSES OF FRAUD
    6. A HISTORICAL ACCOUNT OF THE AUDITOR'S ROLE
    7. AUDITORS ARE NOT ALONE
    8. DETERRENCE, AUDITING, AND INVESTIGATION
    9. CONCEPTUAL OVERVIEW OF THE FRAUD DETERRENCE CYCLE
    10. FIRST LOOK INSIDE THE FRAUD DETERRENCE CYCLE
    11. AUDITING AND INVESTIGATION
  8. Chapter 2: Psychology of the Fraudster
    1. CALCULATING CRIMINALS
    2. SITUATION-DEPENDENT CRIMINALS
    3. POWER BROKERS
    4. FRAUDSTERS DO NOT INTEND TO HARM
    5. KINDS OF RATIONALIZATION
    6. AUDITORS’ NEED TO UNDERSTAND THE MIND OF THE FRAUDSTER
    7. CONCLUSION
  9. Chapter 3: The Roles of the Auditor and the Forensic Accounting Investigator
    1. THE PATROLMAN AND THE DETECTIVE
    2. COMPLEXITY AND CHANGE
    3. AUDITOR ROLES IN PERSPECTIVE
    4. NOT ALL GOOD PEOPLE
    5. EACH COMPANY IS UNIQUE
    6. ROLE OF COMPANY CULTURE
    7. ESTIMATES
    8. CHOICES
    9. WHAT AUDITORS DO
    10. BEDROCK OF AN EFFECTIVE AUDIT
    11. SPADE
    12. AUDITING STANDARDS TAKE A RISK-BASED APPROACH TO FRAUD
    13. MANAGEMENT OVERRIDE
    14. REGULATORY REACTION TO FRAUD
    15. FINANCIAL BENEFITS OF EFFECTIVE FRAUD MANAGEMENT
    16. CONCLUSION
  10. Chapter 4: Auditor Responsibilities and the Law
    1. APPENDIX: SUMMARY OF PCAOB MATTERS INVOLVING DETECTION OF FRAUD
  11. Chapter 5: When and Why to Call in Forensic Accounting Investigators
    1. TODAY'S AUDITORS ARE NOT FORENSIC ACCOUNTING INVESTIGATORS
    2. AUDITORS ARE NOT AUTHENTICATORS
    3. AUDITORS HAVE LIMITED EXPOSURE TO FRAUD
    4. AUDITORS ARE NOT GUARANTORS
    5. HISTORICALLY, AUDITS MAY HAVE BEEN PREDICTABLE
    6. POTENTIAL TRIGGER POINTS OF FRAUD
    7. RELIANCE ON OTHERS
    8. CONCLUSION
  12. Chapter 6: Internal Audit: The Second Line of Defense
    1. WHAT DO INTERNAL AUDITORS DO?
    2. INTERNAL AUDIT SCOPE OF SERVICES
    3. THE HANDOFF TO FORENSIC ACCOUNTING INVESTIGATORS AND LEGAL COUNSEL
    4. PERCEPTION PROBLEM
    5. COMPLEX CORPORATE FRAUD AND THE INTERNAL AUDIT
    6. WORLDCOM AND THE THORNBURGH REPORT
    7. CASE STUDIES: THE INTERNAL AUDITOR ADDRESSES FRAUD
    8. A TRAGIC CIRCUMSTANCE
    9. REPORTING RELATIONSHIPS: A KEY TO EMPOWERING FRAUD DETECTION
    10. TOMORROW'S INTERNAL AUDITOR, TOMORROW'S MANAGEMENT AND BOARD
  13. Chapter 7: Teaming with Forensic Accounting Investigators
    1. FORENSIC ACCOUNTING INVESTIGATORS’ COOPERATION WITH INTERNAL AUDITORS
    2. FORENSIC ACCOUNTING INVESTIGATORS’ COOPERATION WITH EXTERNAL AUDITORS
    3. OBJECTIVES OF ALL INTERESTED PARTIES
    4. HOW SHOULD THE INVESTIGATION OBJECTIVES BE DEFINED?
    5. WHO SHOULD DIRECT THE INVESTIGATION AND WHY?
    6. READY WHEN NEEDED
    7. WHERE TO FIND SKILLED FORENSIC ACCOUNTING INVESTIGATORS
  14. Chapter 8: Anonymous Communications
    1. TYPICAL CHARACTERISTICS OF ANONYMOUS TIPS
    2. FEDERAL STATUTES RELATED TO ANONYMOUS REPORTING AND WHISTLE-BLOWER PROTECTIONS
    3. RECEIPT OF AN ANONYMOUS COMMUNICATION
    4. INITIAL UNDERSTANDING OF ALLEGATIONS
    5. DETERMINE WHETHER ANY ALLEGATION REQUIRES IMMEDIATE REMEDIAL ACTION
    6. DEVELOPMENT AND IMPLEMENTATION OF THE INVESTIGATIVE STRATEGY
    7. DISCLOSURE DECISIONS
    8. PRIORITIZE THE ALLEGATIONS
    9. INTERVIEWING EMPLOYEES
    10. FOLLOW-UP TIP
    11. CONCLUSION
  15. Chapter 9: Personal Privacy and Public Disclosure
    1. INTRODUCTION
    2. DATA PRIVACY: PROVIDING CONTEXT
    3. DATA PRIVACY IN THE UNITED STATES
    4. DATA PRIVACY IN THE EUROPEAN UNION
    5. NAVIGATING THE LEGAL DIFFERENCES BETWEEN THE UNITED STATES AND THE EUROPEAN UNION
    6. ELSEWHERE AROUND THE GLOBE
    7. PUBLIC DISCLOSURE
    8. CONCLUSION
  16. Chapter 10: Building a Case: Gathering and Documenting Evidence
    1. CRITICAL STEPS IN GATHERING EVIDENCE
    2. WHOSE EVIDENCE IS IT?
    3. EVIDENCE CREATED BY THE FORENSIC ACCOUNTING INVESTIGATOR
    4. WHAT EVIDENCE SHOULD BE GATHERED?
    5. IMPORTANT CONSIDERATIONS REGARDING DOCUMENTS AND WORKING PAPERS
    6. CONCLUSION
  17. Chapter 11: Independence, Objectivity, Skepticism
    1. ACCOUNTANT'S INDEPENDENCE
    2. SEC FINAL RULES FOR STRENGTHENING AUDITOR INDEPENDENCE
    3. SEC REGULATION OF FORENSIC ACCOUNTING SERVICES
    4. CONSULTING VERSUS ATTEST SERVICES
    5. INTEGRITY AND OBJECTIVITY
    6. PROFESSIONAL SKEPTICISM
    7. TRUST BUT VERIFY: A CASE STUDY
    8. LOOSE-THREAD THEORY OF AUDITING
    9. FURTHER THOUGHTS ON THE LOOSE-THREAD THEORY
  18. Chapter 12: Potential Missteps: Considerations When Fraud Is Suspected
    1. CONFRONTING SUSPECTS
    2. DISMISSING THE TARGET
    3. ASSUMPTIONS
    4. THE SMALL STUFF COULD BE IMPORTANT
    5. MATERIALITY: MORE ON A KEY TOPIC
    6. ADDRESSING ALLEGATIONS
    7. THE CASE OF THE CENTRAL AMERICAN GENERAL MANAGER
    8. EXERCISING SKEPTICISM
    9. CASE OUTCOMES
  19. Chapter 13: Potential Red Flags and Fraud Detection Techniques
    1. TYPES OF FRAUD REVISITED
    2. FRAUD DETECTION: OVERVIEW
    3. LAYING A FOUNDATION FOR DETECTION
    4. INTERPRETING POTENTIAL RED FLAGS
    5. IMPORTANCE OF PROFESSIONAL SKEPTICISM
    6. REVISITING THE FRAUD TRIANGLE
    7. IDENTIFYING AND EVALUATING RISK FACTORS
    8. INFORMATION GATHERING
    9. ANALYTIC PROCEDURES
    10. ANALYTIC TECHNIQUES
    11. ASSESSING THE POTENTIAL IMPACT OF FRAUD RISK FACTORS
    12. EVALUATING CONTROLS
    13. UNPREDICTABLE AUDIT TESTS
    14. OBSERVATION AND INSPECTION
    15. FINANCIAL STATEMENT FRAUD: DETECTION TECHNIQUES
    16. REVENUE RECOGNITION
    17. CORRUPTION
    18. SUMMARY
  20. Chapter 14: Investigative Techniques
    1. TIMING
    2. COMMUNICATION
    3. EARLY ADMINISTRATIVE MATTERS
    4. PREDICATION
    5. WHAT SHOULD YOU KNOW BEFORE YOU START?
    6. A WORD ABOUT INSURANCE
    7. EXCEPTIONS AND OTHER CONSIDERATIONS
    8. CONSIDERATIONS ON INTERNATIONAL ASSIGNMENTS
    9. ACCOUNTING ISSUES
    10. DATA ANALYSIS
    11. DOCUMENT REVIEW
    12. CONCLUSION
  21. Chapter 15: Corporate Intelligence
    1. DEFINITION OF CORPORATE INTELLIGENCE
    2. EVOLUTION OF CORPORATE INTELLIGENCE
    3. TODAY'S BUSINESS NEED
    4. LEGAL AND REGULATORY DRIVERS OF CORPORATE INTELLIGENCE
    5. COST DRIVERS OF CORPORATE INTELLIGENCE
    6. NEGOTIATION DRIVERS OF CORPORATE INTELLIGENCE
    7. BASIC DEPLOYMENT AND CONSUMPTION OF CORPORATE INTELLIGENCE
    8. CUSTOMARY DATA FIELDS NECESSARY TO FULFILL CORPORATE INTELLIGENCE REMITS
    9. ANALYSIS AND REPORTING OF FINDINGS
    10. COORDINATION AND SELECTION OF MANAGEMENT AND EXTERNAL ADVISORS FOR INTELLIGENCE GATHERING
    11. TIMING OF DEPLOYMENT
    12. LIMITATIONS OF AND INHERENT BARRIERS TO CORPORATE INTELLIGENCE
    13. LEGAL PARAMETERS AND OPERATING CONSTRAINTS VERSUS ENABLING LEGISLATION
    14. ETHICAL DEBATES SURROUNDING CORPORATE INTELLIGENCE
    15. SUMMARY
  22. Chapter 16: The Art of the Interview
    1. DIFFICULTY AND VALUE OF OBTAINING AN ADMISSION
    2. PLANNING FOR THE INTERVIEW
    3. TYPES OF INTERVIEWS
    4. OTHERS MAY WISH TO ATTEND INTERVIEWS
    5. INTERVIEW PROCESS
    6. DOCUMENTING THE INTERVIEW
    7. USE OF SUBTERFUGE
    8. SUMMARY
  23. Chapter 17: Data Mining
    1. DEFINITION AND BENEFITS OF DATA MINING
    2. STRUCTURED VERSUS UNSTRUCTURED DATA
    3. PLANNING
    4. METHODS OF DATA ACQUISITION
    5. STRUCTURED DATA ANALYSIS
    6. UNSTRUCTURED DATA
    7. ADVANCED DATA ANALYSIS TOOLS
    8. CONCLUSION
  24. Chapter 18: Report of Investigation
    1. TYPES OF REPORTS
    2. IMPORTANCE OF ADEQUATE PREPARATION
    3. STANDARDS OF REPORTING
    4. WRITTEN REPORT OF EXPERT WITNESS OPINING FOR THE PLAINTIFF ON A CIVIL FRAUD CLAIM
    5. AFFIDAVITS
    6. INFORMAL REPORTS
    7. GIVING A DEPOSITION
    8. MISTAKES TO AVOID IN REPORTING
    9. WORKING PAPERS
    10. RELATIONSHIP REVIEW
    11. SUBSTANTIVE WORKING PAPERS
    12. EACH WORKING PAPER SHOULD STAND ON ITS OWN
    13. TESTIMONY BINDER
    14. INTERVIEW MEMORANDUMS
  25. Chapter 19: Supporting a Criminal Prosecution
    1. KEY CONSIDERATIONS
    2. REFERRAL CONSIDERATIONS
    3. PLEA AGREEMENTS
    4. FILING A CIVIL LAWSUIT
  26. Chapter 20: Working with Attorneys
    1. IN THE COMPANY OF LAWYERS
    2. CONFIDENTIALITY REQUIREMENTS
    3. FORMING THE INVESTIGATIVE TEAM
    4. DOCUMENTATION
    5. CIVIL LITIGATION
    6. INTERVIEWING
    7. EXTERNAL AUDIT FIRM
    8. WORKING FOR OR INTERACTING WITH LAW ENFORCEMENT OR GOVERNMENT AGENCIES
    9. DISAGREEMENTS WITH COUNSEL
    10. CONCLUSION
  27. Chapter 21: Financial Reporting Fraud and the Capital Markets
    1. TARGETS OF CAPITAL MARKET FRAUD
    2. SECURITIES INVESTMENT MODEL
    3. SOME OBSERVATIONS ON FINANCIAL FRAUD
    4. SUMMARY
  28. Chapter 22: Financial Statement Fraud: Revenue and Receivables
    1. IMPROPER REVENUE RECOGNITION
    2. REVENUE RECOGNITION DETECTION TECHNIQUES
    3. ANALYTICAL PROCEDURES TO IDENTIFY OR EXPLORE POTENTIAL REVENUE RED FLAGS
    4. IMPROPER ALLOCATION OF VALUE IN MULTIPLE-ELEMENT REVENUE ARRANGEMENTS
    5. IMPROPER ACCOUNTING FOR CONSTRUCTION CONTRACTS
    6. RELATED-PARTY TRANSACTIONS
    7. REVENUE AND RECEIVABLE MISAPPROPRIATION
    8. INFLATING THE VALUE OF RECEIVABLES
    9. EXTENDED PROCEDURES
    10. ROUND-TRIPPING
    11. IMPROPERLY HOLDING OPEN THE BOOKS
    12. CONSIGNMENTS AND DEMONSTRATION GOODS
    13. SUMMARY
  29. Chapter 23: Financial Statement Fraud: Other Schemes and Misappropriations
    1. ASSET MISSTATEMENTS
    2. UNDERSTATEMENT OF LIABILITIES AND EXPENSES
    3. BACKDATING SHARE OPTIONS
    4. OFF-BALANCE-SHEET TRANSACTIONS
    5. TWO BASIC ACCOUNTING MODELS
    6. COOKIE JAR RESERVES
    7. IMPROPER AND INADEQUATE DISCLOSURES
    8. MATERIALITY
    9. DISBURSEMENT SCHEMES
    10. INVOICE SCHEMES
    11. CHECK TAMPERING
    12. EXPENSE REIMBURSEMENT SCHEMES
    13. PAYROLL SCHEMES
    14. FRAUD IN AN ECONOMIC DOWNTURN
    15. UNAUTHORIZED TRADING
    16. MORTGAGE FRAUD
  30. Chapter 24: Ponzi Schemes
    1. PONZI SCHEME ORIGIN AND DEVELOPMENT
    2. RECENT SPOTLIGHTS
    3. INSIGHTS INTO PONZI SCHEMES: PASSING TREND OR LASTING REALITY?
    4. ACCOUNTANT'S CHALLENGES
    5. REGULATORY BODIES AND TASK FORCES
    6. BANKRUPTCY IMPLICATIONS
    7. SUMMARY
  31. Chapter 25: Money Laundering
    1. RELATIONSHIP BETWEEN FRAUD AND MONEY LAUNDERING
    2. COUNTER-TERRORIST FINANCING
    3. VARYING IMPACT OF MONEY LAUNDERING ON COMPANIES
    4. THE FIVE-POINT PROGRAM FOR AML-REGULATED BUSINESSES
    5. IMPACT OF MONEY LAUNDERING ON FINANCIAL STATEMENTS
    6. AML AND FORENSIC ACCOUNTING INVESTIGATION
    7. LEGAL ARRANGEMENTS LENDING THEMSELVES TO ANONYMITY
    8. AUDITING AND MONEY LAUNDERING
    9. RELATIONSHIP BETWEEN FRAUD INVESTIGATION AND AML
  32. Chapter 26: Foreign Corrupt Practices Act
    1. BACKGROUND
    2. RECENT ENFORCEMENT TRENDS
    3. U.K. BRIBERY ACT 2010
    4. THE ROLE OF THE FORENSIC ACCOUNTANT
    5. RED FLAGS
    6. REPORTING
    7. CONCLUSION
  33. Chapter 27: Construction Projects
    1. THE NATURE OF THE CONSTRUCTION INDUSTRY
    2. CONTRACT PRICING STRATEGY
    3. STANDARD FORM CONTRACTS
    4. ISSUES IN ANALYSIS
    5. CHANGE ORDERS
    6. FINANCIAL DAMAGES
    7. UNDERBID
    8. INFLATION
    9. ANALYSIS OF CLAIMS
    10. SUMMARY
  34. Chapter 28: Contract Compliance
    1. EFFECTIVE INTEGRATED INTERNAL AND EXTERNAL CONTRACT COMPLIANCE PROGRAM
    2. THE ROLE OF THE FORENSIC ACCOUNTANT
    3. GOVERNMENT CONTRACTING
    4. RISK AND COMPLIANCE
    5. RECOVERY
    6. CRISIS MANAGEMENT AND LITIGATION SUPPORT
  35. Chapter 29: Other Dimensions of Forensic Accounting
    1. ENVIRONMENTAL ISSUES
    2. INTELLECTUAL PROPERTY
    3. INSURANCE AND BUSINESS INTERRUPTION
    4. MARITAL DISSOLUTION
    5. SHAREHOLDER LITIGATION
    6. BUSINESS VALUATION
    7. BUSINESS COMBINATIONS
    8. CYBERCRIME
  36. Chapter 30: Corporate Remediation
    1. WHAT IS REMEDIATION?
    2. WHAT IS DRIVING CORPORATE REMEDIATION?
    3. WHY IS REMEDIATION NECESSARY?
    4. HOW TO REMEDIATE
    5. ROLE OF THE FORENSIC ACCOUNTANT
    6. RECENT CASES
    7. REMEDIATION GOING FORWARD
  37. Index