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Financial Fraud Prevention and Detection: Governance and Effective Practices

Book Description

Step-by-step guidance for board members and executives on preventing and detecting accounting fraud

In the wake of highly publicized allegations of accounting irregularities and fraudulent financial reporting that are shaking up today's corporate community, Financial Fraud Prevention and Detection provides a step-by-step guide to how these crises can envelop a company and how to prevent them from happening in the first place. It is written for almost everyone involved: outside directors, audit committee members, senior executives, CFOs, CPAs, in-house lawyers, and outside law firms.

  • Provides a blueprint for Fraud Prevention and Detection for corporate executives

  • Presents step-by-step guidance to corporate boards and C-suite executives on managing the threat of accounting fraud

  • Prepares directors and executives for the possibility of accounting irregularities

  • Answers the question of how accounting fraud starts—and grows

With solid strategies for prevention of accounting fraud as well as a process to follow when fraud has been discovered, Financial Fraud Prevention and Detection vividly explores the corporate environment that causes fraud, how it spreads, the kind of crises it can create for a company, and the best ways to deal with it.

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Dedication
  6. Epigraph
  7. Preface
  8. Acknowledgments
  9. List of Exhibits
  10. Part One: Origin
    1. Chapter One: The Origin of Financial Fraud
      1. WHAT IS FINANCIAL FRAUD?
      2. HOW DOES FINANCIAL FRAUD COME ABOUT?
      3. ISOLATING THE ELEMENTS
      4. THE DANGER OF “MANAGED EARNINGS”
      5. THE AUDIT COMMITTEE
      6. INTERNAL AUDIT
      7. THE OUTSIDE AUDITOR
      8. THE FRAUD SURFACES
    2. Chapter Two: The Path to Corruption
      1. LOOKING AT THE NUMBERS
      2. LOOKING AT THE ENVIRONMENT
      3. THE CHIEF EXECUTIVE OFFICER
      4. THE CHIEF FINANCIAL OFFICER
      5. THE EFFECTIVENESS OF THE AUDIT COMMITTEE
      6. A NEW INDUSTRY
      7. AN AGGRESSIVE GROWTH PROGRAM
      8. AN INDUSTRY DOWNTURN
      9. REGULATORY REACTION
  11. Part Two: Prevention
    1. Chapter Three: From Treadway to Sarbanes-Oxley
      1. BEFORE TREADWAY: BLAMING THE AUDITOR
      2. THE TREADWAY COMMISSION
      3. CONSEQUENCES OF THE TREADWAY COMMISSION REPORT
      4. FURTHER DEVELOPMENTS
      5. THE LEVITT INITIATIVES
      6. ENRON
    2. Chapter Four: The Sarbanes-Oxley Act
      1. SIX UNDERLYING THEMES
      2. THE CEO AND CFO
      3. THE AUDIT COMMITTEE
      4. THE OUTSIDE AUDITOR
      5. COMPANY COUNSEL
      6. INVESTMENT BANKERS
      7. DID IT WORK?
    3. Chapter Five: The Audit Committee
      1. THE AUDIT COMMITTEE'S RESPONSIBILITY
      2. CHECKLISTS, CHECKLISTS, CHECKLISTS
      3. AN APPROACH TO AUDIT COMMITTEE OVERSIGHT
      4. THE TONE AT THE TOP
      5. LOGISTICAL CAPABILITY
      6. IMMEDIATE DETECTION OF FINANCIAL MISREPORTING
      7. A PROPERLY CONFIGURED AUDIT COMMITTEE
      8. INDEPENDENCE
      9. FINANCIAL SOPHISTICATION
      10. WILLINGNESS TO WORK
      11. THE BIGGEST CHALLENGE: INFORMATION
      12. GETTING INFORMATION FROM SENIOR MANAGEMENT
      13. GETTING INFORMATION FROM THE OUTSIDE AUDITOR
      14. GETTING INFORMATION FROM INTERNAL AUDIT
      15. MORE ON THE TONE AT THE TOP
      16. MINIMIZE RELIANCE ON PAPER
      17. LEARN THE BUSINESS
      18. MEET WITH OTHERS AND ALONE
      19. MEET WHEN NECESSARY
      20. USE GOOD JUDGMENT
    4. Chapter Six: In the Crosshairs: The Chief Executive Officer
      1. CORPORATE GOVERNANCE PAPERWORK
      2. THE RIGHT CULTURE
      3. GETTING INFORMATION
      4. SIGNS OF CORRUPTION
      5. WHAT'S THE OBJECTIVE?
  12. Part Three: Detection
    1. Chapter Seven: Detection and Its Aftermath
      1. WHISTLEBLOWERS
      2. THE IMMEDIATE CHALLENGE: RELIABLE INFORMATION
      3. ENTER THE AUDIT COMMITTEE
      4. A PRELIMINARY INVESTIGATION
      5. DIGGING DEEPER
      6. ALERTING THE COMPANY'S AUDITOR
      7. SECURING DOCUMENTS
      8. SENIOR MANAGEMENT CULPABILITY
      9. INITIAL DISCLOSURE
      10. INFORM THE SEC?
      11. THE SECURITIES EXCHANGE
      12. COMPANY LENDERS
      13. D&O INSURANCE
      14. CLASS ACTION LITIGATION
      15. NOW FOR A MORE THOROUGH INVESTIGATION
    2. Chapter Eight: Investigating Financial Fraud: Objectives and Approach
      1. AUDIT COMMITTEE OVERSIGHT
      2. AUDIT COMMITTEE COUNSEL AND ACCOUNTANTS
      3. WHAT IS THE AUDIT COMMITTEE LOOKING FOR?
      4. SCOPE OF THE INVESTIGATION
      5. LACK OF SUBPOENA POWER
      6. INDIVIDUAL COUNSEL FOR EXECUTIVE EMPLOYEES
      7. CONDUCTING INTERVIEWS
      8. THE INVESTIGATION REPORT
    3. Chapter Nine: Finding the False Numbers
      1. A DAUNTING TASK
      2. GETTING STARTED
      3. THE GENERAL LEDGER
      4. EMAIL SEARCHES
      5. TERMINATING SENIOR WRONGDOERS
    4. Chapter Ten: Getting a New Audit Report on the Financial Statements
      1. EARLY INVOLVEMENT OF THE AUDITOR
      2. SECURITIES EXCHANGE ACT SECTION 10A
      3. THE IMPACT ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS
      4. THE DIFFERENCE BETWEEN AN AUDIT AND A FORENSIC INVESTIGATION
      5. COORDINATION BETWEEN THE FORENSIC ACCOUNTANTS AND THE OUTSIDE AUDITOR
      6. STRESS BETWEEN THE AUDITOR AND ITS CLIENT
      7. BENEFITS OF CONTINUING THE AUDIT RELATIONSHIP
      8. RESPONSIBILITY FOR RESTATED FINANCIAL STATEMENTS
      9. RESTATEMENT REQUIREMENTS
      10. RESTATEMENTS AND MATERIALITY
      11. THE AUDIT PROCESS
      12. THE AUDITOR'S EVALUATION OF THE AUDIT COMMITTEE'S INVESTIGATION
      13. REPRESENTATIONS TO THE AUDITOR
      14. AUDITOR INDEPENDENCE
    5. Chapter Eleven: The Securities and Exchange Commission
      1. STRUCTURE OF THE SEC
      2. WHETHER TO SELF-REPORT
      3. THE “SEABOARD FACTORS”
      4. HOW TO SELF-REPORT
      5. KEEPING THE INITIATIVE
      6. THE AUDITOR'S WATCHFUL EYE
      7. PRESENTATION TO THE SEC STAFF
      8. POST-INVESTIGATION ACTIONS BY SEC STAFF
      9. A NEGOTIATED RESOLUTION
      10. THE WELLS PROCESS
    6. Chapter Twelve: Criminal Investigations
      1. WHETHER TO COMMENCE A CRIMINAL INVESTIGATION
      2. THE INITIAL GRAND JURY PHASE
      3. PRODUCING DOCUMENTS TO THE PROSECUTOR
      4. INITIAL CONTACTS WITH COUNSEL FOR INDIVIDUAL EMPLOYEES
      5. THE TESTIMONIAL GRAND JURY PHASE
      6. PROSECUTORIAL STATUS AND IMMUNITY
      7. CORPORATE CRIMINAL LIABILITY FOR EMPLOYEE ACTIONS
      8. CORPORATE INDEMNIFICATION OF COUNSEL FEES
      9. SEPARATE COUNSEL FOR TARGETS AND SUBJECTS
      10. PARALLEL PROCEEDINGS
      11. PLEA DISCUSSIONS AND SENTENCING
      12. DISCUSSIONS OVER INDICTMENT
    7. Chapter Thirteen: Class Action Lawsuits
      1. WHAT IS A CLASS ACTION?
      2. COMMENCEMENT OF CLASS ACTION LITIGATION
      3. POTENTIAL DEFENDANTS
      4. SORTING OUT PARTIES AND COUNSEL
      5. THE CONSOLIDATED COMPLAINT
      6. LIABILITY IMPLICATIONS OF THE INITIAL PRESS RELEASE
      7. MOTION TO DISMISS
      8. PROSPECTS OF AN EARLY SETTLEMENT
      9. THE PROCESS OF DISCOVERY
      10. THE PRODUCTION OF DOCUMENTS
      11. ADDITION OF THE OUTSIDE AUDITOR
      12. THE TAKING OF DEPOSITIONS
      13. DYNAMICS FAVORING SETTLEMENT
      14. SECURITIES LAW DAMAGES
      15. ULTIMATELY A SETTLEMENT
  13. Part Four: The Future
    1. Chapter Fourteen: The Future of Financial Reporting
      1. A REAL-TIME WORLD
      2. A 1930S FINANCIAL REPORTING SYSTEM
      3. SO ENTER THE ANALYSTS
      4. A CONSEQUENCE IS FINANCIAL FRAUD
      5. OTHER CAPITAL MARKET INEFFICIENCIES
      6. THERE'S ANOTHER WAY
  14. About the Author
  15. Index