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Forensic Accounting and Fraud Investigation for Non-Experts, 3rd Edition by Michael Sheetz, Howard Silverstone, Frank Rudewicz, Stephen Pedneault

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CHAPTER 3

Understanding the Basics of Financial Accounting

Where It All Begins

Clearly we have seen in the previous chapter that despite its increased exposure, better corporate governance, and general increased awareness, financial fraud is not going away. While financial fraud includes the increasing problem of identity theft and other nontraditional crimes, our focus here remains on the use of accounting systems and circumventing controls to achieve financial gain.

No forensic investigation can be undertaken without some knowledge of accounting principles. So much of the media coverage of the recent events involving Enron, WorldCom, Computer Associates, AIG, Tyco, Adelphia, Madoff, and others has focused on manipulation of financial results. The financial crimes perpetrated on smaller companies, as evidenced by the ACFE survey, included fraudulent disbursements, where funds are disbursed through false invoices or forging company checks; skimming, where cash or other payments are stolen before they ever get recorded; and cash larceny, where cash or other payments are stolen after they are recorded. Even if you are not examining a company's books and records yourself, you may well be talking to the people who are, and need to know how an accounting system works in order to understand their language. The purpose of this chapter is to introduce you to some fundamental concepts that will show you how money moves through an organization and how financial transactions should be recorded. ...

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