Instructor: Victor E. Hartman, JD, CPA/CFF, CFE Forensic Accounting: ACCT 8710 Instructor: Victor E. Hartman, JD, CPA/CFF, CFE Time: 7:15 p.m. – 9:45 p.m. Location: Aderhold Learning Center, Room 223 Phone: (404) 574-0807 E-Mail: vic@hartmanfirm.com Content: HartmanFirm.com Twitter: @VicHartman Office Hours: 1 Hour Before Class, or By Appt. Text: Forensic and Investigative Accounting, 7th or 8th Edition (Crumbley)

Definition: Interview Course Objectives Definition: Interview Describe the Field & Practice of Forensic Accounting. Explain relevant guidance including law, accounting, investigative techniques, professional standards, non-authoritative guidance, and credentials. Describe the categories of fraud. Explain courtroom procedures and litigation support.

Definition: Interview Course Objectives Definition: Interview Describe the importance of fraud, and financial, digital and behavioral forensics to forensic and investigative accounting. Provide an overview of the field of business evaluations and asset appraisals. Explain the parts of an interview and interrogation and engage in a role-play exercise. Prepare a paper and oral presentation of a complex fraud. Role playing exercise that demonstrates forensic issues that arise during a corporate governance failure.

Definition: Interview Grade Composition Definition: Interview Class Participation: 5% Interview Exercise: 10% Paper & Presentation: 25% (20% Paper & 5% Presentation) Mid-term Exam: 25% SynTech Skit: 10% (5% Paper & 5% Role Playing) Final Exam: 25%

Vic Hartman J.D., CPA/CFF, CFE The Hartman Firm, LLC Atlanta, Georgia Chapter 1: Fraudulent Financial Reporting Vic Hartman J.D., CPA/CFF, CFE The Hartman Firm, LLC Atlanta, Georgia

Definition: Interview What Is Forensic Accounting Definition: Interview Forensic: Latin – Forum; public place; courtroom. Accounting: Ask any MAcc student! Nevertheless, the term “accounting” is often used in a broader sense. Financial Issues Business issues Issues where those trained in accounting adds value.

Definition: Interview Forensic Accounting v. Fraud Auditing Definition: Interview Fraud Auditor: An accountant especially skilled in auditing who is generally engaged in auditing with a view toward fraud discovery, documentation, and prevention.

Definition: Interview Forensic Accounting v. Fraud Auditing Definition: Interview Forensic Accountant: A forensic accountant may take on fraud auditing engagements and may be a fraud auditor, but he or she will also use other accounting, consulting, and legal skills in broader engagements. In addition to accounting skills, he or she will need a working knowledge of the legal system and excellent communication skills to carry out expert testimony in the courtroom and to aid in other litigation support engagements.

Definition: Interview Forensic Accounting Defined Definition: Interview Time: Forensic accounting focuses on the past, although it may do so in order to look forward. Purpose: Forensic accounting is performed for a specific legal forum or in anticipation of presentation before a legal forum. Peremptory: Forensic accountants may be employed in a wide variety of risk management engagements within business enterprise as a matter of right, without the necessity of allegations (e.g., proactive).

Definition: Interview Forensic Accounting Defined Definition: Interview Forensic accounting is the action of identifying, recording, settling, extracting, sorting, reporting, and verifying past financial data or other accounting activities for settling current or prospective legal disputes or using such past financial data for projecting future financial data to settle legal disputes.

Definition: Interview Types of Forensic Issues Definition: Interview Fraud Analysis Valuation Business Valuations Intellectual Property Marital Dissolution Internal Investigations Tax audits and/or valuation issues Civil Disputes Criminal Charges Cybercrime

Definition: Interview Forensic Posture Definition: Interview Board of Directors Presentation Management Consulting Regulatory Agencies Administrative Hearings Litigation Civil Depositions Mediations Trial Criminal Grand Jury

Definition: Interview History of Forensic Accounting Definition: Interview Before financials were audited by outside experts, the courts often handled challenges and brought in experts to give testimony. Practice of forensic accounting was common even before independent accountants were asked to certify financial statements in auditing engagements.

Definition: Interview AICPA Practice Aid Definition: Interview In 1986, the AICPA broke forensic accounting into two broad areas: investigative accounting and litigation support. The types of litigation services were further broken down in Practice Aid 7, listing: damages antitrust analyses accounting valuation general consulting analyses

Definition: Interview Panel on Audit Effectiveness* Definition: Interview In 1998, the Public Oversight Board appointed the Panel on Audit Effectiveness to review and evaluate how independent audits of the financial statements of public companies are performed and to assess whether recent trends in audit practices serve the public interest. *An independent private sector body. The Panel on Audit Effectiveness was requested by the SEC Chairman at that time.

Definition: Interview Panel on Audit Effectiveness Definition: Interview In 2000, the Panel issues a 200-page report, Report and Recommendations, which includes a recommendation that auditors should perform forensic-type procedures during every audit to enhance the prospects of detecting material financial statement fraud.

Definition: Interview Corporate Fraud Crisis Definition: Interview Arthur Anderson: October 2001: Began Shredding Documents June 2002: Convicted Enron: December 2001, Filed Bankruptcy January 2001, FBI Investigation Began Worldcom: July 2002, FBI Investigation Began 2002-2003: Waive of corporate frauds came to light

Definition: Interview Legal and Auditing Standards Definition: Interview Legal: Sarbanes Oxley Legislation passed July 30, 2002 Auditing Standards: Consideration of Fraud in a Financial Statement Audit: Private Companies: December 2002: SAS 99 / AU 316 Replaced 12/15/12 SAS 122 / AU-C-240 Public Companies: PCAOB initially adopted SAS 99 / AU 316 AS 2401 (effective 12/31/16) Statement on Standards for Consulting Services, No. 1 COSO Federal Sentencing Guidelines

Definition: Interview COSO Definition: Interview Committee of Sponsoring Organizations Sometimes knows as the “Treadway” Commission Comprised of: American Accounting Association AICPA Financial Executive International The Assoc. of Accountants & Financial Professionals Thought leadership on Internal Controls & Fraud Deterrence.

Definition: Interview Compare & Contrast Definition: Interview Characteristic Audit Fraud Examination Forensic Accounting; Financial Forensics Time perspective: Historical Future and historical Primary focus: Periodic Reactive Proactive and ongoing Investigation scope: Narrow Broad ranging Main work product is: Audit opinion Fraud case report Forensic audit report Main responsibility to: Company and public Defrauded party Concerned principal or third party Guidelines are: Rules-based Principles-based; under audit rules, it is rule-based Principles-based Purpose of report: Ensure GAAP is followed Identify perpetrator of fraud Fraud risk assessment and strategic services Professional stance: Non-adversarial Adversarial Adversarial and non-adversarial

Definition: Interview Common White-Collar Crimes Definition: Interview Public Corruption Health Care Fraud Bank Fraud Bankruptcy fraud Corporate/securities fraud Insurance fraud Mass marketing fraud Money laundering Mortgage fraud

Definition: Interview Sarbanes-Oxley Legislation Definition: Interview Title 1 establishes the Public Company Accounting Oversight Board (PCAOB) under the SEC to regulate auditing and to discipline auditors. Title 2 contains a series of rules to ensure that auditors are independent from their clients. For example, neither the primary nor reviewing partner may audit the same client for more than five consecutive years, and the auditor must report all material written communication to the audit committee. Title 3 requires publicly traded companies to have an audit committee, the CEO and CFO must certify their company’s financial statements, and provides rules for the conduct of officers and their attorneys. Title 4 prohibits personal loans and requires certain financial disclosures. Title 5 mandates rules for financial security analysts (i.e., research analysts) to avoid conflicts of interest. Titles 6, among other provisions, allows federal courts the power to bar individuals who violate security laws from participating in penny stocks.

Definition: Interview Sarbanes-Oxley Legislation Definition: Interview Title 7 requires reports and studies on consolidation of accounting firms, credit rating agencies, enforcement actions, and investment banks. Title 8 provides protection for whistleblowers and mandates penalties and fines for certain acts not dischargeable by bankruptcy. For example, failure of an auditor to keep working papers for 5 years* is subject to fines and 10 years in prison, and fine or imprisonment of up to 25 years for anyone knowingly defrauding shareholders of publicly traded companies. A person can receive 20 years in prison and fines for altering, destroying, mutilating, concealing, covering up, falsifying or making a false entry in any record, document, or tangible object. Title 9 increases maximum prison sentences for mail and wire fraud from 5 to 20 years. Willfully and knowingly certifying financial reports not in compliance with the Act is now a criminal offense. Title 10 says that it is the “Sense of the Senate” to require the CEO to sign the corporate tax return. Title 11 provides a possible 20-year prison sentence for anyone altering, destroying, mutilating, or concealing a record, document, or other object (or otherwise impeding) for an official proceeding. *Section 103 = 7 years; Section 801 = 5 years; Rulemaking 7 years Bottom line: 7 years

Definition: Interview SOX Specific Provisions Definition: Interview 301(4) Audit Committee setup hotlines. 302: Corporate responsibility for financial reports (civil certifications). 307: Attorneys required to report up, but not out. 404: Management / External Auditor’s responsibility for internal controls over financial reporting. 409: Real time reporting of material change in financial condition. 806 Whistleblower Protection. 906: Corporate responsibility for financial reports (criminal certifications).

Corruption & Conflicts of Interest

Corruption Government: Laws and regulations Zoning Purchasing products and services Private Sector Methods Conflicts of interest Bribes

Definition: Interview Foreign Corrupt Practices Act (FCPA) Definition: Interview The purpose of the Foreign Corrupt Practices Act (FCPA) of 1977 is to combat corrupt business practices such as bribes and kickbacks. Thus, for more than 30 years these foreign bribery laws in the United States have restricted all U.S. employees, regardless of where the business is conducted.

Definition: Interview FCPA Definition: Interview Two types of offenses: 1. Bribery Provision: Corrupt payments by a U.S. citizen (including corporation) to a foreign official to obtain or retain business. 2. Books & Records Provision: Books and records must accurately reflect the underlying transaction. Adequate Internal Controls

Definition: Interview FCPA Definition: Interview DOJ/FBI Jurisdiction: Exclusive jurisdiction for criminal enforcement Civil enforcement for non-public companies SEC Jurisdiction: SEC registrants only (public companies) Civil enforcement only

Definition: Interview FCPA Definition: Interview Third Party Intermediaries Audit Rights in Contract. Criminal Defenses to Bribery: Facilitation Payment: “routine governmental action” that involves “non-discretionary acts.” Payment is legal in the country where it is paid.

Definition: Interview FCPA: Guidance Definition: Interview DOJ and SEC’s 2012 Resource Guide U.K. Ministry of Justice’s Bribery Act 2010 Resource Guidance OECD’s Good Practice Guidance on Internal Controls, Ethics, and Compliance ISO 37001 is an “international good practice” for managing bribery risk

What are the root causes of corruption?

Predatory vs. Accidental Social compact of reciprocity Slippery slope Human Nature Predatory vs. Accidental Social compact of reciprocity Slippery slope Boiling frogs

Questions Vic Hartman J.D., CPA/CFF, CFE The Hartman Firm, LLC Twitter: @vichartman vic@hartmanfirm.com Mobile: (404) 574-0807