Advanced Forensic Accounting AICPA Practice Aid for Forensic Accountants, Reports and Other Comments about the “First Step” and Evidence Max Liphart

Advanced Forensic Accounting My Perspectives of: The AICPA Practice Aid for Forensic Accountants Types of Forensic Accounting Reports Joseph T. Wells comments on “The First Step” Comments on Evidence : The Evidentiary Nature of Accounting Data by D Larry Crumbley

Advanced Forensic Accounting The AICPA Practice Aid 10-1 for Forensic Accountant's

AICPA - Practice Aid 10 – 1 Some Background The intent of this practice aid is to provide the forensic accounting practitioner with non-authoritative guidance when serving as an expert witness or consultant for litigation and dispute service engagements. This practice aid supersedes AICPA Consulting Services Practice Aid 93-4, Providing Litigation Services. Practice Aids are designed to serve as educational and reference material on technical issues and are not intended to serve as authoritative guidance.  Members should exercise independent, professional judgment in the implementation and execution of these services.  My Perspective: (Often engagements can be so diverse that a standard “cookie cutter rule” won’t work therefore guidance is offered by the AICPA.)

AICPA - Practice Aid 10 – 1 Forensic Accounting Services Defined Forensic accounting services include dispute resolution, litigation support, bankruptcy support, and fraud and special investigations, among many other services. Forensic accounting services utilize the practitioner’s specialized accounting, auditing, economic, tax, and other skills to perform a number of consulting activities. The provision of forensic accounting services often requires the practitioner to serve as an expert or fact witness, depending on the assignment. My Perspective: (I always assume my work will lead to trial presentation.)

AICPA - Practice Aid 10 – 1 CPA Expert Witness Services A CPA is designated to render an opinion before a trier of fact as to the matter(s) in dispute. Once a CPA takes the stand as an expert witness, his or her qualifications and work product are exposed to intense scrutiny. If a consultant becomes an expert witness, OFTEN (my experience) , all work, including the initial work performed as a consultant, is subject to discovery.

Types of Forensic Accounting Reports Types of Reports Expert Witness Report Consulting Services Report Fraud Examination Report

Expert Witness Report Expert Report Report Disclosures per the Federal Rules of Civil Procedure follows: Basis for the expert witness opinions (required). In combination with work performed, a description of the fundamental principles used completes the requirement to report the basis and reasons for the expert witness’s opinions. Opinions of the expert witness (required). The practitioner must report the opinions to be expressed by testimony at the trial. Data or other information considered (required). Disclose materials considered by the practitioner in reaching opinions and preparing the expert report. This includes documents and data produced by the parties during the litigation, as well as research and other materials independently prepared by the practitioner. Exhibits to be used by the expert witness (required). The expert witness must include exhibits expected to be used during the trial to summarize, support, or explain the expert witness’s opinions. Qualifications of the expert witness (required). Describe the expert witness’s scientific, technical, or other specialized knowledge believed to be able to assist the trier of fact to understand the evidence or determine a fact in issue.

Consulting Services Report First a Definition by the AICPA Consulting Services. A CPA provides advice about the facts, issues, and strategy of a matter. The consultant does not testify as an expert witness before a trier of fact unless the consultant’s role subsequently changes to that of an expert witness

AICPA - Sample Report Format for Consulting Services Consulting Services Report I. INTRODUCTION……………………………………………………………………….1 Why we were retained (example: perform a proof of cash) A statement: Procedures do not constitute an audit II. OVERVIEW..........................................................................................2 Brief Company Background III. PROCEDURES PERFORMED……………………………………………………….3 Objectives of Analyses (account for all funds received and disbursed) Scope of Analysis (for period x to y) IV. OBSERVATIONS (FINDINGS)…………………………………………………..…4 Certain funds were not properly accounted for (theft of cash) Possible additional work suggested (Internal Control is weak) Scope Limitations (not allowed to see some stuff we want) V. EXHIBITS………………………………………………………….….……………...5

ACFE’s Sample Fraud Examination Report Section I. Background The background section should generally be about two paragraphs. It should state very succinctly why the fraud examination was conducted (e.g., an anonymous tip was received, an anomaly was discovered during an audit, money or property was missing). You may also state who called for the examination and who assembled the examination team.

ACFE’s Sample Fraud Examination Report Section II. Executive Summary For a simple fraud examination, the executive summary should be no more than four or five paragraphs. For a more complex case, the summary may reach a page in length. In this section, you should also summarize what actions you performed during the fraud examination, such as reviewing documents, interviewing witnesses, conducting analyses or tests, etc. It provides the reader with an overview of what you did during the examination process. At the end of this section, you should summarize the outcome of the examination. For example, “$50,000 in checks was deposited into an account owned by Bob Wilson. When confronted with this information, Wilson stated that he had only borrowed the money and meant to pay it back.”

ACFE’s Sample Fraud Examination Report Section III. Scope This section should consist of just one paragraph explaining what the scope of the fraud examination was. For example, “Determine whether or not inventory was misappropriated from the warehouse,” or “Determine why money is missing from the bank account.” (during relevant time frame).

ACFE’s Sample Fraud Examination Report Section IV. Approach This section gives a brief description of the following items: Fraud examination team members Procedures (generally what documents were reviewed or what tests were conducted) Individuals interviewed It provides a handy reference as to who was involved in the fraud examination, what the team reviewed, what tests or analyses were conducted, and what individuals the team interviewed.

ACFE’s Sample Fraud Examination Report Section V. Findings This section contains the details of the fraud examination. It will generally consist of several pages. In this section you should describe what tasks you performed and what you found. Provide enough detail so that the reader understands what occurred, but not so much detail that the reader begins to lose interest or becomes bogged down in the details. The reader wants to know how many invoices were forged, who was involved, how did they do it, what proof do you have, etc. If the findings section is long, you may wish to use subheadings for particular topics or individuals to make it easier for the reader to stay organized. The information can be presented either chronologically or by topic — whatever makes it easier for the reader to follow.

ACFE’s Sample Fraud Examination Report Section VI. Summary This section should be one or two paragraphs and should succinctly summarize the results of the fraud examination. It should be similar to the outcome stated at the end of the Executive Summary section.

ACFE’s Sample Fraud Examination Report Section VII. Recommendations This section is optional. There may be instances where you wish to discuss remedial measures or specific recommendations in a separate document. If you do wish to include this section, you should state what follow-up action is necessary or recommended, including remedial measures such as a review of internal controls, introduction of a hotline, increased security, etc.

Joseph T. Wells Chairman of the ACFE and “The First Step”, Journal of Accountancy, 2003 Analyze the Data ( Max’s comment: Make sure you finish this task) The first step is familiar ground for accountants: analyzing financial information gleaned from the books and records. In a vendor fraud scheme, you typically would gather documents reflecting all of the business the company did with the new vendor: invoices, purchase orders, vendor files, shipping and receiving reports and canceled checks, for example. Then you would closely examine these data, conduct ratio analyses, vouch and trace transactions and perform other tests to look for anomalies.

D. Larry Crumbley - Evidence FORENSIC ACCOUNTING: THE EVIDENTIARY NATURE OF ACCOUNTING DATA (2008) D. Larry Crumbley

D. Larry Crumbley - Evidence Forensic accounting is focused upon the identification, interpretation, and communication of the evidence of economic transactions and reporting events. The ultimate goal of a forensic accountant is to communicate an analysis of this evidence, structured within some legal framework, so that it is understood and accepted as fact with "scientific certainty;" that is, to present "a legally accurate accounting."

D. Larry Crumbley - Evidence In short, forensic accountants are employed to seek, interpret, and communicate transactional and reporting event evidence in an objective, legally sustainable fashion. Other engagements known as a peremptory forensic accounting engagement, should not be confused with the more common review of internal controls or the like. Forensic accounting, whether peremptory or after-the-fact engagements, is applied to the evidence of first order activities, not secondary systems of controls.

Advanced Forensic Accounting END