FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Today’s Topics n Fighting Fraud n Fraud prevention n Early detection n Fraud investigations n Legal intervention n Preventing Fraud n The 13 Shenanigans

Fighting Fraud FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Fraud Prevention n Culture of honesty and integrity n Manage by example n Hire the right people n Communicate expectations n Positive work environment n Proper handling of fraud n Enterprise risk management n Identify risks-likelihood and impact n Implementing controls n Widespread monitoring n Effective audit function

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Fraud Detection n By chance n By intent-new trend

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Fraud Investigation n Predication: circumstances that lead to past, present or future fraud n Using the evidence square n Testimonial evidence n Documentary evidence n Physical evidence n Personal observation n Using a variation of the fraud triangle n Investigation of theft n Investigation of concealment n Investigation of conversion n Direct inquiry

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Investigation Process n Establish truth n Use experienced investigators n Guard hypotheses n Prudent communication n Independent corroboration of information n Avoidance of questionable techniques n Fair and objective reporting

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Legal Action n None n More than 50% n Civil n Good for non employees n Criminal n Restitution and jail time n Harder to convict n Higher degree of evidence

Preventing Fraud FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Creating the Culture n Not everyone is honest n Desperate people do desperate things! n Four ways to establish the culture n Hire honest people and train them n Cultivate a positive work environment n Spread a relevant and understandable code of ethics n Provide employee assistance programs

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Hire and Train Honest People n ! (honest, swing, dishonest) n Privacy laws create problems n Resume fraud n Reinforce company policy n If it is to be “no tolerance”; make it no tolerance

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Positive Work Environment n Happy employees usually won’t rip you off! n “I don’t get mad, I get even” mentality n Note the list in the text.

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Code of Ethics n Make it relevant and understandable n Emphasize who gets hurt n Promote open discussion

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Employee Assistance Programs n We are all human n We can all use help n 6:1 return ratio for EAPs n Combine with your Management by Objectives (MBO) program n Private MBOs

The 13 Shenanigans FORENSIC ACCOUNTING - MSA 220 I – Spring 2014

Howard Schilit’s Financial Shenanigans  3 rd Edition published in 2010  Accounting gimmicks in financial reports  Schilit: president of the Financial Shenanigans Detection Group, LLC  International expert on financial fraud 15

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Three Families—13 Shenanigans  The categories  Earnings manipulation shenanigans  Cash flow shenanigans  Key metrics shenanigans 16

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Earnings Manipulation Shenanigans 1.Premature recognition of revenue 2.Recognition of bogus revenue 3.One time items masked as recurring items 4.Deferral of expenses 5.Hiding expenses 6.Shifting revenue into the future 7.Shifting expenses into the present 17

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Cash Flow Shenanigans 8. Shifts to operating cash increases 9. Shifts to investing cash decreases 10. Misuse of mergers 11. Unsustainable generation of cash flow 18

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Key Metrics Shenanigans 12. Overstating performance metrics 13. Distorting performance metrics 19

FORENSIC ACCOUNTING - MSA 220 I – Spring 2014 Transparency is the Key  Are the #’s telling the story or making the story?  Is the company managing the business or managing the #’s?  “What is, is?” versus “What is. Is!” 20