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FORENSIC ACCOUNTING 1 “You Can’t Always Get What You Want…” Forensic Accounting: Issues and Implications A N D E R S M I N K L E R & D I E H L LLP Presented to: Accounting 614 – Seminar - Accounting and Society St. Louis University April 6, 2010 Thomas E. Hilton, MS, CPA/ABV/CFF, ASA, CVA Anders Minkler & Diehl LLP St. Louis, MO 63101 thilton@amdcpa.com © 2009
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FORENSIC ACCOUNTING 2 Forensic Accountant “ An accountant who performs an orderly analysis, investigation, inquiry, test, inspection, or examination in an attempt to obtain the truth and develop an expert opinion.” - Forensic Examiner May/June 2001 © 2009
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FORENSIC ACCOUNTING Definition of Forensic Accounting The use of accounting for legal purposes 3
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FORENSIC ACCOUNTING 4 Forensic accounting services are non-attest services that involve the application of special skills in accounting, auditing, finance, quantitative methods and certain areas of the law, and research and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings, and consist of : → Litigation services → Investigative services Source: AICPA Interpretation 101-3 Definition of Forensic Accounting © 2009
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FORENSIC ACCOUNTING Financial Audit A sampling activity that tests the system of internal controls rather than the detail. Forensic Audit An analysis of the detail of a specific aspect of the accounting records to detect and explain observed aberrations. 5
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FORENSIC ACCOUNTING 6 Forensic Skill Sets © 2009
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FORENSIC ACCOUNTING 7 Fundamental Forensic Knowledge Basic civil and criminal law Federal and State Rules of Evidence Federal and State Rules of Civil Procedure Basics of alternative dispute resolution, negotiation, arbitration and mediation © 2009
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FORENSIC ACCOUNTING 8 Fundamental Forensic Knowledge Interviewing Research Written and oral reporting © 2009
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FORENSIC ACCOUNTING 9 Specialized Forensic Knowledge Asset tracing Bankruptcy and Insolvency Computer forensics and data mining Economic damages © 2009
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FORENSIC ACCOUNTING 10 Specialized Forensic Knowledge Valuation Fraud investigations Family Law Shareholder disputes © 2009
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FORENSIC ACCOUNTING 11 Certified in Financial Forensics (CFF) © 2009
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FORENSIC ACCOUNTING 12 CPA Core Skills Asset Tracing Computer Forensics and Data Mining Valuation Economic Damages Fraud Investigations Shareholder Disputes Fundamental Forensic Knowledge Specialized Forensic Knowledge Bankruptcy & Insolvency Family Law © 2009
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FORENSIC ACCOUNTING 13 Evidence © 2009
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FORENSIC ACCOUNTING 14 Evidence is anything that can cause another person to believe that a fact or proposition is true or false © 2009
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FORENSIC ACCOUNTING 15 Rule 702 - Federal Rules of Evidence “If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise.” (Emphasis added) Role of Forensic Accountant © 2009
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FORENSIC ACCOUNTING 16 Types of Evidence Direct Circumstantial Real Documentary Testimonial © 2009
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FORENSIC ACCOUNTING 17 David Duncan Arthur Andersen Houston, TX “If it’s destroyed in the course of normal policy and litigation is filed the next day, that’s great.. we’ve followed our policy and whatever there was that might have been of interest to somebody is gone and irretrievable.” © 2009
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FORENSIC ACCOUNTING 18 Walter Van de Vijer Royal Dutch Group April 2004 “I am sick and tired of lying about the extent of our reserve issues and the downward revisions that need to be done because of far too aggressive projections.” © 2009
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FORENSIC ACCOUNTING 19 Business Damage Claims © 2009
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FORENSIC ACCOUNTING 20 Harmful act has occurred Harmful act has reduced the plaintiff’s earnings or stream of economic value Principle of economic equivalence Common Elements of Business Damage Claims © 2009
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FORENSIC ACCOUNTING 21 Lost Profits vs. Loss of Business Value Destruction of Business Temporary Impairment Slow Death Loss of Business Value: © 2009
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FORENSIC ACCOUNTING 22 Loss of Business Value Destruction of Business: $2,000,000 $1,600,000 $1,200,000 $800,000 $400,000 $0 12345678910 Profits Expected Profits Actual Profits Lost Profits © 2009
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FORENSIC ACCOUNTING 23 Lost Profits Temporary Impairment: $1,600,000 $1,200,000 $800,000 $400,000 $0 1234567 Profits Expected Profits Actual Profits Lost Profits © 2009
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FORENSIC ACCOUNTING 24 $2,000,000 $1,600,000 $1,200,000 $800,000 $400,000 $0 12345678910 Profits Expected Profits Actual Profits Lost Profits vs. Loss of Business Value Slow Death Scenario: Lost Profits © 2009
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FORENSIC ACCOUNTING 25 Fraud © 2009
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FORENSIC ACCOUNTING 26 Types of Irregularities Financial Irregularities Errors Fraud © 2009
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FORENSIC ACCOUNTING 27 Conditions Generally Present When Fraud Occurs Incentive/Pressure Opportunity Attitude/Rationalization Statement on Auditing Standards (SAS) No. 99 Consideration of Fraud in a Financial Statement Audit © 2009
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FORENSIC ACCOUNTING 28 The Fraud Triangle Source: SAS 99 Opportunity Circumstances that allow a misrepresentation to occur. Attitude / Rationalization A frame of mind that justifies the misrepresentation. Incentive / Pressure A reason to misrepresent.
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FORENSIC ACCOUNTING 29 The Fraud Diamond Source: December 2004/The CPA Journal Incentive Capability Opportunity Rationalization
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FORENSIC ACCOUNTING The Components of Capability Position/Function Knowledge Confidence/Ego Coercion Skills Effective Lying Immunity to Stress Source: Wolfe & Hermanson The CPA Journal December, 2004 30
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FORENSIC ACCOUNTING Ethical Implications Character: Constellation of a person’s virtues and vices 31 © 2009
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FORENSIC ACCOUNTING Ethical Implications Ethics Social Responsibility Moral Judgment 32 © 2009
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FORENSIC ACCOUNTING Ethical Implications Fundamental Principles –Dignity of every human person –Common Good –Subsidiarity 33 © 2009
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FORENSIC ACCOUNTING Ethical Implications Michael Novak “The Spirit of Democratic Capitalism” –Capitalism is the one economic system that lifts the greatest numbers out of poverty –Capitalism is itself not selfish, exploitive or unequal –Capitalism cannot exist in a void – it requires an underlying moral edifice – a knowledge of right and wrong 34 © 2009
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FORENSIC ACCOUNTING 35 Thank you for your attention!
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