1. FORENSIC ACCOUNTING - BA124 - Fall 2009Slide 6-1 Today’s Topics n Inductive Fraud Detection n Financial Statement Analysis and Detection n High Technology Trends n Shenanigan #1

2. FORENSIC ACCOUNTING - BA124 - Fall 2009Slide 6-2 Inductive Methods Broad Analysis n Commercial Data-mining Tools (ACL) n Query and sorting tools n Covers a vast amount of data n Easy to use n Requires a lot of memory n Static in nature n Data  information; false positives n Database Analysis n Analysis of internal data using, for example, Benford’s Law

3. FORENSIC ACCOUNTING - BA124 - Fall 2009Slide 6-3 Benford’s Law n Occurrence of digits in a random number sequence n Series starting with 1’s greater than 2’s; 2’s greater than 3’s etc. n Effective for locating falsified trends

4. FORENSIC ACCOUNTING - BA124 - Fall 2009Slide 6-4 Deductive Methods Narrow Analysis n Five-step process n Know the territory n Know fraud possibilities n Determine the symptoms n Use tools to search for the symptoms n Follow up on the symptoms n Two examples n Bank example n Oil company example

5. FORENSIC ACCOUNTING - BA124 - Fall 2009Slide 6-5 Financial Statement Analysis n Methodology n Trends n Ratios n Horizontal analysis n Vertical analysis n What looks out of the ordinary

6. FORENSIC ACCOUNTING - BA124 - Fall 2009Slide 6-6 High Tech Trends n Artificial intelligence or “fuzzy logic” n Unique associations n Invasion of privacy issues

7. FORENSIC ACCOUNTING - BA124 - Fall 2009Slide 6-7 Shenanigan #1 n Technique #1: n Recording revenue when services remain n Technique #2: n Recording revenue before shipment or acceptance n Technique #3: n Recording revenue when payment is not required n Technique #4: n Selling to an affiliate n Technique #5 n Using quid pro quo (I.e. bartering) n Technique #6: n Grossing up revenue

8. FORENSIC ACCOUNTING - BA124 - Fall 2009Slide 6-8 Revenue Red Flags n Aggressive Rev. Rec. Policies n Rise in unbilled receivables n Rising receivables n Rising allowance for doubtful accounts n Increased returns