Forensic Accounting: Key Concepts

Forensic Accounting Definition

• Forensic accounting involves using investigative and analytical skills.
• These skills are used to resolve financial issues while maintaining standards required by courts.
• It is not simply using financial ratios or law enforcement to determine unlawful actions.
• It is also not the sole domain of the Securities and Exchange Commission.

Fraudulent Actions

• Actions involving intentional misleading or omissions of information for personal gain constitute fraud.
• Such actions are not perjury, contempt, or treason.

Juxtaposition Test

• This test involves an auditor comparing documents side by side.
• It is different than the test of impossibility and the test of absurdity.

ACFE Study Findings

• Senior-level management is often found committing the highest value frauds monetarily.
• These are not low-level or mid-level management.

Elements of Fraud

• Key components include the individual knowing the statement is untrue.
• A key component includes an intent to deceive someone
• It includes the victim's reliance on the statement.
• The victim experiencing financial or other harm is also a key element.

Types of Fraud

• E-frauds are known as a specific type of fraud.
• These specifically involve the use of forged emails and websites to defraud users.
• E-frauds are categorized as phishing.

Shot Gunning

• It occurs when a fraudster obtains multiple loans for the same property at the same time.
• The total loan amount exceeds the property's actual value.
• Types of fraud are not phishing, window dressing, or skimming.

Fraud Triangle

• Pressure, opportunity, and rationalization are key aspects of a fraud triangle.
• Creation and commitment are not directly considered elements of the fraud triangle.

Red Flags

• These serve as indications of potential danger or warning signals.
• Red flags are not green, amber, or white flags.

"Too Good to Be True"

• A "too good to be true scenario” is denoted by green flags.
• It is not represented by red, amber, or white flags.

Increased Borrowing

• Significant increases in working capital borrowing as a turnover percentage is a red flag.
• It is not a green, amber, or white flag.

Employee Travel Habits

• An employee who consistently pays for travel out of pocket instead of taking a travel advance is a possible red flag.
• This scenario is denoted by a green flag.

Forensic Auditor Skills

• Forensic auditors must analyze non-verbal cues when interviewing and interrogating suspects.
• Forensic auditors should use these skills in both interviewing and interrogating.

Fraud Model: The Fraud Tree

• The fraud tree is a model categorizing known frauds and lists about 49 different individual fraud schemes.
• The fraud schemes are grouped by categories and sub-categories.
• Fraud square, fraud model, and fraud triangle are different concepts.

Fraud Rationalization

• A fraudster's ability to personally justify dishonest actions is rationalization.
• Rationalization is not pressure or opportunity within the context of fraud.

Banking Sector Frauds

• Appraisal fraud, mortgage fraud, and shot gunning are various types of fraud.
• There are other types of fraud in the banking sector.

Forgery

• It involves altering checks to change the name or amount.
• Forgery is not considered to be phishing, disbursement fraud, or skimming.

Ratio Analysis

• Ratio analysis is an important aspect for forensic auditors.
• There are key aspects to consider, and therefore ratio analysis should be correct.

Three-Dimensional Vision

• Key elements involve are time dimension analysis and space dimension analysis.
• It is not either time dimension analysis or space dimension analysis.

Definition of Fraud

– It is a deliberate act of omission or commission carried out during banking transactions or accounting practices.

• Results in unjust financial gains to the perpetrator, with or without monetary loss to the bank.
• The professional standards, with wrongful impact to the bank comes from regulatory bodies like the RBI not SEBI, ICAI, or ACFE.

Embezzlement Techniques

• The Salami Technique is a method to embezzle small amounts of money at a time from numerous accounts.
• Salami Technique is not data diddling, pretexting, or spoofing.

Vendor Payment Irregularities

• Payments made to vendors not on the approved list suggests the presence of a red flag in purchase.
• This situation is not a management red flag, or in AR (accounts receivable) or payroll.

Larceny

• Larceny refers to the theft of an employer's property that was not entrusted to the employee. – Larceny and lapping are different terms with different meanings like check kitting .

Unreliable Internal Controls

• Weakness in the internal control environment of a company is Management Red Flag.
• It is not an Employee Red Flag, or a General Red Flag.

File Concealment

• Hiding a file, message, image, or video within another is steganography.
• Steganography is not imaging, encryption, or data hiding.

Identifying Red Flags

• The basic principles are distrusting the obvious and using 3D vision.
• These principles entail both distrusting the obvious and using 3D vision.

Red Flags Rule

• It detects warming signs in day to day operations and mitigates the damage it inflicts, not taking steps.
• It is focused on not detecting warning signs or taking steps to prevent the crime.

Payroll Fraud Schemes

• Falsifying wages, or Falsifying commissions, or ghost employees are payroll fraud schemes.
• They are also examples of fraud and should follow the processes.

Lapping

– It is the diversion of cash by covering it by crediting a customers account that matches a credit from another account. – It is not larceny and skimming of accounts.

Ghost Employee Scheme

– The falsification of personnel and payroll records, with pay checks generated for an employee may result to someone who is not affiliated with the victim company. – This scheme isn't a falsified salary scheme, record alteration scheme, or inflated commission scheme

Forgery and Cheating

• In cheating, the deception is oral, and in forgery, it is in writing.

Financial Statement Fraud

• People commit financial statement fraud to conceal true business performance.
• Reasons include preserving personal status/control, or to maintain personal income/wealth.

Financial Forensics

• The interrelationship between auditing, fraud examination, and financial forensics is dynamic.
• The dynamic changes based on social and cultural pressures, not on legal structures and practices.

Financial Statement Fraud Conditions

• Financial statement fraud is easiest to commit in organizations that have complex organizational structures.

Bid Pooling

• Several bidders conspire to split contracts to ensure each gets work.

Forensic Accountant Clients

• Public, private, non-profit groups and federal/state agencies typically use forensic accountants.

Red Flag Procedures

• They are required by individual departments and must be written alongside be written and accessible.

Identity Theft

• Identity fraud is a use of stolen identity to get goods or services by deception.

White Collar Crimes

• White collar crimes are defined as crimes which damage organizations less times but more huge amounts.

Fraud Exposure Rectangle

• The rectangle includes rationalization, perceived pressure and relationships with others.

Motivation for Financial Statements

• This may be to increase stock prices or maximize management bonus and pressure management

Fraud Management Componets

• Managements & Directors, relationships with others, organization & industry. components are financial results & operating characteristics

Management Relationships

• Authorities such as auditors, bankers, lawyers and regulatory relationships. To determine management & directors and relationships with other organisations is financial results & operating characteristics

Red Flag Indicators

• Unfriendly and an introverted red flag

Elements of Interviews

• Introduction, rapport, questioning, summary & close are elements of an interview.

Voice Analysis Detection

• Voice analysis can identify the temperament and whether someone is lying

Fraud: Proaction

• An organization cannot adopt, create widespread monitoring by employees and eliminating protections when whistleblowing

Professional Skepticism

• Both an alert mind and a questioned mind indicate skepticism

Internal Controls & Fraud

• Opportunity affects fraud by enabling weak internal control

Fraud detection Improvement

• Forensic accountants is fraud detection but you should not use frequent or surprise Audits

Financial Reporting & Fraud

• Company management is linked to fraudulent reporting

Confrontational Interviews

• The Company Directors should be advised in counsel by the legal advisors

Remidies

• Disgorgement

Financial Transactions

• A gunpowder efffect known as transactions that are not relevant on its own but are widely effective.

Occam’s Razer theory

• Theory’s razor signifies shaving off unnecessary data

Macro Level Warning flags

• Red flags such disorderliness, and uncompleted information in a disaster area.

Micro Level Warning flags

• Orphan funds, access knowledge, close neuxus with vendors etc

Interview Rules

• When conducting interveiws, only one person per time

Interview Questions

• Open, closed and misleading questions in an interview