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.

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“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 UniversityApril 6, 2010

Thomas E. Hilton, MS, CPA/ABV/CFF, ASA, CVAAnders Minkler & Diehl LLP

St. Louis, MO [email protected]

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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

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Definition of Forensic Accounting

• The use of accounting for legal purposes

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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

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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.

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Forensic Skill Sets

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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

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Fundamental Forensic Knowledge

• Interviewing

• Research

• Written and oral reporting

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Specialized Forensic Knowledge

• Asset tracing

• Bankruptcy and Insolvency

• Computer forensics and data mining

• Economic damages

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Specialized Forensic Knowledge

• Valuation

• Fraud investigations

• Family Law

• Shareholder disputes

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Certified in Financial Forensics(CFF)

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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

FamilyLaw

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Evidence

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Evidence is anything that can cause another person to believe that a fact or

proposition is true or false

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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

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Types of Evidence

• Direct• Circumstantial• Real• Documentary• Testimonial

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David DuncanArthur AndersenHouston, 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.”

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Walter Van de VijerRoyal Dutch GroupApril 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.”

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Business Damage Claims

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• Harmful act has occurred

• Harmful act has reduced the plaintiff’s earnings or stream of economic value

• Principle of economic equivalence

Common Elements of BusinessDamage Claims

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Lost Profits vs. Loss of Business Value

• Destruction of Business

• Temporary Impairment

• Slow Death

Loss of Business Value:

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Loss of Business Value

Destruction of Business:

$2,000,000

$1,600,000

$1,200,000

$800,000

$400,000

$0

1 2 3 4 5 6 7 8 9 10

Pro

fits

Expected Profits

Actual Profits

Lost Profits

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Lost Profits

Temporary Impairment:

$1,600,000

$1,200,000

$800,000

$400,000

$0

1 2 3 4 5 6 7

Pro

fits

Expected Profits

Actual Profits

Lost Profits

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$2,000,000

$1,600,000

$1,200,000

$800,000

$400,000

$0

1 2 3 4 5 6 7 8 9 10

Pro

fits

Expected Profits

Actual Profits

Lost Profits vs. Loss of Business Value

Slow Death Scenario:

Lost Profits

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Fraud

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Types of Irregularities

Financial Irregularities

Errors Fraud

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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

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The Fraud TriangleSource: SAS 99

OpportunityCircumstances that allow a misrepresentation to occur.

Attitude / Rationalization

A frame of mind that justifies the misrepresentation.

Incentive / PressureA reason to misrepresent.

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The Fraud DiamondSource: December 2004/The CPA Journal

Incentive

Capability

Opportunity

Rationalization

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The Components of Capability

• Position/Function• Knowledge• Confidence/Ego• Coercion Skills• Effective Lying• Immunity to Stress

Source: Wolfe & Hermanson The CPA Journal December, 2004

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Ethical Implications

Character: Constellation of a person’s

virtues and vices

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Ethical Implications

• Ethics

• Social Responsibility

• Moral Judgment

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Ethical Implications

Fundamental Principles

– Dignity of every human person– Common Good– Subsidiarity

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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

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Thank you for your attention!