Fraud Auditing and Forensic Accounting

TOMMIE W. SINGLETON, CPA, CMA, CISA, CFF, CGEIT, and CITP, is Marshall IS Scholar and coordinator of the Forensic Accounting Program at the University of Alabama at Birmingham. His articles have appeared in such journals as EDPACS, EDP Auditor Journal, White-Collar Crime Fighter, Journal of Corporate Accounting and Finance, and Information Systems Audit and Control journal. Tommie has presented this material to dozens of auditing firms, internal audit departments, and professional organizations as seminars and training. He is a scholar-in-residence for the regional public accounting firm Carr, Riggs & Ingram with responsibilities related to fraud auditing and forensic accounting. AARON J. SINGLETON, CPA, CISA, has worked for five years at a global public accounting firm performing information technology, financial statement, and regulatory compliance audits. Aaron's prior experience includes managing accounting and systems for a private wholesale company, and experience in systems development, installation, and support. Aaron has published articles related to fraud and forensics in journals including the Information Security Journal and the Journal of Corporate Accounting and Finance. Aaron earned his master's of accountancy from Bowling Green State University, and bachelor's degrees in accounting and management from the University of Alabama at Birmingham.

Preface xi

Acknowledgments xiii

Chapter 1: Background of Fraud Auditing and Forensic Accounting 1

Introduction 1

Brief History of Fraud and the Antifraud Profession 3

The Fraud Cycle 7

Review of Technical Literature 9

Forensic Accountant and Audits 11

Forensic Accountants 20

Fraud Auditors 25

Keys to Effective Fraud Investigation 31

The Antifraud Professional’s Career 33

Summary 36

Notes 37

Chapter 2: Fraud Principles 39

Introduction 39

Definition: What Is Fraud? 40

Synonyms: Fraud, Theft, and Embezzlement 42

Classic Fraud Research 42

Fraud Triangle 44

Scope of Fraud 47

Profile of Fraudsters 49

Who Is Victimized by Fraud Most Often? 53

Fraud Taxonomies 54

Fraud Tree 62

Evolution of a Typical Fraud 65

Summary 68

Notes 69

Chapter 3: Fraud Schemes 71

Introduction 71

ACFE Fraud Tree 73

Financial Statement Schemes 80

Corruption Schemes 83

Asset Misappropriation Schemes 84

Summary 94

Notes 94

Chapter 4: Red Flags 95

Introduction 95

Professional Standards 97

Common Red Flags 99

Specific Red Flags 101

Fraud Detection Model 110

Summary 111

Notes 112

Chapter 5: Fraud Risk Assessment 113

Introduction 113

Technical Literature and Risk Assessment 114

Risk Assessment Factors 115

Risk Assessment Best Practices 119

Risk Management Checklists and Documentation 125

Summary 129

Notes 129

Chapter 6: Fraud Prevention 131

Introduction 131

Prevention Environment 132

Perception of Detection 135

Classic Approaches 137

Other Prevention Measures 139

Accounting Cycles 141

Summary 143

Notes 143

Chapter 7: Fraud Detection 145

Introduction 145

Fraud Detection Axioms 146

Common Detection Methods 146

Specific Detection Methods 149

Summary 155

Appendix 7A: Beneish’s Ratios 156

Chapter 8: Fraud Response 157

Introduction 157

Fraud Policy 157

Fraud Response Team 160

Recovery 164

Summary 165

Notes 166

Appendix 8A: ACFE Sample Fraud Policy 167

Appendix 8B: Sample Fraud Policy Decision Matrix 172

Chapter 9: Computer Crime 175

Introduction 175

History and Evolution of Computer Crimes 176

Computer Crime Theories and Categorizations 179

Characteristics of the Computer Environment 182

Information Security (INFOSEC) 185

Profiling Internet Fraudsters 186

Summary 192

Notes 193

Chapter 10: Fraud and the Accounting Information System 195

Introduction 195

Accounting Concepts 196

Segregation of Duties 202

Accounting Information Systems 203

Key Personnel 204

Computer Hardware 208

Computer Software 210

New Forms of Media 211

Audit Trail Concept 211

Summary 212

Chapter 11: Gathering Evidence 213

Introduction 213

Rules of Evidence 213

Hearsay Exceptions 217

Other Rules of Evidence 218

Summary 223

Notes 223

Chapter 12: Cyber Forensics 225

Introduction 225

Expectation of Privacy 226

Types of Investigations 227

Sources of Digital Data 230

Types of Cyber Data 231

Cyber Forensics Investigation Process 234

Variety of Specialists in Cyber Forensics 236

Summary 237

Notes 237

Chapter 13: Obtaining and Evaluating Nonfinancial Evidence in a Fraud Examination 239

Introduction 239

Interviews 240

Body Language 242

Deception Cues 243

Eye Language 244

Statement Analysis 245

SCAN 246

Summary 247

Notes 247

Chapter 14: General Criteria and Standards for Establishing an Expert Witness’s Qualifications 249

Introduction 249

Credentials 250

Personal Qualities of the Expert 255

Sources for Locating Expert Witnesses 259

Distinguishing the Actual Area of Competence 261

Summary 261

Notes 262

Chapter 15: The Legal Role and Qualifications of an Expert Witness 263

Introduction 263

Role of a Forensic Accountant as a Witness in Court 264

Legal Qualifications for a Forensic Accountant as an Expert Witness 269

Qualification and Admissibility of Accounting Evidence 270

Expert’s Role in the Litigation Team 272

Pretestimony Activities 272

Summary 273

Notes 274

Appendix 15A: Transcript of Typical Court Testimony of Expert Witness 275

Chapter 16: Effective Tactics and Procedures for the Expert Witness in Court 277

Introduction 277

Effective Profile 278

Being a Credible Expert Witness 278

Expert’s Role in the Litigation Team 279

Pretestimony Activities 280

Trial and Testimony 281

Survival Techniques 288

Summary 290

Notes 290

Chapter 17: Fraud and the Public Accounting Profession 291

Introduction 291

History of Fraud and the Auditor: A Summary 291

Fraud and the Auditor’s Liability 302

Fraud and the Auditor’s Responsibility 303

Fraud and the Auditor’s Role 306

Summary 308

Note 308

About the Authors 311

Index 313