Forensic Accounting and Fraud Investigation for Non-Experts

HOWARD SILVERSTONE, CPA, FCA, CFE, is Director at Forensic Resolutions, Inc. MICHAEL SHEETZ, JD, is an adjunct professor of business law, ethics, and international law for several universities, and a former appellate law clerk for the Fourth District Court of Appeals. STEPHEN PEDNEAULT, CPA/CFF, CFE, is a Principal of Forensic Accounting Services, LLC, where he specializes in forensic accounting, employee fraud, and litigation support matters. He is an adjunct professor at the University of Connecticut; is the author of Fraud 101: Techniques and Strategies for Understanding Fraud, Third Edition; contributed to Fraud Casebook: Lessons from the Bad Side of Business; and has written articles for state and national publications. Frank E. Rudewicz, JD, CPP, CAMS, has more than thirty years’ experience conducting domestic and international investigations for fraud, ethics, and other employment-related conduct. Mr. Rudewicz has been involved in numerous high-profile and sensitive engagements regarding fraud, organized crime, compliance, and security assessments. He has appeared on Dateline NBC, Forensic Files, and various other media outlets for his investigative work. A recognized expert on security and investigations, Mr. Rudewicz lectures and teaches frequently on these topics. He often provides expert testimony and conducts independent inquiries for a variety of employee misconduct issues.

Preface xiii

Acknowledgments xv

Part I Forensic Accounting and Fraud Overview 1

Chapter 1 Forensic Accounting 3

What Is Forensic Accounting? 3

Why Has Forensic Accounting Become the Buzz? 4

Introduction to a Profession 5

Applications for Forensic Accounting 6

A Third Dimension: Contexts within Each Area of

Specialization 11

Conclusion 14

Suggested Readings 15

Notes 15

Chapter 2 Fraud in Society 17

What Is Fraud? 17

Types of Fraud 21

Other Types of Financial Fraud 25

Sarbanes–Oxley 27

What the Numbers Tell Us about Fraud 28

Categories of Occupational Fraud 29

Drawing Conclusions 31

Society’s Perception of Fraud 32

Who Commits Fraud?—Profile of the Typical

Fraudster 33

The Social Consequences of Economic Crime 39

Conclusion 39

Suggested Readings 40

Notes 40

Chapter 3 Understanding the Basics of Financial Accounting 43

Where It All Begins 43

The Five Accounting Cycles 46

Journals: Subsidiary and General 54

Conclusion 56

Suggested Readings 56

Note 57

Chapter 4 Forms of Entities 59

Basics of Business Structures 59

Sole Proprietorships 60

Partnerships 60

Corporations 63

Business Enterprises in the Global Environment 66

Conclusion 70

Suggested Readings 70

Notes 72

Chapter 5 Fundamental Principles of Financial Analysis 73

Good Analysis = Due Diligence? 73

Why Perform Financial Analysis? 76

What and Whom Can You Trust? 76

Other Factors to Consider 77

Financial Analysis for the Non-Expert 78

To the Future 85

Conclusion 86

Suggested Readings 87

Notes 87

Chapter 6 The Role of the Accounting Professional 89

The Importance of Accounting Professionals in the Investigation 89

The Audit Process 93

Internal Controls 98

Conclusion 101

Notes 101

Part II Financial Crime Investigation 103

Chapter 7 Business as a Victim 105

Introduction 105

Employee Thefts 106

Fraudulent Billing Schemes 112

Fraud Committed by Outsiders 113

Management Thefts 114

Corporate Thefts 117

Identity Theft 118

Conclusion 120

Suggested Readings 120

Notes 120

CHAPTER 8 Business Villains 123

Introduction 123

Organized Crime and Business 123

Money Laundering 130

Conclusion 137

Suggested Readings 138

Notes 139

Chapter 9 The Investigative Process 143

Introduction 143

Case Initiation 144

Case Evaluation 145

Solvability Factors 147

Goal Setting and Planning 148

Investigation 156

Background 158

Conclusion 166

Suggested Readings 167

Notes 167

Chapter 10 Interviewing Financially Sophisticated

Witnesses 169

Introduction 169

The Interview 170

Interviewing Financially Sophisticated Witnesses 185

Conclusion 188

Suggested Readings 189

Notes 190

Chapter 11 Proving Cases through Documentary Evidence 193

Introduction 193

Document Collection 194

Document Organization 207

The Process of Proof 211

The Logic of Argument 213

Proof through Inference 217

Conclusion 221

Suggested Readings 222

Notes 224

Chapter 12 Analysis Tools for Investigators 227

Introduction 227

Why Use Analysis Tools at All? 227

Associational Analysis 229

Temporal Analysis 246

Conclusion 252

Suggested Readings 252

Notes 253

Chapter 13 Inferential Analysis 255

Introduction 255

How Inferential Analysis Helps 255

What Is an Inference Network? 256

Investigative Inference Analysis 259

The Key List 263

Constructing an Investigative Inference Chart 264

Plotting the Chart 268

Some Tips for Charting Success 272

Applying the Chart to the Investigative Process 273

Conclusion 275

Suggested Readings 275

Notes 277

Chapter 14 Documenting and Presenting the Case 279

Introduction 279

Creating a System 279

The Casebook System 280

Report Writing 287

Testifying as a Financial Expert 290

Conclusion 305

Suggested Readings 305

Notes 306

About the Authors 309

Index 311