Forensic Accounting and Fraud Examination

Mary-Jo Kranacher is a CPA and a certified fraud examiner. She is the Editor-in-Chief of The CPA Journal, the official publication of the New York State Society of CPAs.?She is a tenured accounting professor and department chairman at York College of The City University of New York.?Professor Kranacher was recently selected by the ACFE as the 2009 Educator of the Year for educating current and future CPAs about fraud detection and deterrence. She?was a member of the planning panel that developed a model curriculum for fraud and forensic accounting education for the U.S. National Institute of Justice. Professor Kranacher has conducted forensic investigations related to asset misappropriation, fraudulent financial statements, expense reimbursement schemes, and others. Richard?Riley (CPA, CFE, CFF)?is currently a Louis F. Tanner Distinguished Professor of Public Accounting at West Virginia University, the 2008 Association of Certified Fraud Examiners Educator of the Year and 2009 American Accounting Association Innovation in Accounting Education Award recipient. He has developed and implemented fraud and forensic accounting education programs for the United States National Institute of Justice and the Internal Revenue Service and is the Director of Research for the Institute for Fraud Prevention.?Since 2002, Dr. Riley has performed expert financial analysis and litigation support services, offering deposition and trial testimony. He has two forthcoming books: Financial Statement Fraud: Prevention and Detection with Zabi Rezaee and Forensic Accounting and Fraud Examination textbook with Joseph Wells and Mary-Jo Kranacher. Dr. Riley possesses an undergraduate degree in accounting from Wheeling Jesuit University, a Masters of Professional Accountancy from West Virginia University and Doctor of Philosophy Degree from the University of Tennessee.

Preface xii

About the Authors xiv

Section I Introduction to Forensic Accounting and Fraud Examination 1

1 Core Foundation Related to Forensic Accounting and Fraud Examination 3

Module 1: What is Fraud? 4

What is the Difference Between Fraud and Abuse? 8

Module 2: What is Forensic Accounting? 10

Module 3: The Professional’s Skill Set 10

Module 4: The Role of Auditing, Fraud Examination, and Forensic Accounting 11

Module 5: The Basics of Fraud 11

Module 6: The Investigation 22

Module 7: Fraud Examination Methodology 30

Critical Thinking 31

Review Questions 31

Multiple Choice Questions 31

Fraud Casebook 32

Brief Cases 32

Major Case Investigation (MCI)—Johnsons Real Estate 32

IDEA Exercises 33

IDEA—Assignment Chapter 1 34

Tableau Exercises 34

Tableau—Assignment Chapter 1 35

Endnotes 35

Appendix I: Careers in Fraud Examination and Financial Forensics 36

2 Who Commits Fraud and Why: The Profile and Psychology of the Fraudster 48

Module 1: Criminology, Fraud and Forensic Accounting 48

Module 2: Who Commits Fraud and Why: The Fraud Triangle 51

Module 3: The Role of Personal Integrity, Capability, Gender, and the Influence of the Organization 59

Module 4: The Psychology of the Fraudster, a Deeper Look: M.I.C.E., Predators, and Collusion 64

Module 5: The Fraud Triangle in Court and the Meta-Model 68

Critical Thinking 70

Review Questions 70

Multiple Choice Questions 70

Fraud Casebook 71

Brief Cases 72

Major Case Investigation 72

IDEA Exercises: Assignment 2 72

Tableau Exercises: Assignment 2 72

Endnotes 72

3 Legal, Regulatory, and Professional Environment 74

Module 1: Introduction 75

Module 2: The Rights of Individuals 75

Module 3: Probable Cause 80

Module 4: Rules of Evidence 81

Module 5: Criminal Justice System 83

Module 6: Civil Justice System 84

Basic Accounting Principles 86

Regulatory System 92

The Role of Corporate Governance 105

Critical Thinking 105

Review Questions 106

Multiple Choice Questions 106

Fraud Casebook 107

Brief Cases 107

Major Case Investigation 107

IDEA Exercises: Assignment 3 108

Tableau Exercises: Assignment 3 108

Endnotes 108

Section II Fraud Schemes 109

4 Cash Receipt Schemes and Other Asset Misappropriations 111

Module 1: Skimming Schemes—Cash 112

Module 2: Skimming Schemes—Receivables 117

Module 3: Cash Larceny Schemes 123

Module 4: Noncash Misappropriation Schemes 129

Module 5: Concealing Inventory Shrinkage 134

Module 6: Preventing and Detecting Noncash Thefts That are Concealed by Fraudulent Support 136

Critical Thinking 138

Review Questions 138

Multiple Choice Questions 139

Fraud Casebook 139

Brief Cases 140

Major Case Investigation 140

IDEA Exercises: Assignment 4 141

Tableau Exercises: Assignment 4 141

Endnotes 141

5 Cash Disbursement Schemes 142

Module 1: Billing Schemes 142

Module 2: Check Tampering Schemes 154

Module 3: Payroll Schemes 169

Module 4: Expense Reimbursement Schemes 179

Module 5: Register Disbursement Schemes 186

Critical Thinking 190

Review Questions 190

Multiple Choice Questions 190

Fraud Casebook 191

Brief Cases 191

Major Case Investigation 192

IDEA Exercises: Assignment 5 192

Tableau Exercises: Assignment 5 192

Endnotes 192

6 Corruption and the Human Factor 193

Module 1: Corruption Schemes 194

Module 2: Bribery 195

Module 3: Foreign Corrupt Practices Act (FCPA) 203

Module 4: Illegal Gratuities, Economic Extortion, and Conflicts of Interest 205

Module 5: The Human Factor 210

Critical Thinking 213

Review Questions 213

Multiple Choice Questions 214

Fraud Casebook 214

Brief Cases 215

Major Case Investigation 215

IDEA Exercises: Assignment 6 216

Tableau Exercises: Assignment 6 216

Endnotes 216

7 Financial Statement Fraud 217

Module 1: Financial Reporting Fraud: Who, Why, and How 218

Module 2: Accounting Principles and Fraud 220

Module 3: Fraudulent Financial Statement Schemes 228

The Capital Forum 234

Module 4: Detection of fraudulent financial statement schemes 242

Module 5: Deterrence of Financial Statement Fraud 249

Critical Thinking 252

Review Questions 252

Multiple Choice Questions 252

Fraud Casebook 253

Brief Cases 253

Major Case Investigation 255

IDEA Exercises: Assignment 7 255

Tableau Exercises: Assignment 7 255

Endnotes 255

Section III Detection and Investigative Tools and Techniques 257

8 Fraud Detection: Red Flags and Targeted Risk Assessment 259

The Fraud Prompt—Simple and Effective 259

Module 1: Corporate Governance and Fraud 259

Module 2: Fraud Detection 266

Module 3: Targeted Fraud Risk Assessment 275

Module 4: Targeted Fraud Risk Assessment in a Digital Environment 281

Critical Thinking 282

Review Questions 282

Multiple Choice Questions 282

Fraud Casebook 283

Brief Cases 284

Major Case Investigation 285

IDEA Exercises: Assignment 8 285

Tableau Exercises: Assignment 8 286

Endnotes 286

9 Evidence-Based Fraud Examinations 287

The Fraud Triangle and the Courts 287

Module 1—Fraud Examinations: Who, What, Where, When, How, and Why 288

Module 2—Evidence 292

Organizing the Evidence and Documenting Work Product 294

Module 3—Evidence Sources of the Act, Concealment, and Conversion 295

Module 4—Evidence Sources Specific to Concealment 300

Module 5—Evidence Sources Specific to Conversion 303

Critical Thinking 317

Review Questions 317

Multiple Choice Questions 317

Fraud Casebook 318

Brief Cases 319

Major Case Investigation 320

IDEA Exercises: Assignment 9 320

Tableau Exercises: Assignment 9 321

Endnotes 321

Appendix A: Data Collection Checklist 322

10 Effective Interviewing and Interrogation 323

Module 1: Introduction to Interviews and Interrogations 324

Module 2: Details of the Interview and Interrogation Process 326

Module 3: Five Types of Interview and Interrogation Questions 328

Joe Wells’ Ten Commandments for Effective Interviews 337

Module 4: Steps in the Admission-Seeking Interview (Interrogation) 338

Module 5: Judging Deception 344

Critical Thinking 348

Review Questions 348

Multiple Choice Questions 348

Fraud Casebook 349

Brief Cases 350

Major Case Investigation 351

IDEA Exercises: Assignment 10 351

Tableau Exercises: Assignment 10 351

Endnotes 351

Appendix : Comprehensive Guidelines: Information Collected in Interviews 352

11 Using Information Technology for Fraud Examination and Financial Forensics 354

Module 1: The Digital Environment 354

Module 2: Digital Evidence 356

Module 3: Detection and Examination in a Digital Environment 359

Module 4: Graphics and Graphics Software 367

Module 5: Case Management Software 372

Critical Thinking 373

Review Questions 373

Multiple Choice Questions 374

Fraud Casebook 374

Brief Cases 375

Major Case Investigation 376

IDEA Exercises: Assignment 11 376

Tableau Exercises: Assignment 11 376

Endnotes 376

Section IV Advanced Topics in Forensic Accounting and Fraud Examination 377

12 Complex Frauds and Financial Crimes 379

Former Congressman Pleads Guilty to Helping Charitable Entity with Ties to Terrorist Organization 379

Module 1: The Predator versus the Situational Fraudster 379

Module 2: Collusion among Multiple Individuals, Organizations, or Jurisdictions 380

Module 3: Dismantling Organizations using Asset Forfeiture and Seizure 381

Module 4: Schemes and Illegal Acts Associated with Complex Frauds and Financial Crimes 382

Module 5: The U.S. Banking System 391

Module 6: Tools and Techniques for Moving Money 392

Module 7: Other Complex Frauds and Financial Crimes 399

Critical Thinking 405

Review Questions 405

Multiple Choice Questions 405

Fraud Casebook 406

Brief Cases 406

Major Case Investigation 408

IDEA Exercises: Assignment 12 408

Tableau Exercises: Assignment 12 408

Endnotes 409

13 Cybercrime: Fraud in a Digital World 410

Module 1: The Digital Environment 410

Module 2: Frauds and Other Threats in the Digital World 416

Module 3: Cyber Fraud 423

Module 4: Complex Frauds and Financial Crimes in Cyberspace 426

Module 5: Reporting Cybercrime 429

Critical Thinking 429

Review Questions 429

Multiple Choice Questions 429

Fraud Casebook 430

Brief Cases 431

Major Case Investigation 431

IDEA Exercises: Assignment 13 432

Tableau Exercises: Assignment 13 432

Endnotes 432

14 Antifraud and Compliance Efforts: Ethics, Prevention, and Deterrence 433

Module 1: Ethics 433

Module 2: Compliance 439

Module 3: Fraud Deterrence 440

Module 4: Fraud Prevention 450

Critical Thinking 453

Review Questions 453

Multiple Choice Questions 454

Fraud Casebook 454

Brief Cases 455

Major Case Investigation 455

IDEA Exercises: Assignment 14 455

Tableau Exercises: Assignment 14 456

Endnotes 456

Section V Litigation Advisory Services and Remediation 457

15 Consulting, Litigation Support, and Expert Witnessing: Damages, Valuations, and Other Engagements 459

Module 1: Consulting, Litigation Support, and Expert Witnessing 459

Module 2: Commercial Damages 465

Module 3: Valuations 482

Module 4: Personal Injury, Wrongful Death, and Survival Actions 498

Critical Thinking 513

Review Questions 513

Multiple Choice Questions 513

Fraud Casebook 514

Brief Cases 514

Major Case Investigation 516

IDEA Exercises: Assignment 15 517

Tableau Exercises: Assignment 15 517

Endnotes 517

16 Remediation and Litigation Advisory Services 518

Module 1: Introduction to Remediation 519

Module 2: Recovery of Money and Other Assets 520

Module 3: Support for Criminal and Civil Court Actions 522

Module 4: Restructure the Internal Control Environment 533

Critical Thinking 541

Review Questions 541

Multiple Choice Questions 542

Fraud Casebook 542

Major Case Investigation 543

IDEA Exercises: Assignment 16 543

Tableau Exercises: Assignment 16 543

Endnotes 543

Appendix A: Fraud/Financial Crimes Report 544

Appendix B: Commercial Damages/Lost Profits Report 550

Appendix C: Valuation Report 556

Appendix D: Forensic Economics (Personal Injury) Report 585

Glossary 595

Index 599