Forensic Accounting _amp; Fraud Investigation

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					‘Forensic Accounting & Auditing’
       Week 3 – Lecture 1
 Auditor
 Forensic Accountant
 The word ‘audit’ comes form the Latin word audire,
  meaning to ‘hear’.
 An audit is a professional service that involves an
  objective and critical examination of a subject matter
  with the aim of assessing its credibility, in order to
  provide assurance through the issue of an objective
 Assurance refers to the auditor’s ability to provide a
  degree of satisfaction regarding the reliability of the
  information provided
 Historically, auditing was to ensure the correctness of
  accounts, detecting fraud and errors, and providing an
  independent opinion on the truth and fairness of the
  financial statements for users
 The auditor was to examine accounts and to provide a
  report, which was then ‘ heard’ by the authorities.
 Today, because of the complexity of the information
  needs of users, auditors are expected not only to
  enhance the credibility of financial statements, but
  also to provide value-added services, such as reporting
  on irregularities, identifying business risks and
  advising management
 The auditors role has moved from a conformance role
  to an enhancing role and recently to convergence role

 Auditors are second line of defence against fraud
 A shifting paradigm
 Corporate collapses
 Accounting crises
 Reforms
Roles – Auditor vs Forensic

 The Patrolman and Detective
Roles – Auditor vs Forensic
 Lopes LJ in Kingston Cotton Mill Co. (1896) 2 Ch. 279

 ‘… An auditor is not bound to be a detective… He is a
 watchdog, but not a bloodhound….’
Roles – Auditor vs Forensic
  Professional Auditing Standards state that auditors
 Guarantee financial statements are free of material
 Provide absolute assurance due to:
   nature of audit evidence (sample)
   characteristics of fraud (collusion & falsified
Roles – Auditor vs Forensic
 Auditors will be expected to exercise a higher degree of
  professional skepticism,
 To ask the next question, and the next, and
 To corroborate audit evidence rather than accept a
  single informant’s words.
Roles – Auditor vs Forensic
 Recent wave of high-profile, complex frauds involving
 billions of dollars, wayward accounting and
 catastrophic corporate failures raised many questions
 such as:

 Where were the auditors?
Comparison – Auditing &
Forensic Examination
Issue         Audit                     Forensic Examination
Timing        Recurring (Proactive)     Nonrecurring (Reactive)
Scope         Known to client           Confidential
Objective     Opinion                   Affix blame
Methodology   Audit techniques applied Examination techniques
              primarily to financial data include document
                                          examination, public
                                          record searches and
Presumption   Professional skepticism   Proof to support or refute
                                        an allegation
Audience      Investors, etc.           Party engaging him
Focus         General                   Specific
Forensic Accountant
  Empowered by management to:
 Assess risk of fraud
 Investigate fraud and
 Report to management
Forensic Accountant
 Employs higher degree of professional skepticism
 Do not accept explanations and documents at face
 Digs much deeper into facts and issues
 More familiar with employee abuse & fraud schemes
Forensic Accountant
 Experience in gathering evidence
 Confidence in conducting interview
 Experience in interpreting facts
 Have a sixth sense of interpreting facts
Forensic Accountant:
 Attorneys – investigate financial trail
 Bankruptcy court – employees/managers use assets
 Public listed companies – part of strong internal
 Government agencies
 Banking & Insurance industries
 Loss profits & Business interruption
 Mediation & Arbitration
Forensic Accounting

 …It is an interesting way to spend a day….
Fraud detection
  Cooperation between:
 Management
 Board of directors
 Auditors
 Forensic accounting investigators
 In-house legal counsel
Fraud detection
  When should management and legal counsel be
  alerted and forensic accountants are called:
 Policy (management & legal counsel)
 Skill sets of internal audit team
 Best practice
Example – Inventory fraud
 Gold refiner
 Auditors annual review
 Unable to reconcile inventory value of the gold in
  balance sheet with assessed value
 To solve problem, vice-president (VP) of finance hired
  forensic accountants to review inventory
 Discovery of brass bar of exactly the same weight as a
  gold bar on the inventory list raised questions in the
  minds of forensic investigators
 No record of brass bars in inventory list
Example – Inventory fraud
 Interview smelter worker, brass scrap melted down,
  cast into bars, added to the inventory
 45 brass bars valued at $8million on balance sheet
 Another $5million classified as gold bars “in transit”
 VP of Finance & CEO, no personal gains but attempt to
  hide operating losses which will cause fall in
  company’s stock if made public in Annual Report
 Both VP Finance & CEO charged with fraud, convicted
  and served terms in prison.
 In gathering facts and evidence, a forensic accountant
 is more experienced in:
    where to look,
    what type of evidence to look for,
    how to extract it and
    what constitute relevant and valid support.

     (Cooper, 2008)
Forensic Accountant & Auditor


            Thank you

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