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CHAPTER 1
INTRODUCTION TO FORENSIC AND INVESTIGATIVE ACCOUNTING
Definition and Development of Forensic Accounting
Defining Forensic Accounting
Historical Roots of Accounting
History of Financial Reports and Legal Challenges
Threads of Forensic Accounting
Accounting Literature Parallels Accounting Practice
The Phrase "Forensic Accounting" Is Born
Forensic Accounting and Investigative Accounting Come of Age
The Forensic Accountant Becomes an Investigator
FBI and Forensics
First Forensic Accounting Books in United States
AICPA Practice Aid
American Management Association Course
The Panel on Audit Effectiveness
AICPA Fraud Task Force Report
Controversy Surrounding the Accountant’s Role in Fraud Detection
Conclusion
CHAPTER 2
FORENSIC ACCOUNTING EDUCATION, INSTITUTIONS, AND SPECIALTIES
Preparing to Become a Forensic Accountant
College and University Programs
Keystones of Forensic Accounting Curricula
KSAs and Education of the Forensic Accountant
Career Tracks in Forensic Accounting Income
Expectations for Forensic Accountants
Specialties Within Forensic and Investigative Accounting
Professional Groups and Credentials
American College of Forensic Examiners
National Litigation Support Services Association
Network of Independent Forensic Accountants
Association of Certified Fraud Examiners
Association of Certified Fraud Specialists
Forensic Accounting Society of North America
National Association of Certified Valuation Analysts
Institute of Business Appraisers
Other Organizations Serving Forensic Practitioners
Conclusion
CHAPTER 3
FRAUDULENT FINANCIAL REPORTING
Importance of Transparent Financial Information
Statement of Financial Accounting Concepts No. 2
Means and Schemes of Financial Reporting Fraud
Three M’s of Financial Reporting Fraud
Ten Fraud Schemes Bases on SEC Releases
Shenanigans to Boost Earnings
Sources of Fraudulent Financial Reporting
Internal Versus External Fraud
Motivation and Contributing Factors
Contributing Factor Model
Risk Factor Analysis
Internal Controls
Incidence of Crime and Characteristics of Perpetrators
Studies of the Prevalence of Fraud in Business
Characteristics of the White-Collar Criminal
Earnings Management and GAAP
Flexibility of GAAP
Restatements of Earnings
Conclusion
CHAPTER 4
DETECTING FRAUD IN FINANCIAL REPORTING
Responsibilities and Roles in Financial Reporting
Independent Audit Procedures and the Auditor’s Role
Internal Auditor’s Procedures and Role
Audit Committee’s Role
Management Role
Forensic Accountant’s Role
Financial Statement Fraud Categories and Red Flags
Overstated Revenues
Management Estimates
Pro Formas Can Mislead
Earnings Problems: Masking Reduced Cash Flow
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
CPA Problems
Sales and Expenses Problems
Excessive Debt
Inventory Problems
Big Bath
Balance Sheet Account Problems
Pension Plan Problems
Reserve Estimates
Personal Piggy Bank
Barter Deals
Financial Fraud Detection Tools
Interviewing the Executives
Analytics
Percentage Analysis
Using Checklists to Help Detect Fraud
Conclusion
CHAPTER 5
EMPLOYEE FRAUD: THE MISAPPROPRIATION OF ASSETS
Fraud Schemes and Their Schemers
Company Susceptibility to Fraud
Employee Fraudsters
Types of Misappropriations
Embezzlement
Cash and Check Schemes
Accounts Receivable Fraud
Inventory Fraud
Fictitious Disbursements
Walking the Walk of Fraud Detection Programs
Company Fraud Prevention, Detection, and Mitigation Measures
Companies on the Front Lines in Preventing Employee Fraud
Nonprofit Entities as Special Fraud Targets
Reasons for Fraud in Not-for-Profits
Prevention Programs for Not-for-Profits
Fraud in Federal, State, and Local Governments
When It’s Time to Call in Professionals
Forensic Accountant’s Techniques
Conclusion
CHAPTER 6
INDIRECT METHODS OF RECONSTRUCTING INCOME
Forensic Audit Approaches Used by the IRS
Minimum Income Probes
Lifestyle Probes
IRS’s Financial Status Audits
Indirect Methods
Market Segment Specialization Program
Cash T
Source and Application of Funds Method (Expenditure Approach)
Net Worth Method
Bank Deposit Method
Conclusion
CHAPTER 7
MONEY LAUNDERING
Legal and Illegal Laundering
Cybercash Creates New Laundering Opportunities
Who Uses Money Laundering Practices?
Financial Institutions’ Role in Money Laundering
Correspondent Banking
Tools Banks Use to Identify Money Launderers
Due Diligence Laws for Banks
Shell Banks
Other Businesses’ Role in Money Laundering
Cash-Oriented Businesses
Audit Trail for Business Money Laundering Schemes
Finding Money Laundering Schemes
Likely Sources
Guarding Against Money Laundering
Individual Due Diligence Using Identity Checks
Company Due Diligence in Verification Procedures
Trust Due Diligence Using Trust Deeds
Organization-Wide Suspicious Activities
The Accountant’s Role as Gateway Keeper
New Initiatives: USA Patriot Act of 2001
Conclusion
CHAPTER 8
LITIGATION SERVICES PROVIDED BY ACCOUNTANTS
Types of Litigation Services Provided by Accountants
Consultant
Expert Witness
Masters and Special Masters
Standards of Conduct for Performing Litigation Services
Knowledge, Skills, Experience, Training, and Education
Professional Codes of Conduct
Conflicts of Interest
Written Agreement to Perform Litigation Services
Becoming an Expert Witness Expert
Expert Witnesses Distinguished from Lay Witnesses
What Lawyers Look for in an Expert Witness
Qualifying as an Expert Witness
Court-Appointed Expert Witnesses
Preparing to Testify as an Expert Witness
Maintaining Independence from the Client
Evidence Upon Which Experts May Rely
Use of Confidential Client Information
Expert Reports
Working Papers
Evaluation of Other Experts
Exhibits and Other Demonstrative Evidence
Testifying as an Expert Witness
Testifying at a Deposition
Preparing to Testify at Trial
Testifying at Trial
Liability of Expert Witnesses
Witness Immunity
Bases for Liability
Conclusion
CHAPTER 9
PROPER EVIDENCE MANAGEMENT
Basic Rules of Evidence
What Are the Rules of Evidence?
What Is Evidence?
Process for Determining the Admissibility of Evidence
Relevance Requirement
Privileged Communications
Hearsay Rule
Authentication Requirement
Best Evidence Rule
Demonstrative Evidence
Special Rules for Criminal Cases
Special Rules in Administrative Proceedings
Management of Evidence
Maximizing Client Confidentiality
Using Technology to Gather Evidence
Computer Evidence
Ensuring the Admissibility of Evidence in Court
Security for Evidence and Working Papers
Evidence Database
Evaluating the Quality and Persuasiveness of Evidence
Record Retention
Conclusion
CHAPTER 10
COMMERCIAL DAMAGES
The Expert
Expert Witnesses’ Qualifications
Expert Witnesses’ Testimony Requirements
Basics of Damages Litigation
The Legal Framework of Damages
Two Types of Harm: Tort and Breach of Contract
Two Types of Damages: Restitution and Reliance
Approaches to Loss Estimation
Damages Calculation Approaches
The Lost Profits Methods
Study of Losses Process
Economic Framework for the Lost Profits Estimation Process
Measuring the Loss
Length of the Loss Period
Components of Damages
The Defendant’s Damages Estimate
The Plaintiff’s Damages Estimate
Lost Sales and Profits
Production or Other Cost Increases
Customer Ill Will and Future Lost Profits
Other Adverse Effects
The Expert’s Journey Through the Legal System
Testimony Early in Case
Defending the Expert Report
Cost Behavior and Damages Calculations
Cost Behavior Defined
Common Types of Cost Behavior
Cost Behavior Assumptions
Damages Period and Discount Rate
Conclusion
CHAPTER 11
LITIGATION SUPPORT IN SPECIAL SITUATIONS
Antitrust Litigation
Overview of Antitrust Laws
Role of Accountants in Antitrust Litigation
Actions That Constitute Predatory Pricing
Determining a Company’s Average Variable Costs
Estimating Cost Behavior Patterns
Case Study: Coho Grocery
Federal False Claims Act Litigation
Overview of the Federal False Claims Act
The Accountant’s Role in False Claim Act Litigation
Conclusion
Chapter 12
COMPUTING ECONOMIC DAMAGES
The Nature of Economic Damages
Wrongful Discharge Case
Permanent Disability Case
Conclusion
CHAPTER 13
COMPUTER FORENSICS: A BRIEF INTRODUCTION
Introduction to Electronic Evidence
Perspectives on Investigation
Auditor’s Job as Related to Computer Forensics
Electronic Evidence Collection
Can Digital Evidence Really Be Destroyed
The Auditor’s Computer Forensics Skill Set
Encase and the Forensic Environment
Collection of Seizure of Electronic Evidence
How Can Electronic Evidence Be Legally Collected?
Conclusions
CHAPTER 14
INTERNET FORENSICS ANALYSIS: PROFILING THE CYBERCRIMINAL
Sifting for Clues to Cybercrimes
Collecting Evidence
Clues Versus Evidence
Technical Searches
Internet Protocols: Technical Searches Begin Here
Decoding Packet Information
Decoding Simple Mail Transfer Protocol (SMTP)
Decoded IP Addresses: Tracing Tools
Decoded IP Addresses: Narrowing the Search
Informational Searches
Internet Databases: Informational Searches Begin Here
Web Page Searches
Government Data Searches
Miscellaneous Searches
Conclusion
Chapter 15
CYBERCRIME MANAGEMENT: LEGAL ISSUES
Cybercrimes: An Introduction
Net Frauds
Unauthorized Access to Network Assets
Types of Unauthorized Access
Criminality of Cybercrimes
When Is a Cybercrime Really a Cybercrime?
Legislation as Lagging Technology
Cybercrime Statutes
International Law
Federal Legislation
State Legislation
Guidelines for Cybercrime Management
KSAs for Fighting Cybercrime
Filing Reports of Cybercrimes
Conclusion
CHAPTER 16
CYBERCRIME LOSS VALUATIONS Attacks on Tangibles and Intangibles
Extent of the Problem
Statutory Loss Valuations
High-Tech “Tangible” Losses Attributed to Cyber Attacks
High-Tech Intangible Losses
Loss Valuations and Insurance Claims
Insurers
Costs and Types of Coverage
Qualifying for Coverage
Conclusion
CHAPTER 17
BUSINESS VALUATIONS
Fundamentals
Valuation and Appraiser Accreditations
Engagement Agreements That Create Successful Client Relationships
Purposes for Obtaining Business Valuations
Standards of Value
Purpose of the Valuation Affects the Valuation Methods Used
The Three Valuation Approaches
Income Approach
Market Approach
Cost Approach
Gathering Initial Information
Initial Information Request
Discerning What Data Is Required
Financial Analysis
How Much History Is Enough?
Spreading Financial Statements
Analyzing Financial Statements for Trends and Risks
Revenues
Gross Profits
Operating Expenses
Operating Profits
Other Income and Expense
Pretax Profitability
Practical Illustrations
Earnings History
Income Statement Methods of Determining a Business Valuation
Cash Flow Methods of Determining the Business Valuation
Rules of Thumb—Valuation on the Cheap
Business Valuation Standards
Uniform Standards of Professional Appraisal Practice (USPAP)
American Institute of Certified Public Accountants (AICPA)
Common Requirements of Business Valuation Standards of Valuation Societies
Features of the Standards
Business Valuation Reports
Organization of the Report
Attention to Mechanics
Main Sections of the Valuation Report
Conclusion
CHAPTER 18
FORENSIC ACCOUNTING IN ACTION
The Elements of Fraud
Eye on the Investigative Outcome
Case Number 1: TruGloss Shanghai JV
Principles of Applied Forensic Analysis
Unusual or Unrealistic Procedures and Relationships
Case Number 2: Tallahassee BeanCounters
Problem-Based Learning to ask the Right Questions
Conclusions
APPENDICES
Appendix 1: Reference Materials from the Institute of Internal Auditors
Appendix 2: Statement on Auditing Standards No. 99
Appendix 3: Council of Europe Convention on Cybercrime
GLOSSARY OF TERMS
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