Finding Fraud With the Right Auditor

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The idea of performing a “fraud examination” sounds interesting to many. They don’t necessarily want to deal with the numbers that a forensic accountant wades through, but they like the idea of someone sleuthing and digging through records.

I’ll admit that the work I do is pretty darn interesting. Each case has its own intricacies and unusual spin.

In contrast, the idea of an accountant performing an “audit” on a company’s books doesn’t sound half as exciting. I’ve done both, and from my perspective, audits are far less noteworthy. They’re both necessary evils in the business world, and it’s important for executives, attorneys, and consultants to know the difference between the two. Buyer beware of what services a client is really buying.

Defining an Audit
There are many different types of audits that are all properly named, but they must be differentiated from one another. A typical bank audit for lending purposes is generally a limited scope examination of certain financial statement items. Each bank has its own guidelines for performance of those audits, and generally they are aimed at verifying the value of collateral. Continue reading

What is an Accounting Review?

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An independent financial statement audit done by external auditors is the most extensive attest service provided by auditors, and it is still limited. A review of financial statements by an independent auditor is even more limited in scope.

Reviews amount to auditors looking at account balances and determining whether or not the balances look reasonable. They will perform some analytical procedures on the financial statements to further analyze the numbers. On occasion, they may ask to see some details about accounts and their balances, but this happens on a very limited basis. Continue reading

The Fraud Blame Game: Accusing the Auditors

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magnifyprintWhen a company discovers an internal fraud, it’s not uncommon for owners and management to look for a party to blame. After all, someone should have known that a fraud was in-progress, right? Often, the blame is cast in the direction of the auditors.

The auditors are an easy target. Not only do they usually have professional liability insurance policies to fall back on, the auditors initially seem like the logical culprit.

Management often believes that the auditors worked very closely with the financial information; therefore, they should have discovered the fraud. Continue reading

Marc G. Nochimson, CPA, Medifast, and Deficient Audits

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Alternative Title: Marc Nochimson, CPA makes the case FOR publicly identifying audit partners. (You really need to know if a goof like this was the engagement partner!)

In 2013, Marc G. Nochimson, CPA entered into a settlement agreement with the Securities and Exchange Commission based on his improper professional conduct as the engagement partner for the Medifast Inc. audits from 2006 to 2008. You may recall that in 2010, Medifast sued me (and several others) for negative opinions we expressed about Medifast.

Among the negative opinions: Medifast’s increasing revenue is the result of an endless chain recruiting scheme.  Medifast doesn’t disclose certain figures that would allow consumers and investors to fully evaluate the company and its business. Sam Antar criticized Medifast for its revenue accounting. Others criticized the company’s revenue and business model. Indeed, Medifast did overstate it income, resulting in a civil penalty and a cease and desist order from the SEC.

As time goes on, it appears more likely that our criticisms of Medifast were spot on. It also appears that the professionals affiliated with Medifast did not meet professional standards Continue reading

The Golden Era of White Collar Crime

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sam-antar-crazy-eddieSam Antar is a legend in the fraud industry. He was the CFO of Crazy Eddie, an electronics retailer which pulled off (for a time!) a massive fraud in the 1980’s. He was interviewed by CNNMoney while attending the New Jersey securities fraud summit as a keynote speaker.

Antar said during the interview:

“We are in the golden era of white-collar crime. My biggest regret is I should’ve been a criminal today rather than 20 years ago.”

Continue reading

Benjamin Wey Threatens Investigative Reporter Francine McKenna

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Francine McKenna is an investigative reporter who focuses her writings on the auditing profession. She blogs at re: The Auditors, and also writes for financial publications such as Forbes, The Financial Times, American Banker, and more.

In February, Ms. McKenna wrote about the auditors of AgFeed, a Chinese company involved in an elaborate accounting fraud. In March 2014, the Securities and Exchange Commission charged the company and its top executives with fraud:

With the bulk of its hog production operations in China, the executives used a variety of methods to inflate revenue from 2008 to mid-2011, including fake invoices for the sale of feed and purported sales of hogs that didn’t really exist.  They later tried to cover up their actions by saying the fake hogs died.  Because fatter hogs bring higher market prices, they also inflated the weights of actual hogs sold and correspondingly inflated the sales revenues for those hogs.  Continue reading

Mandatory Auditor Rotation is Dead

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Almost two years ago, I wrote about a PCAOB proposal that would require companies to rotate auditors every 5 to 10 years.  The theory was that forcing companies to change auditors regularly would make audits better, because fresh eyes on the books every few years would mean a more skeptical audit.

My position was that it doesn’t matter how long an auditor worked on the same engagement. Instead, the problem is audits themselves. Audits have never been designed to detect fraud. Thus, audits rarely find fraud. I wrote previously: Continue reading

Fooling the Auditors in Seven Easy Steps

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mncpa-footnoteMinnesota Society of CPAs Footnote Magazine
February/March 2014

Even with all of the publicity surrounding the issue of financial fraud in the last decade, most auditors, investors and other professionals still do not “get it” when it comes to detecting fraud. Traditional financial statement audits were never designed to detect fraud. The audit is simply a process by which auditors check the company’s math and application of accounting rules.

Fraud is rarely detected by financial statement audits because they are not designed to do so. Occasionally, fraud is detected by auditors, but they could increase their chances of finding fraud if they changed their audit procedures. Continue reading