Questions to Ask at the Start of a Fraud Investigation

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In order to properly plan a fraud investigation, a fraud examiner needs to be able to ask good questions that extract valuable information about what needs to be done. The specific questions vary with each investigation, but the following are some basic areas that an investigator should strongly consider exploring.

What happened?

  • How did this situation come to light?
  • Who was involved with the discovery?
  • Who is aware that a potential fraud occurred?

Evidence

  • What evidence has already been found?
  • How conclusive is it?
  • Are there multiple pieces of evidence?
  • Might there be other easily discoverable pieces of evidence?
  • How much does the evidence tell us about the methods of fraud and the parties involved?

Continue reading

Analytical Review of Financial Statements to Find Fraud

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Performing analytical review on the financial statements of a company is an important part in the fraud detection process. It can help detect manipulation of the numbers, as we are looking at account balances and their relationships to one another. How have account balances changed from period to period? How have the relationships between accounts changed from period to period?

Some of the things that may be evaluated include:

  • Current period figures versus prior period numbers
  • Financial statement line items compared to one another
  • Actual financial results compared to budgeted or projected figures prepared before that accounting period
  • Company data compared to operational facts
  • Company data compared to industry data
  • Numeric data compared to the notes to the financial statements

In later video posts, we’ll cover some of the common ratios that can be used to analyze the balance sheet and income statement to evaluate them for the potential that fraud may be occurring.

 

Searching for Fraud in a Company

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How do you begin searching for fraud in a company?

Sometimes I get called in when a company finds an employee stealing. They have found one instance of theft and they want to have the rest of the company looked at, but they don’t know where to begin. What should we look at? If a specific instance of fraud has been identified, that will dictate which financial statement accounts are examined by the fraud investigation team in detail.

But what if no conclusive evidence of fraud exists, and the investigator is instead looking for clues that might point to a fraud? The company has become suspicious, yet has little hard proof that anything unusual has occurred.

In that case, the investigator must dig through at-risk accounts and functions to look for suspicious activity. Analytical review of the financial statements will provide clues about the potential for fraud. (Come back tomorrow to see a video about this very thing!) Ratios may look unusual. Account balances may be out of line with recent history. Key documentation may be missing. These types of red flags will point the investigator toward areas that deserve additional investigation. Continue reading

Top Ways Fraud is Detected in Companies

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Tracy Coenen talks to a group of CPAs about the top ways fraud is detected within companies. The Association of Certified Fraud Examiners (ACFE) conducts a survey of its members every two years. It consistently finds that tips from employees, customers, and vendors most commonly uncover fraud within companies.

But after that, management review of financial statements and account balances and reconciliations is a very effective technique. The internal audit function can also be very effective at helping to uncover fraud at companies. Sadly, many internal frauds are also uncovered by accident.

Financial Statement Fraud in Public Companies

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How prevalent is financial statement fraud in public companies? In this video, Tracy Coenen talks about the most recent COSO report on fraudulent financial reporting at U.S. public companies. The most common financial statement fraud that companies engaged in was improper revenue recognition, followed by the overstatement of asset or the improper capitalization of expenses.

What benefits do companies and their executives receive from financial statement fraud?

  • The stock price goes up because the company is more profitable.
  • The company’s debt rating goes up.
  • The company is likely to be able to refinance its debt and therefore can reduce its interest expense. The company may also have fewer debt covenant restrictions associate with its debt.
  • Executives win because they will probably get higher bonuses that are tied to the profitability of the company, and their stock options will be more valuable.

Short Seller Marc Cohodes About Face on Overstock

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BFFs Marc Cohodes and Patrick Byrne

Former hedge fund manager Marc Cohodes has been a long-time critic of Overstock.com and its wacky CEO, Patrick Byrne. The criticism dates back to the days when Cohodes was at Rocker Partners, a company that was sued by Overstock along with research firm Gradient Analytics. In 2005, Cohodes was fingered by Byrne as being part of a “miscreants ball” under the direction of a “Sith Lord.” Yet after more than a decade with a negative opinion of the company and its management, Cohodes recently did an about face.

Is money fueling the change of heart?

Sam Antar, another long-time critic of Overstock, details the Cohodes/Overstock situation nicely on his blog. The crux of the issue is that Cohodes (who has been focused on short selling) took a long position in Overstock in May 2017. A month later, Cohodes met personally with Byrne. In October, Cohodes hyped the company during a presentation at a Grant’s Interest Rate Observer conference, and said that Byrne is now his friend. Continue reading

Lifestyle Analysis in Divorce and Child Support Cases

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One of the chief concerns in a divorce or child custody case is identifying the true income of one or both of the parties. It is not unusual for such a case to include allegations of hidden income or assets. It is common for a closely held business to suspiciously encounter declining sales and profits following the filing of a family law case.

In each of these instances, properly determining the income of the party is critical to getting a fair and equitable settlement, maintenance award, or child support award. Until you have the correct numbers, the attorney may find it very difficult to decide what is fair or in the best interest of the client.

How can a spouse or parent with little to no direct access to the other party’s financial records prove that there is undisclosed income? What happens if the financial records obtained during discovery appear woefully incomplete? A forensic accountant is the logical choice to help reconstruct financial records, estimate earnings, and analyze fine details of financial documents to prove or disprove income claims. Continue reading

Financial Statement Fraud: The Damage Inflicted

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Financial statement fraud impacts any person or organization that has a financial interest in the success or failure of a company. A manipulation of the company’s reported earnings or assets can affect a bank that extends credit to the company, a shareholder who invests money in the company, and those organizations that enter into contracts or agreements with the company.

The manipulation of financial statements also affects employees. It has the power to put employees out of work once the fraud is exposed or collapses. It also has the power to enrich employees – mostly those involved in the fraud, but potentially those who are not. Good financial results (actual or fabricated) can be linked to promotions, raises, enhanced benefit packages, bonuses, and the value of stock option awards. Continue reading

Financial Statement Fraud: How It Is Done

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Financial statement fraud happens is one of the most costly types of fraud. It is a significant problem because people inside and outside the company rely on the information provided in the financial statements. They assess the financial results and make predictions and decisions about the future of the company based on those results.

Upper management or company owners are the ones who are usually responsible for financial statement fraud. Executives are entrusted with entire companies. They have access to nearly all data and employees, and they can exploit this access to commit and conceal fraud.

The power the executive has by virtue of her or his position in the company is closely linked with the high cost of financial statement fraud. Power and access within a company make it possible for larger frauds to be committed and covered up. Continue reading

Searching for Assets in Divorce

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Potential clients in the process of divorce often contact me because they are concerned about hidden assets. Often the spouse had a history of financial dishonesty throughout the marriage, or his or her behavior became suspicious around the time divorce was filed. It is not uncommon for there to be a sudden lack of money once divorce is filed. Previously, it was easy to pay the bills and pay for vacations and other extras. Now it’s hard to find money for even the basic necessities.

When a spouse is suspected of hiding money and other assets, professional help is required. But what kind of help?

It depends. There are two types of help that you can get for this aspect of a divorce case. The first is a forensic accountant who will essentially trace money through accounts, follow the paper trail, and determine if there is any missing money. This work is heavily rooted in the documentation you obtain. I can’t trace the money without the documents. Continue reading