Forensic Accounting

No, it is not counting the dead bodies or keeping track of all the numbered evidence tags at a crime scene. It is the use of accounting and auditing procedures to discover, analyze, organize, and present evidence of a financial nature for use in a legal, administrative, or other official proceeding. "Forensic" means suitable for use in court. In addition to employing accounting principles and audit standards, the forensic accountant must obtain and preserve financial evidence in accordance with the rules of criminal or civil procedure. Not unlike a detective, the forensic accountant must obtain the facts in a legal manner, maintain the integrity and chain of custody of documentary and physical evidence, and be able to testify and be cross-examined as to the facts his investigation uncovered. Forensic accountants may look beyond the mere transaction to reveal the true economic substance - unscrambling a financial shell game. Even the lack of accounting records will not deter a forensic accountant. The forensic accountant may use the net worth and expenditures, bank deposits, or source and application of funds methods of reconstructing income to reveal the fruit of illicit activity, even if the perpetrator has dealt exclusively in cash. Proof of proceeds in this manner can be used to establish an element of the offense in money laundering or tax evasion cases, or to corroborate a substantive offense such as fraud, embezzlement, drug trafficking, racketeering, or another income-producing enterprise.

While every Certified Public Accountant (CPA) should be able to examine financial records and prepare a report of findings, not every CPA has the unique skills and experience necessary to perform forensic (acceptable in court) accounting. The Certified Fraud Examiner (CFE) designation together with a CPA license indicates that the holder should possess a level of education, experience, and knowledge of accounting and auditing principles, investigative procedure, criminology and law to perform the forensic accounting function.

Forensic accountants are employed by public accounting firms, private investigation agencies, law firms, insurance companies, police and law enforcement agencies, banks and other financial institutions, government regulatory agencies, and the internal audit staffs of businesses and non-profit enterprises. Forensic accountants in private practice are usually retained by the attorney for the client requiring the services.

 J. William Studdard, CFE, CPA

 

 

 

Money Laundering

Money laundering is the term used to describe any scheme whereby "dirty" (illicit) money is made to look "clean" (legitimate). It is done to avoid the detection of and prosecution for criminal activity, to evade taxes, and to prevent the forfeiture of assets acquired with illicit proceeds. Money laundering is accomplished by camouflaging or cutting the paper trail connecting the proceeds to the true owner and illegal source. Money laundering is a federal crime, proscribed by Title 18 United States Code Sections 1956 and 1957.

Regardless of the scheme employed, money laundering follows a three-step process:

Placement - disposal of illegal proceeds into banking or business systems to make them more manageable

Layering - separating the proceeds from the illegal source and true owner through financial transactions

Integration - the return of, or the constructive use of, apparently legitimate funds to the owner

Although money laundering traditionally refers to the "washing" of illegal funds, the same process can be employed for other motivations, such as the concealment of assets from a spouse, a creditor, or a claimant, or to evade payment of a civil judgment. (Ever wonder why O.J. has plenty of money to play golf, yet has nothing to pay a wrongful death judgment?) Most recently, terrorist organizations have used money-laundering methods to conceal funds used to support their operations.

Although the term "money laundering" was popularized during the "Miami Vice" era of drug smuggling cartels, the process has been practiced ever since one person has wanted to hide wealth from another. French aristocrats stashed their funds abroad during the French Revolution. Nazis placed their loot in numbered Swiss accounts as a hedge against losing World War II. Prudent dictators have always kept a supply of untraceable "flight capital" to insure a comfortable lifestyle in exile after a coup-de-etat. At a more personal level, spouses often conceal assets and income during divorce proceedings.  The methods employed change with the times. As authorities develop procedures and laws to defeat existing money-laundering schemes, new schemes evolve. Money launderers take advantage of new technologies and changes in business and banking practices to keep their activities hidden. On the other hand, money launderers can revert back to the most basic exchange systems, such as the hawala, black market peso exchange, and similar alternative or parallel remittance systems.

 J. William Studdard, CFE, CPA

 

 

Financial Fraud Investigation

What makes economic crime investigation challenging compared to other types of investigation?

- The investigator must understand the legal framework, business procedures, industry norms, technical aspects, and accounting principles involved in order to uncover the scheme and prove the case.

- The investigator often deals with educated, savvy perpetrators who understand the industry, business environment and processes in which they operate. They may have plenty of ill-gotten funds available to obtain first class legal representation.

- Unlike some mysteries, the investigator may start off with knowing the culprit, but must work to uncover whether a crime has occurred, and determine that the matter is not a result of mistake or error.

The methodologies employed in a financial investigation are not unlike that of any other type of investigation. There is a victim - an individual, a business, or the people as a whole represented in their government. There is a crime scene, although it may be in the accounting records or computer system. The investigator follows leads, uncovering clues that lead to the next inquiry. Interviews, searches, undercover operations, informants, surveillance, evidence preservation, laboratory analysis, and other techniques common to other types of investigation can be found in a financial or fraud investigation. In contrast, financial investigations often involve large amounts of data and documents that require expert analysis by forensic accountants to uncover the clues they hold. A financial investigation is an objective search for the truth, wherever the trail leads.

What qualities make a good financial investigator?

- The financial investigator should be technically knowledgeable as to legal matters, accounting principles, business methods and industry norms. They should be familiar with the indicators of illegal activity and common fraud schemes. They should have earned the appropriate professional credentials, such as a Certified Public Accountant (CPA) license and the Certified Fraud Examiner (CFE) designation.

- The financial investigator should have a skill set that includes the ability to think like an accountant, which means attention to detail, being methodical, basing opinions and conclusions on facts and evidence, and exercising professional skepticism (not believing everything you are told). They should possess the ability to clearly communicate verbally and in writing, be familiar with accepted investigative methods and techniques, be skilled at interviewing and interrogation, and have the ability to direct and supervise others who assist in the investigation. The investigator must also have the ability to sell - to convince reluctant witnesses to cooperate, guilty suspects to confess, and to get prosecutors to accept cases when warranted.

- The financial investigator must have the personal qualities of possessing integrity, of being ethical, objective, believable, creative, and self-confident in their abilities. They must have a positive work ethic; investigation is no 9 to 5 activity. Professional appearance and the overall image they project are critical. When appropriate, the investigator must have the ability to be assertive and be willing to confront hostile witnesses and suspects. They must be able to see the whole picture and not get bogged in detail.

J. William Studdard, CFE, CPA 

 

 

An Investigative Interview

An interview is a conversation with a purpose. An investigative interview is contrasted to an interrogation in that an interview may be conducted of victims, witnesses, and even suspects to obtain facts to further the investigation. An interrogation is conducted of a suspect at or near the end of an investigation, once the facts have established a reasonable probability of culpability, in an effort to obtain an admission or confession. There are other types of specialized interviews, such as multiple suspect elimination. This discussion is confined to that of an investigative interview.

There are five steps to an investigative interview:

THE INTRODUCTION is where the investigator introduces himself and his partner, if any. The interviewee/witness is identified and provided the purpose for the interview. The information given to the witness is only that necessary to establish a framework for the contact and the line of questioning to follow. It may or may not be the true purpose - a plausible ruse may be necessary with some witnesses.

ESTABLISH RAPPORT, which breaks the ice and conditions the witness to talk. It may consist of general small talk before the main line of questioning begins. It also has the purpose of establishing a behavioral baseline to assist the investigator in evaluating verbal and non-verbal behavior indicative of deception by the witness during the questioning phase of the interview.

In the QUESTIONING phase, the investigator starts out with general questions, such as "tell me about..." or "describe to me..." This type of question should result in a narrative response by the witness about the matter. To the extent the narrative omits these details, the investigator follows up with specific questions covering the who, what, when, where, why, and how of the matter.

The investigator gives an oral SUMMARY of the information provided by the witness. The summary is an important part of the interview as it allows the investigator to be sure he has all the information. Often the witness will add to or clarify previous information. Generally, the investigator should repeat everything given by the witness to verify the information received. The witness may be asked to restate key answers. The investigator may ask new questions during the summary as missing, unclear, or inconsistent information becomes apparent. If a written statement is to be taken from the witness, it is obtained at the end of the summary.

The CLOSE is where the investigator thanks the witness, even if they have been uncooperative or deceptive ("Thank you for your time."). Rapport is important at this stage as well - leave on a positive note. The investigator will provide the witness with a means of contact (business card, etc.) and discuss how and when the witness may be recontacted if necessary.

Investigative interviews comprise a critical part of any financial investigation. They require careful planning, as there may be only one opportunity to interview the witness during the investigation. Skill in interviewing is a fundamental requirement of forensic accountants and other financial investigators.

J. William Studdard, CFE, CPA

 

 

Due Diligence

Due diligence is the level of care a person would reasonably be expected to take in a particular situation. In financial matters, it includes knowing about those with whom you seek to do business or are about to employ in a key position. What you don't know can hurt you. You want to find out if a potential business associate, critical new vendor, significant new customer, or a candidate for a key company position has ethical lapses or other "baggage" BEFORE you place trust in them. A key position is any position that involves access to sensitive information or company assets. Besides putting a business at risk for loss, failure to exercise due diligence can result in criminal charges in some cases. For example, a person in a financial institution can commit the offense of money laundering under Title 18 United States Code Section 1957 by engaging in "willful blindness" (a serious lack of due diligence) when conducting a transaction with a another person involving certain criminal proceeds. A financial institution is defined to include auto, boat, aircraft and other vehicle dealers, real estate agencies and others involved in closings, travel agencies, money transmitters, pawn shops, and others, in addition to traditional banks, insurance companies, and credit card companies (Title 31, United States Code Section 5312). Even if loss and liability are avoided, your company's good name and reputation can be put in jeopardy by association with others involved in scandal or criminal activity.

Exercise of due diligence includes knowing the background of persons and businesses with which you plan to do business or employ. A qualified investigator can perform database searches, verify address and employment history, check public records for judgments, liens, criminal records, and property, conduct personal interviews of associates, references and others who know the subject, and confirm the existence of professional licenses and academic degrees. The scope and depth of the inquiry depends of the nature of the business relationship contemplated.

J. William Studdard, CFE, CPA

 

 

Litigation Support

Litigation support by a forensic accountant means providing assistance to law firms in the preparation and presentation of financial-related evidence in court or before an administrative body. This assistance can take the form of determining economic gains or losses from activities or events, analysis of financial information in discovery materials, assisting in the interviews of potential witnesses regarding financial matters, providing testimony as to facts and evidence uncovered by the forensic accountant in a financial investigation, acting as an expert witness regarding accounting and financial matters, and providing advice to the attorney in matters of accounting and auditing for the purpose of developing lines of questioning. The scope of litigation support is limited only by the needs of the attorney and the individual competencies of the forensic accountant. Attorneys for the government, the plaintiff, and the defense use forensic accountants in support of litigation or potential litigation.  A forensic accountant in private practice may at times work for each of these parties (of course, not in the same case!).

J. William Studdard, CFE, CPA

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