Académique Documents
Professionnel Documents
Culture Documents
Court-Appointed Trustee
Forensic accountants are being used by the court appointed trustees (Irving Picard and Securities Investor Protection Corporation) to reconstruct the books of Bernard L. Madoff Investment Securities (BLMIS). According to Picard, there were paper records, microfilm, and microfiche. But there was nothing that was electronic. Every customer statement was fiction, so the first task is to reconstruct the books and records of BLMIS. One of the early projects was to digitize the records so they are easier to compare, including customer statements, incoming letters, faxes, and bank records. The forensic accountant will use records from third parties and customers. Every customer account must be reconstructed from the ground up. Stephen Harbeck, President of Securities Investor Protection Corporation, stated that the forensic accountants are working as quickly as possible to catalog all the farreaching aspects of the Madoff scheme and to recover money for investors to the extent possible by law. The cost of the Ponzi scheme may be as high as $65 billion.
Source: WebCPA staff, Forensic Accountants Reconstruct Madoff Books, May 15, 2009. http://www.webcpa.com/news/Forensic-Accountants-Reconstruct-Madoff-Books-50484-1.html
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Scaling the Audit for Smaller, Less Complex Companies. Evaluating Entity-Level Controls. Assessing the Risk of Management Override and Evaluating Mitigating Actions. Evaluating Segregation of Duties and Alternative Controls. Auditing Information Technology Controls in a Less Complex IT Environment. Considering Financial Reporting Competencies and Their Effect on Internal Control. Obtaining Sufficient Competent Evidence When the Company Has Less Formal Documentation. Auditing Smaller, Less Complex Companies with Pervasive Control Deficiencies.
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Entity-Level Controls
Controls related to the control environment. Controls over management override; the company's risk assessment process. Centralized processing and controls, including shared service environments. Controls to monitor results of operations. Controls to monitor other controls, including activities of the audit committee and self-assessment programs. Controls over the period-end financial reporting process. Policies that address significant business control and risk management practices.
Definition of Fraud
Four major legal elements of fraud would be: A false representation or willful omission regarding a material fact. The fraudster knew the representation was false. The target relied on this misappropriation. The victim suffered damages or incurred a loss.
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Audit Procedures
Audit evidence is gathered in two fieldwork stages: 1. Internal control testing phase. 2. Account balance testing phase.
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Materiality is the measure of whether something is significant enough to change an investors investment decision. Control risk is risk that a material error in the balance or transaction class will not be prevented or detected.
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Inherent risk is risk that an account or transactions contain material misstatements before the effects of the controls. Detection risk is risk that audit procedures will not turn up material error when it exists.
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Manipulation, falsification, or alteration of accounting records, or supporting documents from which financial statements are prepared. Misrepresentation in or intentional omission from the financial statements of events, transactions, or other significant information. Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure.
Source: SAS No. 99, Consideration of Fraud in a Financial Statement Audit, New York: AICPA
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Examining journal entries and other adjustments. Reviewing accounting estimates for bias, including a retrospective review of significant management estimates. Evaluating the business rationale for significant unusual transactions.
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Recording fictitious journal entries (especially near end of quarter or year). Intentionally biasing assumptions and judgments used to estimate accounts (e.g., pension plan assumptions or bad debt allowances). Altering records and terms related to important and unusual transactions.
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Know your enemy as you know yourself, and you can fight a hundred battles with no danger of defeat. Chinese Proverb. Military leaders study past battles. Football and basketball teams study game films of their opponents. Chess players try to anticipate the moves of their opponent.
Examples: If contracts above $40,000 are normally audited each year, check the contracts between $30,000-$40,000.
FAs must learn the tricks of the trade as well as the trade.
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The PCAOB is also empowered to adopt or amend standards issued or recommended by private accounting industry groups or to adopt its own standards independent of such private industry standards or recommendations.
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Walkthroughs
According to the PCAOB, in a walkthrough, an auditor traces company transactions and events both those that are routine and recurring and those that are unusual from origination, through the companys accounting and information systems and financial report preparation processes, to their being reported in the companys financial statements.
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2.
Notify management or the board when the incidence of significant fraud has been established to a reasonable certainty. If the results of a fraud investigation indicate that previously undiscovered fraud materially adversely affected previous financial statements, for one or more years, the internal auditor should inform appropriate management and the audit committee of the board of directors of the discovery.
(continued on next slide)
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4.
A written report should include all findings, conclusions, recommendations, and corrective actions taken. A draft of the written report should be submitted to legal counsel for review, especially where the internal auditor chooses to invoke client privilege.
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Audit Committee
The audit committee is the subcommittee of an organizations board of directors charged with overseeing the organizations financial reporting and internal control processes. The audit committees biggest responsibility is monitoring the component parts of the audit process.
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Managements Role
The Sarbanes-Oxley Act of 2002 mandates that CEOs and CFOs certify in periodic reports containing financial statements filed with the SEC the appropriateness of financial statements and disclosures.
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Audit Tests
The Panel on Audit Effectiveness recommended that surprise or unpredictable elements should be incorporated into audit tests, including: Recounts of inventory and unannounced visits to locations. Interviews of financial and nonfinancial client personnel in different locations.
(continued on next slide)
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Auditing Hints
SAS No. 99 does not require auditors to make inquiries of others, as opposed to management. Auditors must talk to and interview others below management level. If asked, employees may be willing to report suspicious activities. Use independent sources for evaluating management (e.g., financial analysts). Surf the internet. Auditors need to follow the performance history of managers and directors. If a company has an anonymous reporting system, obtain information about the incidents reported and consider them when assessing fraud risk. (continued on next slide)
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Auditing Hints
Be sure to perform analytical procedures, and the work should be reviewed by senior members of the audit team.
Auditors should select sample items below their normal testing scope (e.g., HealthSouth). Fraud procedures should be more than checklists. Audits should focus on finding and detecting fraud. Ask for and review all top drawer entries. Ask for and review all side agreements. Look for hockey stick patterns.
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Audit Tests
Requests for written confirmations from client employees regarding matters about which they have made representations to the auditors. Tests of accounts not normally performed annually. Tests of accounts traditionally or frequently deemed low risk.
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Overstated revenues. Management estimates. Pro formas can mislead. Earnings problems: masking reduced cash flow. Earnings before interest, tax, depreciation, and amortization (EBITDA). Excessive debt. Inventory problems.
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For restatements between January 1, 1997 to June 30, 2002, 45% were accused of securities fraud and subject to shareholder suits. Average of 7 individuals were implicated, including CEOs CFOs COOs General counsel Directors Internal/external auditors
Source: Robert Tillman and Michael Indergaard, Control Overrides in Financial Statement Fraud.
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At least 40 people knew about the fraud. They were afraid to talk. Scott Sullivan handed out $10,000 checks to 7 involved individuals. Altered key documents and denied Andersen access to the database where most of the sensitive numbers were stored. Andersen did not complain about denied access. Company officials decided what tax rates they wanted and then used the reserves to arrive at the tax rates.
Source: Rebecca Blumenstein and Susan Pullian, WorldCom Fraud Was Widespread, Wall Street J., June 10, 2003, p. 3.
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HealthSouth
From 1999 to 2001, HealthSouths net income increased nearly 500 percent, but revenue grew only five percent. On March 19, 2003, the SEC said that HealthSouth faked at least $1.4 billion in profit since 1999. Professional fees associated with the reconstruction of HealthSouths financial records and restatement of 2001 and 2002 consolidated financial statements totaled over $270 million.
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Using checklists to help detect fraud: SAS checklist. Attitudes/Rationalizations checklist. Audit test activities checklist. Miscellaneous fraud indicator checklist.
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Behavioral Approaches
Some fraud schemes cannot be effectively detected using data-driven approaches. Instead, behavioral considerations may help an auditor find fraud. Employee attitudes, feelings, values, norms, interaction with peers, and general satisfaction should all be considered when looking for fraud.
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v. Blakely, 542 U.S. 296 (2004). U.S. v. Booker, 543 U.S. 220 (2005). 3 U.S. Sentencing Commission, Guideline Manual, 3E1.1 (November 2008), p.16. 4 Ibid., p. 395. 5 Department of Justice, Fact Sheet: The Impact of United States v. Booker on Federal Sentencing, March 15, 2006.
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Duplicate payments (2% of total purchases) $80 million times 2% = $1.6 million loss.
Extract only the numerical digits of an invoice number and match on only the numbers portion of the invoice. Try identifying the dates that are similar such as dates that are less than 14 days. Try matching on the absolute value of the amount.
2. 3. 4. 5.
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Rounded-amount invoices. Invoices just below approval amounts. Abnormal invoice volume activity (two invoices one month and 60 the next). Vendors with sequential invoice numbers. LC 0002, LC 0003, LC 0004 Above average payments per vendor.
C. Warner and B. G. Dubinsky, Uncovering Accounts Payable Fraud, Fraud Magazine, July/ August 2006, pp. 29-51.
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