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Today’s Topics

Today’s Topics

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Today’s Topics

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  1. Today’s Topics • Interviewing Techniques • Types of Questions • Transparency Barriers • Nature of Financial Fraud • Detection of Financial Fraud FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-1

  2. General Interview Guidelines • Be aware of the “crisis cycle” • Remain a people person • Engage rather than challenge • Conduct the interview as close to the event as possible • Plan for the interview • See text for demeanor (p.281) & language (p.281) FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-2

  3. Types of Questions • Introductory • Informational • Assessment • Closing • Self Admission-use carefully FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-3

  4. Interview Facilitators • Expectation fulfillment • Recognition • Altruism • Sympathy • Newness • Catharsis • Sense of meaning • Availability of rewards Don’t try to memorize the details of this list. Know how to use some of them. FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-4

  5. Interview Inhibitors • Time demands • Ego threats • Etiquette • Trauma • Forgetfulness • Time-line confusion • Logic confusion • Unconscious behaviors Unwilling Don’t try to memorize the details of this list. Know how to use some of them. Unable FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-5

  6. Fraud Reporting • WFO Suggestion: • Summary • Chronology • Interview & Procedural Summaries • Admission information • Loss Assessment FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-6

  7. Barriers to Transparency • Transparency defined • WYSIWYG • Management bias • Measurement bias FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-7

  8. Financial Fraud Statistics • Key players • COSO • The Treadway Comm.-NCFFR • SEC’s AAERs • Accounting & Auditing Enforcement Releases • Treadway Commission: 1987 • Infrequent but costly • COSO Update: 1999 • 300 AAERs 1987-1997 FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-8

  9. Drivers of 2000’s Meltdown • Booming economy • Moral decay • Incentives • Analysts’ expectations • Debt • Rules versus principles • Auditor independence issues • Greed • Educator failure • Failure to forecast FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-9

  10. Financial Fraud Motivation • Greed • Fear of failure • Lack of accounting expertise • Scope of operations—too broad FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-10

  11. 18 Key Tidbits • Average period: 23.7 months • Revenue frauds were #1 • Asset misstatement-spread around • Mean misstatement = $25 M • CEO involved in 72% of the cases • Last audit was unqualified in 55% of the cases • Mean assets = $532 M; revenues = $232 M • S/W and manufacturing involved in 12% of the cases • NASDAQ had 78% • 36% filed for bankruptcy • Non-existent or uninvolved audit committees • Insiders on Boards of Directors • Family relationships were common • Financial pressures were high • 56% of auditors were Big 6 • Auditors named in 30% of cases • 25% changed auditors after the fraud • Relatively few executives went to prison FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-11

  12. Financial Fraud Detection • KTT is the key • Use the Fraud Exposure Rectangle • Management & Directors • Background, motivation & influence • Company relationships • Obligations, related party transactions & compliance • Nature of organization & industry • Financial results & operations • GAAP, attitude FORENSIC ACCOUNTING - BA124 – Spring 2013 Slide 15-12