Forensic Accounting

Investigative Accounting: Engagements

 Employee Theft or Embezzlement

 Insurance Fraud
 Bankruptcy Fraud
 Financial Statement Fraud
 Tax Fraud
 Securities Fraud
Who Hires Forensic Accountants?

 Insurance Companies

 Government Agencies

 Banks

 Police Departments

 Public and Private Businesses

 Accounting Firms
Why do one commit fraud???
 Fraud Triangle

Donald Cressey, a sociologist and criminologist in the 1940s, was one of the first persons to specialize in the
field of understanding fraudsters and why they do what they do.
 Incentive/Pressure:

 Financial stability or profitability is threatened by economic, industry, or

entity
operating conditions.
 Excessive pressure exists for management to meet debt requirements
 Personal net worth is materially threatened
 Attitude/Rationalism:(Ethical Behavior)

 Everyone else is doing it

 I needed the money
 I meant no harm and did no harm
 The organization can afford it
 I was used and needed revenge
 What I did was entirely right for someone in my position
 My employer did not compensate me well enough and hence I took
what was due to me
 Bribery is a norm in this type of business
 Opportunities:

 There is a presence of large amounts of cash on hand or inventory

items.
 There is an inadequate internal control over assets.
 Inadequate segregation of duties.
 Absence of mandatory job rotation and vacations.
 Fraud Diamond

Wolf and Hermanson (2004)

introduced the fraud diamond
model where they presented
another view of the factors to
fraud. The theory adds fourth
variable “Capability” to the three
factor theory of fraud triangle.

Wolf and Hermanson believed

many frauds would not have
occurred without the right person
with right capabilities.
 Capabilities:

 Authoritative position or function within the organization.

 Capacity to understand and exploit accounting systems and internal control
 Confidence that he/she will not be detected, or if caught, he/she will get out of it
easily.
 Capability to deal with the stress created within.
Fraud Pentagon

 The fraud triangle can be

expanded further to a
Crowe Horwath’s Fraud
Pentagon, where an
employee’s competence and
competence Arrogance
arrogance are factored into
the 3 conditions generally
Attitude Opportunity
present when fraud occurs.

Pressure
 Competence: It is an extension on the element of opportunity to include an
individual’s ability to override internal controls and to socially control the
situation to his advantage.

 Arrogance (lack of conscience): It is an attitude of superiority and entitlement

or greed on the part of the perpetrator who believes that company policies and
procedures do not apply to him.
Corruption

 Purchase schemes, which involve the overbilling of a company for goods or services
by a vendor in which an employee has an undisclosed ownership or financial interest
 Sales schemes, which involve the underselling of company goods by an employee to
a company in which the employee maintains a hidden interest.
 Illegal gratuities schemes, which involve giving or receiving something of value to
reward a business decision.
 Economic extortion schemes, which occur when an employee demands payment
from a vendor for decisions made in the vendor's favor. Refusal to pay the extorter
results in harm to the vendor.
 A lapping scheme is a fraudulent practice that involves altering accounts receivables
to hide stolen cash.
A robbery took place in a mall in January 2016

 Thieves broke in through the door

 They stole case worth more than Rs. 40 lacs

 Police complaint lodged

 Police made inquiries with staff, neighbourhood
Findings of the Police

 They concluded that this was the work of a local gang of thieves operating in the area and
this mall was the latest victim
 They suspected that some employee may have helped but could not get specific clues
against anyone
 They recommended better locks and greater security. Case virtually closed
Management appointed auditors
who were specialized investigators
more for studying controls and
recommending preventive measures
Auditors spot red flags

The time element indicated that the thieves had only 20 minutes to complete the robbery
while the patrolling guards were circling the mall.
 How could they throw about all contents of all drawers?
 Where did they have time to steal a few cell phone handsets which were on a different
floor?
 The alarm had been switch off. Therefore it was certain that someone had helped them
 The door that was broken was done with crude tools- not the work of a professional gang
 Out of two safes only one was broken into and robbed. The second was left untouched?
Auditors try a new approach

 The use the space time dimension approach

 Amazing findings- Late night sales

The log in id was traced – the store manager. On being questioned he confessed

 There was no robbery- it was a stage managed robbery to cover up stock shortages
 The shortages were built up over a period of time. The store manager panicked when he
was told that a stock inspection was to take place
 He converted the stock shortages into ‘artificial’ sales by entering sales at midnight along
with his accomplice the head cashier during the previous two nights. This resulted into
stock shortages being converted into cash shortages.
 This shortage was then palmed off as robbery by breaking open the door and throwing
papers and documents in the cash room to make it look like a robbery