Essentials of Forensic Accounting

Essentials of Forensic Accounting

Essentials of Forensic Accounting is an authoritative resource covering a comprehensive range of forensic accounting topics. As a foundation review, a reference book, or as preparation for the Certification in Financial Forensics (CFF^®) Exam, this publication will provide thoughtful and insightful examination of the key themes in this field, including:

• Professional responsibilities and practice management
• Fundamental forensic knowledge including laws, courts, and dispute resolution
• Specialized forensic knowledge such as bankruptcy, insolvency, reorganization, and valuation

Through illustrative examples, cases, and explanations, this book makes abstract concepts come to life to help you understand and successfully navigate this complex area.

About the Authors:

Michael A. Crain, DBA, CPA/ABV, CFA, CFE
Michael A. Crain is a member of faculty at Florida Atlantic University, where he teaches and is director of FAU's Center for Forensic Accounting. Prior to joining the full-time faculty at FAU, he was a practicing CPA for over 30 years and spent much of his time in forensic accounting and business valuation. He still consults in forensic accounting and valuation. he is a doctor of business administration (finance) from the Manchester Business School, University of Manchester in England. He has been a licensed CPA in Florida since 1984 and holds several certifications in valuation, fraud examination, and financial analysis. He has certifications of Chartered financial Analyst (CFA) from the CFA Institute, Accredited in Business Valuation (ABV^®) from the AICPA, and Certified Fraud Examiner (CFE) from the Association of Certified Fraud Examiners. He has also received several awards, including the AICPA's Lawler Award presented bthe the Journal of Accountancy for best article of the year, AICPA's Sustained Contribution Award, and has been inducted into the AICPA's Business Valuation Hall of Fame.

William S. Hopwood, Ph.D.
William S. Hopwood is a professor of accounting at Florida Atlantic University (FAU). He earned a Ph.D. from the University of Florida and has worked extensively with curriculum development in the FAU Master of Accounting — Forensic Concentration Program. He is also a coauthor of widely used textbooks in the areas of Forensic Accounting and Accounting Information Systems as well as an AICPA study guide for the CFF Exam.

Richard S. Gendler, J.D, LL.M, J.S.D.
Richard S. Gendler is Business Law Area Coordinator and an instructor at Florida Atlantic University (FAU). He earned a Doctor of Jurisprudence from the University of Miami School of Law, as well as a Masters of Laws, and a Doctor of Science of Law from the Thomas Jefferson School of Law. He is a member of the Florida Bar and licensed to practice before several U.S. District, Circuit, Tax and Bankruptcy Courts. He has published several law review and journal articles, presented before various bar and accounting association conferences, and has served as a contributing editor for several widely distributed business law text books.

George R. Young, Ph.D., CPA, CFE
George R. Young is an associate professor of accounting at Florida Atlantic University (FAU). He is a CPA and practiced public accounting for nine years before entering academia. He earned his doctorate from the University of Texas at Arlington and a Master of Accounting degree (tax concentration) from Southern Illinois University at Carbondale. Since 2003, he has been academic director of the forensic concentration in the Master of Accounting program at FAU. He was a member of the Technical Working Task Group (sponsored by a National Institute of Justice grant) that developed a model educational curriculum for fraud examination and forensic accounting. He is a coauthor of Forensic Accounting and Fraud Examination (McGraw-Hill, 2e) and a chair emeritus of the Association of Certified Fraud Examiners Higher Education Advisory Committee.

Carl Pacini, Ph.D., JD, CPA/CFF
Carl Pacini is an associate professor of accounting at the University of South Florida St. Petersburg (USFSP). He received his Ph.D. in Accounting from Florida State University and his law degree from the University of Notre Dame. He is a licensed CPA, a Certified Financial Services Auditor, Certified in Financial Forensics, and a member of the Florida Bar. He has published over 75 articles in varous academic and practitioner journals.

Section I: Introduction

Chapter 1: The Forensic Accounting Profession 3

Learning Objectives 3

Introduction 3

Forensic Accounting Knowledge and Skills 7

Professional Opportunities in Forensic Accounting 9

Professional Organizations and Certifications 10

Organization of This Book 13

Summary 13

Review Questions 15

Short Answer Questions 16

Brief Cases 16

Internet Research Assignments 17

Chapter 2: Professional Ethics and Responsibilities 19

Learning Objectives 19

Introduction 19

Authoritative Guidance 20

Non-Authoritative Guidance 44

Summary 44

Review Questions 46

Short Answer Questions 47

Brief Cases 48

Cases 49

Internet Research Assignments 51

Section II: Fundamental Forensic Knowledge

Chapter 3: Civil and Criminal Procedure 55

Learning Objectives 55

Introduction 55

The American Court System 57

Steps in Civil Litigation (Rules of Civil Procedure) 59

Steps in a Criminal Proceeding 71

Summary 76

Review Questions 78

Short Answer Questions 80

Brief Cases 81

Cases 82

Internet Research Assignments 83

Chapter 4: Evidence 85

Learning Objectives 85

Introduction 85

Categories of Evidence 85

Testimonial, Physical, and Demonstrative Evidence 86

Federal Rules of Evidence 87

Relevance 87

Privilege(s) 88

Competency and Knowledge 97

Opinions Including Experts 97

Hearsay 98

Use of Originals 101

Documents 103

Witness Examination and Impeachment 104

Authentication 104

Burden of Proof 106

Presumptions 107

Summary 107

Review Questions 109

Short Answer Questions 113

Brief Cases 114

Cases 114

Internet Research Assignments 116

Chapter 5: Discovery 117

Learning Objectives 117

Introduction 117

Discovery Standards 118

Discovery Sequence 119

Discovery Abuse 120

ESI (Electronically Stored Information) 121

Interrogatories 122

Depositions 124

Requests for Document Production, ESI, and Tangible Things or Entering Onto Land 129

Requests for Physical or Mental Examinations 131

Requests for Admission 132

Ways to Fight Discovery Abuse 133

Recent Amendments to the FRCP 135

Summary 136

Review Questions 138

Short Answer Questions 139

Brief Cases 140

Cases 141

Internet Research Assignments 142

Chapter 6: Litigation Services 143

Learning Objectives 143

Introduction 143

Federal Rules Governing Expert Testimony 145

Disclosure of Expert Testimony 153

Alternative Dispute Resolution 160

Summary 168

Review Questions 170

Short Answer Questions 173

Brief Cases 174

Cases 174

Internet Research Assignments 179

Chapter 7: Engagement and Practice Management 181

Learning Objectives 181

Introduction 181

Forensic Accounting Services 181

Engagement Management 191

Practice Development 198

Summary 201

Review Questions 203

Short Answer Questions 204

Brief Cases 205

Cases 206

Internet Research Assignments 212

Section III: Specialized Forensic Knowledge

Chapter 8: Fraud Prevention, Detection, and Response 215

Learning Objectives 215

Introduction 215

Managing Fraud Risk 215

Fraud Prevention 218

Fraud Detection 219

Fraud Investigation and Response Protocols 224

Evidence Gathering 228

Summary 240

Review Questions 242

Short Answer Questions 244

Brief Cases 245

Cases 246

Internet Research Assignments 252

Chapter 9: Fraud Schemes and Applications 253

Learning Objectives 253

Introduction 253

Occupational Fraud 253

External and Individual Fraud 255

Occupational Fraud Schemes 255

Money Laundering Fraud Schemes 268

Organized Crime and Fraud 271

Summary 273

Review Questions 275

Short Answer Questions 276

Brief Cases 277

Cases 277

Internet Research Assignments 283

Chapter 10: Bankruptcy and Related Frauds 285

Learning Objectives 285

Introduction 285

Federal Rules of Bankruptcy Procedure 289

IRS Case Files: Examples of Bankruptcy Fraud Investigations 298

Bankruptcy Fraud Versus Divorce Fraud 299

Bankruptcy Fraud Versus Fraud in the Administration of Estates and Trusts 300

Legal Processes for Investigations 302

Investigations and Involvement From the United States Trustee Program 303

Summary 304

Review Questions 306

Short Answer Questions 307

Brief Cases 308

Cases 309

Internet Research Assignments 312

Chapter 11: Digital Forensics and Data Analytics 313

Learning Objectives 313

Introduction 313

Legal Issues 315

General Knowledge and Skills for Computer and Digital Forensics 317

Digital Forensics Labs 320

Regional Computer Forensic Laboratories 321

Private Investigations Versus Law Enforcement Investigations 321

Types of Investigations 322

Software Used by Digital Forensics Examiners 327

Specific Functions and Capabilities of Popular Computer Forensics Software Products 328

Solid State and Mechanical Storage Devices 332

Advanced Digital Forensics and Computer-Assisted Audit Tools and Techniques 334

CAAT Software 335

Network Forensics 335

Network Forensics Software 339

Conducting Computer Forensics Investigations 340

Law Enforcement Databases 343

Data Analytics and Big Data 344

Summary 347

Review Questions 349

Short Answer Questions 352

Brief Cases 352

Cases 353

Internet Research Assignments 356

Chapter 12: Matrimonial Forensics 357

Learning Objectives 357

Introduction 357

The Role of the Forensic Accountant 358

Accepting an Engagement 360

The Divorce Process 360

Discovery 362

The Character of Property and Its Division 365

Tax Consequences of Asset Distributions 366

Identification of Assets, Liabilities, and Income 368

Valuation and Quantification of Assets, Liabilities, and Income 369

Valuation of Other Assets 373

Alimony and Support 379

Fraud in Matrimonial Engagements 382

Summary 386

References 387

Review Questions 388

Short Answer Questions 389

Brief Cases 390

Cases 391

Internet Research Assignments 394

Chapter 13: Financial Statement Misrepresentations 395

Learning Objectives 395

Introduction 395

Financial Statement Misrepresentations Defined 396

Common Methods Used to Commit Financial Statement Fraud 398

Who Commits Financial Statement Fraud? 410

Red Flags and Risk Factors 414

Investigation Techniques 415

Prevention of Financial Statement Fraud: Best Practices 422

SEC Investigations 424

The Foreign Corrupt Practices Act 425

Summary 426

Review Questions 428

Short Answer Questions 429

Brief Cases 430

Cases 431

Internet Research Assignments 435

Chapter 14: Economic Damages 437

Learning Objectives 437

Introduction 437

General Knowledge for Damage Experts 438

Commercial Litigation 440

Individual Litigation 456

Summary 459

Review Questions 461

Short Answer Questions 463

Brief Cases 464

Cases 465

Internet Research Assignments 466

Chapter 15: Valuation Fundamentals 467

Learning Objectives 467

Introduction 467

General Knowledge 468

General Valuation Models 469

Three General Valuation Approaches 470

Valuation Adjustments 493

Summary 494

Review Questions 496

Short Answer Questions 498

Brief Cases 499

Cases 499

Internet Research Assignments 501

Chapter 16: Valuation Applications 503

Learning Objectives 503

Introduction 504

The Business Valuation Process 504

Applications of the General Valuation Approaches 505

Other Topics in Business Valuation 515

Valuing Pass-Through Tax Entities 516

Models, Approaches, and Methods 517

Standards of Value and Premises of Value 517

Effect of Industry and Economy on Value 519

Effect of Shareholder Agreements on Value 519

Valuation Date 520

Valuation and the Law 520

Business Valuation Standards of Practice 520

Authoritative Interpretations 521

Business Valuation Reports 522

Engagement Letter Terms in Valuation Projects 523

Summary 525

Review Questions 526

Short Answer Questions 528

Brief Cases 529

Cases 530

Internet Research Assignments 532

Appendix A: Fraud-Related Laws 533

Appendix B: Present Value 569

Glossary 575

Index 593

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