Fraud Auditing and Forensic Accounting

TOMMIE W. SINGLETON, CPA, CMA, CISA, CFF, CGEIT, and CITP, is Marshall IS Scholar and coordinator of the Forensic Accounting Program at the University of Alabama at Birmingham. His articles have appeared in such journals as EDPACS, EDP Auditor Journal, White-Collar Crime Fighter, Journal of Corporate Accounting and Finance, and Information Systems Audit and Control journal. Tommie has presented this material to dozens of auditing firms, internal audit departments, and professional organizations as seminars and training. He is a scholar-in-residence for the regional public accounting firm Carr, Riggs & Ingram with responsibilities related to fraud auditing and forensic accounting. AARON J. SINGLETON, CPA, CISA, has worked for five years at a global public accounting firm performing information technology, financial statement, and regulatory compliance audits. Aaron's prior experience includes managing accounting and systems for a private wholesale company, and experience in systems development, installation, and support. Aaron has published articles related to fraud and forensics in journals including the Information Security Journal and the Journal of Corporate Accounting and Finance. Aaron earned his master's of accountancy from Bowling Green State University, and bachelor's degrees in accounting and management from the University of Alabama at Birmingham.

• Preface xiAcknowledgments xiiiChapter 1: Background of Fraud Auditing and Forensic Accounting 1Introduction 1Brief History of Fraud and the Antifraud Profession 3The Fraud Cycle 7Review of Technical Literature 9Forensic Accountant and Audits 11Forensic Accountants 20Fraud Auditors 25Keys to Effective Fraud Investigation 31The Antifraud Professional’s Career 33Summary 36Notes 37Chapter 2: Fraud Principles 39Introduction 39Definition: What Is Fraud? 40Synonyms: Fraud, Theft, and Embezzlement 42Classic Fraud Research 42Fraud Triangle 44Scope of Fraud 47Profile of Fraudsters 49Who Is Victimized by Fraud Most Often? 53Fraud Taxonomies 54Fraud Tree 62Evolution of a Typical Fraud 65Summary 68Notes 69Chapter 3: Fraud Schemes 71Introduction 71ACFE Fraud Tree 73Financial Statement Schemes 80Corruption Schemes 83Asset Misappropriation Schemes 84Summary 94Notes 94Chapter 4: Red Flags 95Introduction 95Professional Standards 97Common Red Flags 99Specific Red Flags 101Fraud Detection Model 110Summary 111Notes 112Chapter 5: Fraud Risk Assessment 113Introduction 113Technical Literature and Risk Assessment 114Risk Assessment Factors 115Risk Assessment Best Practices 119Risk Management Checklists and Documentation 125Summary 129Notes 129Chapter 6: Fraud Prevention 131Introduction 131Prevention Environment 132Perception of Detection 135Classic Approaches 137Other Prevention Measures 139Accounting Cycles 141Summary 143Notes 143Chapter 7: Fraud Detection 145Introduction 145Fraud Detection Axioms 146Common Detection Methods 146Specific Detection Methods 149Summary 155Appendix 7A: Beneish’s Ratios 156Chapter 8: Fraud Response 157Introduction 157Fraud Policy 157Fraud Response Team 160Recovery 164Summary 165Notes 166Appendix 8A: ACFE Sample Fraud Policy 167Appendix 8B: Sample Fraud Policy Decision Matrix 172Chapter 9: Computer Crime 175Introduction 175History and Evolution of Computer Crimes 176Computer Crime Theories and Categorizations 179Characteristics of the Computer Environment 182Information Security (INFOSEC) 185Profiling Internet Fraudsters 186Summary 192Notes 193Chapter 10: Fraud and the Accounting Information System 195Introduction 195Accounting Concepts 196Segregation of Duties 202Accounting Information Systems 203Key Personnel 204Computer Hardware 208Computer Software 210New Forms of Media 211Audit Trail Concept 211Summary 212Chapter 11: Gathering Evidence 213Introduction 213Rules of Evidence 213Hearsay Exceptions 217Other Rules of Evidence 218Summary 223Notes 223Chapter 12: Cyber Forensics 225Introduction 225Expectation of Privacy 226Types of Investigations 227Sources of Digital Data 230Types of Cyber Data 231Cyber Forensics Investigation Process 234Variety of Specialists in Cyber Forensics 236Summary 237Notes 237Chapter 13: Obtaining and Evaluating Nonfinancial Evidence in a Fraud Examination 239Introduction 239Interviews 240Body Language 242Deception Cues 243Eye Language 244Statement Analysis 245SCAN 246Summary 247Notes 247Chapter 14: General Criteria and Standards for Establishing an Expert Witness’s Qualifications 249Introduction 249Credentials 250Personal Qualities of the Expert 255Sources for Locating Expert Witnesses 259Distinguishing the Actual Area of Competence 261Summary 261Notes 262Chapter 15: The Legal Role and Qualifications of an Expert Witness 263Introduction 263Role of a Forensic Accountant as a Witness in Court 264Legal Qualifications for a Forensic Accountant as an Expert Witness 269Qualification and Admissibility of Accounting Evidence 270Expert’s Role in the Litigation Team 272Pretestimony Activities 272Summary 273Notes 274Appendix 15A: Transcript of Typical Court Testimony of Expert Witness 275Chapter 16: Effective Tactics and Procedures for the Expert Witness in Court 277Introduction 277Effective Profile 278Being a Credible Expert Witness 278Expert’s Role in the Litigation Team 279Pretestimony Activities 280Trial and Testimony 281Survival Techniques 288Summary 290Notes 290Chapter 17: Fraud and the Public Accounting Profession 291Introduction 291History of Fraud and the Auditor: A Summary 291Fraud and the Auditor’s Liability 302Fraud and the Auditor’s Responsibility 303Fraud and the Auditor’s Role 306Summary 308Note 308About the Authors 311Index 313