This course will provide accounting and auditing professionals with the tools, techniques and insight to evaluate the potential for fraud to exist within their current operating and financial reporting systems. While the Sarbanes-Oxley Section 404 internal control reporting requirements help to minimize the potential for fraudulent activities to occur, history has shown that ingenious employees can and have manipulated even the best control systems for personal gain.
Objectives of the Presentation:
- Define the legal attributes of fraud
- Understand what drives individuals to commit financial statement fraud
- Identify the behavioral aspects of individuals who perpetrate financial statement fraud
- Identify the Organizational 'Red Flags' of Financial Statement Fraud
- Discuss the elements of the 'Fraud Triangle'
- Identify the key indicators, or 'Red Flags' which indicate that financial statements may have been manipulated
- Identify the Key 'Fraud Strategies' uses to mislead potential investors or regulators
- How to determine if fraudulent activities are occurring in your organization
- Ensure forensic audit evidence will pass The 'Daubert Rule'
Why Should you Attend?
Economic crime is an unpleasant fact. It has touched every country, every industry, and has no signs of stopping. During the past several years, the number of reported cases of fraud and corruption has continued to grow dramatically. Compounding this is the challenges faced by the criminal justice system and a general absence of the necessary skill sets to gather the proper audit evidence so vital to criminal investigations. Even audited financial statements don't safeguard today's investors from these criminals. Current studies show that external auditors were complicit in 50% of the financial statement frauds over the past 10 years.
Winston Churchill was once quoted as saying 'Civilizations that forget their past are doomed to repeat it.' In the past five years, there have been more instances of financial wrong-doings than in the entire 20th Century. In addition, the magnitude of these frauds has dwarfed most of those that have occurred in the past. In this section, we will explore the causes of these frauds, and correlate them with the events that preceded them.
Financial reporting fraud is the intentional misstatements or omission of amounts or disclosures designed to deceive financial statement users. Financial statement fraud typically starts as a simple 'stretch' or accounting 'fix' that people expect to reverse when actual results improve. This often happens when only a small amount of additional revenue is needed to meet expectations. Those involved believe that the 'fix' will be a one-time event. The participants are not usually involved in a grand plan or conspiracy - they simply rationalize the misstatements.
But simple plans grow into more complex schemes that result in material misstatements of financial statements that sometimes cover several years of falsification and manipulation.
Financial statement fraud is accomplished by:
- Manipulating, falsifying or altering documents from which financial statements are prepared
- The manipulation or intentional omission of events, transactions or other significant information in financial statements
- The intentional misapplication of accounting principles relating to the amounts, classification, manner of presentation or disclosure
This course will enhance the forensic accountant/auditor and management's responsibility for the detection, deterrence, investigation and reporting of fraud. Within any processing system, where individuals have access to convertible assets, the auditor should be aware of the potential for fraud to occur.
Definition of Fraud
For purposes of discussion, we will define fraud as the purposeful actions, on the part of any individual or entity, performed for the sole purpose of obtaining assets of the organization through wrongful means.
The Characteristics of Fraud
There are several characteristics common to fraud:
- Fraud is perpetrated through an entire spectrum of improprieties, irregularities, and illegal acts
- Fraud is differentiated from 'mistakes,' in that they are intentionally performed, wilfully and for the singular purpose of personal gain and deceit
- Fraud benefits the perpetrator either directly or indirectly
- Fraud is perpetrated for the benefit or to the detriment of the organization and by persons outside as well as inside the organization
- - Fraud for the benefit the organization typically exploits an unfair or dishonest advantage that deceives a third party. These frauds benefit the perpetrators indirectly through aid to the organization that employs them, as was the case in The Equity Funding Fraud
- - Fraud for the detriment of the organization typically exploits the organization through a bogus or dishonest entity exploiting a weakness in the organization's systems of controls
Frauds Perpetrated for the Benefit of the Organization
Fraud takes on many faces. It ranges from employees 'burying' items on an expense report to the generation of factious revenues as in the Equity Funding Scandal of the early 1970's, to the hiding if debt as was done in the Enron case, to the grand-daddy of them all, WorldCom.
In the Equity Funding case, a few senior managers and computer 'wiz-kids' built an entire multibillion dollar organization by defrauding investors and insurance companies. What began as a simple cover-up of a failure to meet a $2 million shortfall in estimated earnings, resulted in a company with over $500 million in factious assets. Equity funding management inflated earnings by selling factious life insurance policies to third-party re-insurance companies for cash. Management benefited indirectly through the receipt of dividends on stock owned.
The Enron case where inflated revenues, improper use of off-balance sheet financial entities, and a general absence of corporate ethics were used to make a select few very wealthy at the expense of tens of thousands of innocent employees, investors, customers, and even governments. Enron management booked as earnings revenue it would not receive until 4 or 5 years in the future. coupled with a bogus balance sheet drove the price of the Enron=s stock artificially high, so senior management could cash in big on their exercising of stock options, and the receipt of huge bonuses, rewarding them for revenues that Enron would never see. In all cases, employees performed deliberate acts with full knowledge and purpose.
Mr Richard Balog,
Managing Partner ,
Balog + Tamburri, LLC
Richard T. Balog, CPA/CFF, CIA, CGFM, DACFE is the Managing Partner for the Certified Public Accounting Firm of Balog + Tamburri, LLC. He has been a CPA since 1972.
Mr. Balog is an internationally-recognized seminar leader in providing audit, accounting, finance and business management professional development for over 30 years. He has won awards from The Institute of Internal Auditors and is currently a "Top 50 Small Business Influencer" in the Jacksonville Area.
Mr. Balog was named Outstanding Staff Faculty Member for the IIA. He also served on the professional staff of the Committee of Sponsoring Organizations (COSO) where he helped develop the COSO Structured Framework. In addition, he was awarded the Distinguished Leadership Award for his extraordinary contribution to the audit profession. He served as Manager of Internal Audit for Blue Cross and Blue Shield of Maryland, and began his career with a national accounting firm.
Ms Kate Balog,
Balog + Tamburri, LLC
Ms. Balog is a Principal of the Certified Public Accounting Firm of Balog+Tamburri, LLC, providing educational and consultative services to the business community. She has overall responsibility for the management of the Firms financial operations, information technology activities, and the performance and management of consulting engagements in the areas of Forensic Accounting, Professional Controller Services, and Product Cost System Development.
As an internationally known consultant, Ms. Balog specializes in the areas of corporate cost management, Activity-Based Cost system development, treasury functions, Strategic Financial Management, Sick Business Recovery Services and Forensic Accounting. She is also a recognized authority in the design, development, and control of application systems for a wide range of platforms and architectures. Her expertise includes benefit accounting, product costing, foreign investment and exchange, the strategic and tactical applications of information technology, and strategic financial management.
Ms. Balog has contributed to a number of published journals and reference guides in the areas of fiscal management, internal controls, and internal audit. She has assisted in the development of several financial management and internal audit professional development programs including The American Institute of Certified Public Accountants, The American Management Association, The Institute of Internal Auditors, and The Institute of Management Accountants. She is listed in Who's Who in the East, Who's Who in American Finance, Who's Who in America, and Who's Who in the World Ms. Balog is a Certified Public Accountant, and a Certified Management Accountant.
- Certified Public Accountants
- Certified Internal Auditors
- Certified Fraud Auditors
- Loan Underwriters
- Audit Committee Members
- Chief Financial Officers
- Chief Executive Auditors
- Financial Institutions
- Secondary Lenders
- Business Acquisition Professionals