Chapter 1

Critical Thinking Q&A

Anthony and Cleopatra are lying dead on the floor in a villa. Nearby on the floor is a broken bowl. There is no mark on either of their bodies and they were not poisoned. With this information, determine how they died.

Answer: Anthony and Cleopatra are fish and they died of suffocation.

Review Questions & Answers

1-1 Define fraud and identify a potentially fraudulent situation.

Answer: Fraud is an intentional deception, whether by omission or co-mission, that causes its victim to suffer an economic loss and/or the perpetrator to realize a gain. Potentially fraudulent situations may include, for example:

  • Misappropriation of funds, securities, supplies, or other assets.
  • Impropriety in the handling or reporting of money or financial transactions.
  • Profiteering as a result of insider knowledge of company activities.
  • Disclosing confidential and proprietary information to outside parties.
  • Disclosing to others, securities activities engaged in or contemplated by the company.
  • Accepting or seeking anything of material value from contractors, vendors, or persons providing services/materials to the Company. Exception: Gifts less than US $50 in value.
  • Destruction, removal, or inappropriate use of records, furniture, fixtures, and equipment.

1-2 Differentiate between fraud and abuse.

Answer: Although both fraud and abuse involve an intentional deception that causes its victim to suffer an economic loss and/or the perpetrator to realize a gain, abuse does not rise to the level of fraud. Abuse is often a way to describe a variety of petty crimes and other counterproductive behavior, such as surfing the web while at work, coming to work late or leaving early, using sick leave when not sick, that have become common and even silently condoned in the workplace.

1-3 Describe the services that a forensic accountant might provide related to a marital dispute.

Answer: Forensic accountants may assist attorneys with assembling the financial information necessary to either bolster (if hired by the plaintiff) or undercut (if hired by the defendant) a case. This may include, for example, locating hidden marital assets or income, calculating the present value of future cash flow from retirement plans and providing testimony in the case.

1-4 Explain the differences between an audit, fraud examination, and forensic accounting engagement.

Answer: Audits, fraud examinations, and forensic accounting engagements have six major differences:

  1. Timing - Audits are conducted on a regular recurring basis while a fraud examination is nonrecurring and is only conducted on sufficient predication. A forensic accounting engagement is also nonrecurring and is only conducted after an allegation of misconduct.
  2. Scope - The scope of an audit is general while the scope of a fraud examination or forensic accounting engagement is specific. Audits are a general examination of financial information for material misstatements while fraud examiners and forensic accountants are engaged to resolve a specific allegation.
  3. Objective - The objective of auditing is to express an opinion on the financial statements of an organization. The objective of a fraud examination is to determine whether or not fraud has taken place and to determine who is responsible, while a forensic accounting engagement is to determine the financial impact of the allegations.
  4. Nature of the relationship - Auditing is non-adversarial while fraud examination is adversarial in nature. The forensic accountant is independent.
  5. Methodology - Auditing primarily entails examining financial data, while fraud examination and forensic accounting involve gathering sufficient financial and non-financial evidence to meet their objective.
  6. Approach - Auditors are required to approach an audit with professional skepticism while fraud examiners and forensic accountants attempt to establish sufficient proof to meet their objective.

1-5 Explain the theory of the fraud triangle.

Answer: The fraud triangle provides an explanation for the conditions necessary for fraud to occur – perceived pressure, perceived opportunity, and rationalization.

1-6 List the legal elements of fraud.

Answer: Under common law, fraud includes four essential elements:

  1. A material false statement
  2. Knowledge that the statement was false when it was spoken
  3. Reliance on the false statement by the victim
  4. Damages resulting from the victim’s reliance on the false statement

1-7 Identify common fraud schemes.

Answer: Common fraud schemes include asset misappropriation, corruption, and false statements.

1-8 Give examples of non-fraud forensic and litigation advisory engagements.

Answer: Engagements may be criminal, civil or administrative cases that involve economic damage claims, workplace or matrimonial disputes, or asset and business valuations.

1-9 Describe the fraud examiner/forensic accountant’s approach to investigations.

Answer: Fraud examination and forensic accounting entail examining documents, reviewing records, and interviewing witnesses.

1-10 Explain fraud examination methodology.

Answer: Fraud examination involves obtaining documentary evidence, interviewing witnesses and potential suspects, writing investigative reports, testifying to findings, and assisting in the general detection and prevention of fraud.

Chapter 2

Critical Thinking Q&A

Why are manhole covers round?

Answer: Manhole covers are round because other shaped covers can be maneuvered to fall through the hole (e.g., try a square box)

Review Questions & Answers

2-1According to this chapter, what employment trends are expected for professionals in the fields of fraud examination and financial forensics? Why?

Answer: There is also a growing demand for forensic and litigation advisory services related to damages, divorce, valuations, construction delays, antitrust, lost wages, business interruption, intellectual property infringement, insurance claims, environmental issues, tax evasion, wrongful death, reconstruction, and litigation consulting, to name a few.

Another area is the increasing victimization of individuals targeted in fraud schemes (e.g., identity theft). While the most common victims of such fraud are the fraudster’s family and friends, international criminal organizations have developed identity theft and similar frauds into “big business.” Raising awareness of fraud prevention techniques and assisting in remediation procedures are crucial to effectively addressing this growing problem in our global society.

Consequently, the demand for students who have specialized qualifications in fraud and financial forensics has grown significantly and is likely to continue to grow. Many large firms have been seeking to recruit accounting students with some exposure to financial forensics. The need for competent staffing at the SEC, at PCAOB, and in private industry is outpacing the supply. Anticipated growth in the field is expected to be nearly 25 percent over the next ten years.

2-2What employment opportunities currently exist for fraud examiners and financial forensics specialists?

Answer: Fraud examiners and financial forensic specialists work in accounting and professional service firms which provide fraud deterrence, detection, investigation and remediation services to a variety of organizations. In addition, internal audit, corporate compliance, security and internal investigation units all operate within public and private companies and utilize the skills of the fraud examiner and the financial forensic professional. Regulatory agencies, government and not-for-profit, and law enforcement agencies also hire specialists in these areas.

2-3What role do fraud examination and financial forensic skills have in the corporate governance area?

Answer: Corporate governance can play an important role in preventing and detecting financial statement and other types of fraud and corporate malfeasance. Fraud examiners and financial forensic professionals help to identify risks and understand how the organization’s internal controls might be exploited during fraud acts.

2-4Which professional organizations support fraud examination and financial forensics professionals? What certifications do they offer?

Answer:

Association of Certified Fraud Examiners (ACFE)

Certified Fraud Examiner (CFE)

American Institute of Certified Public Accountants (AICPA)

Accredited in Business Valuation (ABV)

Certified Information Technology Professional (CITP)

Certified in Financial Forensics (CFF)

Forensic CPA Society (FCPAS)

Forensic Certified Public Accountant (FCPA)

Information Systems Audit and Control Association (ISACA)

Certified Information Systems Auditor (CISA)

Certified Information Security Manager (CISM)

Certified in the Governance of Enterprise IT (CGEIT)

Institute of Internal Auditors (IIA)

Certified Internal Auditor (CIA)

National Association of Certified Valuation Analysts (NACVA)

Certified Forensic Financial Analyst (CFFA)

Accredited Valuation Analyst (AVA)

Certified in Fraud Deterrence (CFD)

Certified Valuation Analyst (CVA)

Society of Financial Examiners (SOFE)

Accredited Financial Examiner

Certified Financial Examiner

Automated Examiner Specialist

2-5What international opportunities exist in fraud examination and financial forensics?

Answer: Chartered Accountant (CA), one equivalent of the CPA around the globe, is the title used by members of certain professional accountancy associations in the British Commonwealth countries and Ireland.

The Association of Certified Fraud Examiners, which administers the certified fraud examiner (CFE) credential, has international activities in more than 120 countries around the world.

Other international certifications related to the fraud examination and forensic accounting specializations include the following:

  • AAFM - The American Academy of Financial Management offers 16 separate financial certifications recognized worldwide.
  • MFP - Master Financial Professional
  • CWM - Chartered Wealth Manager
  • CTEP - Chartered Trust and Estate Planner
  • CAM - Chartered Asset Manager
  • RFS - Registered Financial Specialist in Financial Planning
  • CPM - Chartered Portfolio Manager
  • RBA - Registered Business Analyst
  • MFM - Master Financial Manager
  • CMA - Chartered Market Analyst and FAD - Financial Analyst Designate
  • CRA - Certified Risk Analyst and CRM - Certified in Risk Management
  • CVM - Certified Valuation Manager
  • CCC - Certified Cost Controller offered in the Middle East, Europe, Asia and Africa
  • CCA - Certified Credit Analyst offered in Asia and Middle East Africa
  • CCA - Chartered Compliance Analyst
  • CITA - Certified International Tax Analyst (for Lawyers or LLM holders)
  • CAMC - Certified Anti-Money Laundering Consultant (for Lawyers or LLM holders)
  • Ch.E. Chartered Economist - For PhDs and Double Masters Degree Holders.
  • CAPA - Certified Asset Protection Analyst

2-6Other than accounting, which disciplines do fraud examination and financial forensics encompass?

Answer: In addition to accounting, fraud examination and financial forensics include finance, economics, law, psychology, sociology, criminology, information technology, business management, and communications.

2-7What is the role of research in the fraud examination and financial forensics professions?

Answer: Research drives professional innovation. Practitioners in the field implement the products of research (concepts, ideas, theories and evidence) by applying, testing and refining theory and research findings in the “real world.” Finally, educators create learning frameworks through which students benefit from the combined efforts of practice and research. For fraud examination and forensic accounting to be a viable specialization over the long term, research opportunities and recognition are required to take the profession to the highest levels.