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Today’s Topics Transparency Barriers Financial Fraud Overview FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Barriers to Transparency Transparency defined WYSIWYG Management bias Measurement bias FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Financial Fraud Statistics Key players COSO The Treadway Comm.-NCFFR SEC’s AAERs Treadway Commission: 1987 Accounting & Auditing Enforcement Releases Infrequent but costly COSO Update: 1999 300 AAERs 1987-1997 FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Drivers of 2000’s Meltdown 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Booming economy Moral decay Incentives Analysts’ expectations Debt Rules versus principles Auditor independence issues Greed Educator failure Failure to forecast FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Financial Fraud Motivation 1. Greed 2. Fear of failure 3. Lack of accounting expertise 4. Scope of operations—too broad FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 18 Key Tidbits Average period: 23.7 months Revenue frauds were #1 Asset misstatement-spread around Mean misstatement = $25 M CEO involved in 72% of the cases Last audit was unqualified in 55% of the cases Mean assets = $532 M; revenues = $232 M S/W and manufacturing involved in 12% of the cases NASDAQ had 78% 36% filed for bankruptcy Non-existent or uninvolved audit committees Insiders on Boards of Directors Family relationships were common Financial pressures were high 56% of auditors were Big 6 Auditors named in 30% of cases 25% changed auditors after the fraud Relatively few executives went to prison FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1 Financial Fraud Detection KTT is the key Use the Fraud Exposure Rectangle Management & Directors Company relationships Background, motivation & influence Obligations, related party transactions & compliance Nature of organization & industry Financial results & operations GAAP, attitude FORENSIC ACCOUNTING - BA124 – Spring 2015 Slide 15-1