Business Bookshelf

A step-by-step guide for finding breaches of controls to build a strong foundation for a fraud case.

by Barbara J. Shildneck

Forensic Accounting and Fraud Investigation for Non-Experts
(2nd ed.)
by Howard Silverstone and Michael Sheetz
294 pages; hardcover; $50
John Wiley & Sons, Inc.
Hoboken, N.J., 2007

ven experienced financial fraud examiners will find this book handy for helping prevent and reduce losses from fraud. Although the book has been written as a primer, it presents a range of case studies every fraud expert can use for quick reference and a blueprint of successful approaches to finding evidence of and proving workplace fraud.

The accounting professional’s training is key in fraud investigation, of course—but an investigative mind-set and skepticism help as well. The authors say Statement on Auditing Standards no. 99, Consideration of Fraud in a Financial Statement Audit, calls on external auditors to take on more responsibility, to “think like both a thief and a detective and be constantly looking for the weak links in the accounting system and among the people who staff it.” The investigative accountant should look for any source—government information, proprietary databases and court records, for example—that might have bearing on a case.

CPAs must be savvy in conducting interviews with all suspects and reviewing evidence from accounting records and documentation. To establish a fraud, financial investigators must be able to pick up on motivational and behavioral clues such as a suspect’s domestic financial worries, for example.

A business has five “typical accounting cycles” that leave audit trails:

The sales and collections cycle can reveal many common frauds: cash thefts, theft of other assets, kickbacks to customers and front-end frauds such as misappropriating rebates.

The purchase and payments cycle includes noncapital procurements for goods, equipment and services, which can lead to dummy entities.

The payroll and personnel cycle covers hiring, firing, salaries, employee insurance and expense accounts, where frauds such as paying ghost employees, overstating expenses and filing false medical claims are common.

The inventory and warehousing cycle controls the purchase and storage of goods. The most common frauds consist of ordering unneeded inventory and stealing it for personal use, charging embezzlements occurring in other areas of the company to inventory losses and committing outright theft.

The capital acquisition and repayment cycle accounts for debt and equity financing, interest and dividend payments. Most frauds in this category are developed at the executive level; they include borrowing company money for personal use and misuse of interest income or of proceeds from financings.

The investigator must thoroughly examine all five cycles for breaches of fundamental controls in maintaining the audit trail, separating duties and keeping proper documentation.

The authors take the reader step-by-step through the early stages of an investigation to build a strong foundation for a fraud case. Some of the most important work occurs before any actual interviews have been conducted or documents collected, they say.

The 22-page chapter on “Interviewing Financially Sophisticated Witnesses” should be placed prominently in every CPA’s library. Its three sections address

The fundamentals of whom to interview and why.

The dynamics of the process, including “the theory of cognitive interviewing techniques that are applicable to both suspect and nonsuspect” interviews.

Specific strategies for conducting successful, productive interviews in white-collar crime cases.

Visual aids. Stressing that “visualizing difficult concepts through graphic representation” is the best aid in staying organized and in understanding complicated topics, the authors offer tools to help analyze cases. “Associational tools” such as matrices and social-network diagrams identify relationships among people, places and organizations. “Temporal analysis tools”—time lines, for example—organize the flow of events or data over time. “Inferential analysis” expands the concept of visual analysis to include visualizing the relationships among pieces of evidence.

Advice on documenting and presenting the fraud report and testifying to its findings round out this book. The authors say they adapted the trial lawyers’ casebook system to the investigative arena to ensure their system is applicable to frauds of all sizes. The fraud analyst/expert witness who follows their guidance should be amply prepared for what lies ahead.

Barbara J. Shildneck, a former editor of the JofA, is now a contributing editor to the magazine.