"a discipline that deals with the relationship and applicaiton of financial facts to business problems conducted in a legal setting"

and

"the practice of rigorous data detection and analysis with built in suspicion and analysis with built in suspicion and skepticism that frad and violation of rulesand regulations are always possible"

litigation support

expert witness

cr.fa

financially (in dollars)

trust

reputation

asset value

lost jobs

legal fees

fines

investor losses

$660 billion

this was $600 in 2002 and $300 in 1996 so it is constantly growing.

business failure (bankruptcy)

accounting firm failure (anderson)

destroyed careers, investments, pensions...

undermind confidence in our markets

intentional

clandestine (secretive)

embarassing

complicated (due to GAAP)

collusive (more than one person)

often committed by "good" people

corruption (30.8%) and fraudulent statements (10.6%)

parts of the fraud triangle

1. incentive - things like compensation, bonuses, expectations, possible M&A
2. opportunity - this relates to internal controls within a company and if there is a way an employee can do it
3. rationalization - must be able to give yourself a reason and justify it

the new fraud "diamond"

1. be in the right position
2. smart enough to exploit opportunities
3. strong ego and confidence
4. ability to coerce others to commit or coneal
5. effective and consistent liar (pokerface)
6. ability to deal with stress

pyramids

1. recording revenue too soon or of questionable quality
2. recording bogus revenue
3. boosting income with one time gains
4. shifting current expenses to a later or earlier period
5. failing to record or improerly reducing liabilities
6. shifting current revenue to a later period
7. shifting future expenses to the current period as a special charge

*more benign*

1. change accounting estimates
2. releasing reserves
3. capitlizing operating costs
4. including bricks in inventory boxes to trick auditors who weigh the boses

*most egregious*

the process and structure used to direct and manage teh entity considering various stakeholder interests. 

-achieve objectives

-ensure accountability

management

other executives

internal auditors

board of directors/audit committee

external auditor-shareholder-other(creditor,underwriter,analysis)

GRC framework

governance, risk management and compliacne all work together to form this

the basic purpose of an audit is to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. (SAS 1)

they should have sufficient knowledge to identify the indicators of fraud but is not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud.

SAS 99 is the consideratioin of fraud in a financial statement audit

• increase emphasis on professional skepticism
• brainstorm possibly frauds and exchange ideas
• inquire about fraud risk and encourage whistleblowing
• develop unpreditible audit tests
• test for management override of controls (capability and opportunity)

1. focus auditors on being diligent about their fraud detection responsibilities

2. help audit committees understand what the auditor is supposed ot be doing in the area of fraud detection

1. poor internal controls (60%)
2. management override (35%)
3. 3rd party collaboration (30%)
4. employee collusion (20%)
5. no director control (10%)
6. no ethics policy (<10%)

"a process - effected by an entity's board of directors, management, and other personnel - designed to provide reasonable assurance regarding the achievement of objectives in teh following categories:

a. reliability of financial reporting

b. effectiveness and efficiency of operations

c. compliance with applicable laws and regulations

sets the tone of an organizaition, influencing the control consciousness of its people.  it is the foundation for all other componenets of internal control, providing discipline and structure.

• tone at the top (mangement's philosophy and operating style)
• orgazational structure
• BOD and its committees
• methods of assigning authority and responsibility
• personnel policies and practices
• commitment to completence

policies and procedures that help ensure that management's directives are carried out. 

• performance reviews (actual vs. budget)
• segregation of duties (authorization, record and custody)
• information processing (authorization, accuracy and completeness of transactions)
• physical controls (safeguards over access to assets and records)

the identification, capture and exchange of the information in a form and time frame that enable people to carry out their responsibilities

• identify and record all valid transactions
• describe transactions on a timely basis in detail
• measure the correct value of transactions
• determine the correct time period
• present properly the transactions and disclusres in the financial statements

the entity's i.d./analysis of relevant risks to achievement of its objectives, forming a basis for determining how the risks should be managed

RM=parallel tracking & constant search for new exposures

• identify - proactively search
• analyze - transform risk data into DM info
• plan - transform info into decisions & implement
• track - monitor risk indicators
• control - correct for deviations

• change loss to income
• makes change in trends
• hides failture to meet analysts expectations
• concerns a segment/division that has a sign role in consolidated entity
• affects compliance with regulatory requirements
• affects compliance with loan covenants
• increases management's compensation
• involves concealing an illegal act
• arises from an item capable of precise measurement or from an estimate

• we follow GAAP and other rules and we have the AICPA guidelines for ethics, independent, etc.  even though we push all these rules we really do not teach "ethics"
• we talk as "friends" because they inspire the best in us.  we should discuss challenges, etc, but not be preachy or accusing in any way
• "mirroring" : when you look in a mirror we see ourselves and so we should consider that in life.  we all come from different places and should remember that.
• character - we must get away from bad habits and improve the way we treat others
• people often confuse character and personality
• loyalty: who should you be loyal to?  a client or your company?

• "ethical complacency" is that people seem to not try to imrpove anymore becuase they think they are too set in their ways to change
• we are so busy that we don't think we have time to change ourselves
• we are arrogant and think we don't need to change
• what are our primary weaknesses?
• look inward and know yoruself and it will help us in life

Schilit Chapter 1: Cendant/CUC Case.

Cendant has places like Days Inn, Century 21, Budget, Ramada Inn, Avis, etc. 

• the company wasn't performing how they wanted so to cook the books they didn't record memberships property so that yearly earnings are overstated, then eventually had to move to mergers to cover amounts. 
• did not recognzie expenses until a later period.  even capitilized marketing expenses.
• companies set up reserves when doing M&A, like ADA, and these can be manipulated.  they would overstate these reserves and the market assumes it is because company is growing.  it is under the operating line so income looks greater.
• if you overstate the reserves by a lot you can use the amount ot increase net income in the next year.  allows you to manipulate income to the amount you want. 

year 1: exp  10

             rev 10

year 2: reserve 5

           exp 5

• the scheme eventually fell apart.  three people were convicted and paid billions in fines.  took 3 trials to convict walter forbes.

1. ponzi scheme - "borrowing from peter to pay paul".  constantly borrowing and repaying eventually had to go ot wall street to make money from an IPO.  also did kiting with checks.
2. barry was th emain player but also invovled Tom Padgett.  Mark Moore was the CFO and was really good at producing copies of statements.  George Greenspan audited the first year financial statements but for an IPO he had to hire Ernst & Whinney so all of them were involved.
3. Originally started as a way to form and operate the business.
4. he didn't want them contacting any of his clients, etc, the change over such a short perod of time in teh financials, using analytical procedures, the auditors should have seen that something was off (ex. a 99% drop in current ratio)

• character may not be exactly what we appear to be but what we'd do it if nobody was watching.  we tend to be creatures of habits.
• if you had the shephards ring your habits would probably come out

• knowing right and doing right are two very different things
• your character is the difference in these two
• your character is developed and tested on a day to day basis with little things you do.  but not really in big ethical delimmas (pg 57)