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Forensic Accounting and Fraud Investigation for Non-Experts
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Forensic Accounting and
Fraud Investigation for
Non-Experts
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Forensic Accounting and
Fraud Investigation for
Non-Experts
Third Edition
HOWARD SILVERSTONE
MICHAEL SHEETZ
STEPHEN PEDNEAULT
FRANK RUDEWICZ
John Wiley & Sons, Inc.
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Copyright © 2012 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
The Second Edition was published in 2007.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the
1976 United States Copyright Act, without either the prior written permission of the
Publisher, or authorization through payment of the appropriate per-copy fee to the
Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,
(978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests
to the Publisher for permission should be addressed to the Permissions Department,
John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011,
fax (201) 748-6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their
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respect to the accuracy or completeness of the contents of this book and specifically
disclaim any implied warranties of merchantability or fitness for a particular purpose. No
warranty may be created or extended by sales representatives or written sales materials.
The advice and strategies contained herein may not be suitable for your situation. You
should consult with a professional where appropriate. Neither the publisher nor author
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For general information on our other products and services or for technical support,
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Library of Congress Cataloging-in-Publication Data:
ISBN 978-0-470-87959-7 (book); 9781118221044 (ebk); 9781118234808 (ebk);
9781118259405 (ebk)
Printed in the United States of America
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To my family, friends, and colleagues nearby and
around the globe.
—Steve Pedneault
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Contents
Preface xiii
Acknowledgments xv
PART I FORENSIC ACCOUNTING AND
FRAUD OVERVIEW 1
CHAPTER 1 Forensic Accounting 3
What Is Forensic Accounting? 3
Why Has Forensic Accounting Become the Buzz? 4
Introduction to a Profession 5
Applications for Forensic Accounting 6
A Third Dimension: Contexts within Each Area of
Specialization 11
Conclusion 14
Suggested Readings 15
Notes 15
CHAPTER 2 Fraud in Society 17
What Is Fraud? 17
Types of Fraud 21
Other Types of Financial Fraud 25
Sarbanes–Oxley 27
What the Numbers Tell Us about Fraud 28
Categories of Occupational Fraud 29
Drawing Conclusions 31
Society’s Perception of Fraud 32
Who Commits Fraud?—Profile of the Typical
Fraudster 33
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The Social Consequences of Economic Crime 39
Conclusion 39
Suggested Readings 40
Notes 40
CHAPTER 3 Understanding the Basics of Financial Accounting 43
Where It All Begins 43
The Five Accounting Cycles 46
Journals: Subsidiary and General 54
Conclusion 56
Suggested Readings 56
Note 57
CHAPTER 4 Forms of Entities 59
Basics of Business Structures 59
Sole Proprietorships 60
Partnerships 60
Corporations 63
Business Enterprises in the Global Environment 66
Conclusion 70
Suggested Readings 70
Notes 72
CHAPTER 5 Fundamental Principles of Financial Analysis 73
Good Analysis = Due Diligence? 73
Why Perform Financial Analysis? 76
What and Whom Can You Trust? 76
Other Factors to Consider 77
Financial Analysis for the Non-Expert 78
To the Future 85
Conclusion 86
Suggested Readings 87
Notes 87
CHAPTER 6 The Role of the Accounting Professional 89
The Importance of Accounting Professionals in
the Investigation 89
The Audit Process 93
Internal Controls 98
Conclusion 101
Notes 101
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Contents ix
PART II FINANCIAL CRIME INVESTIGATION 103
CHAPTER 7 Business as a Victim 105
Introduction 105
Employee Thefts 106
Fraudulent Billing Schemes 112
Fraud Committed by Outsiders 113
Management Thefts 114
Corporate Thefts 117
Identity Theft 118
Conclusion 120
Suggested Readings 120
Notes 120
CHAPTER 8 Business Villains 123
Introduction 123
Organized Crime and Business 123
Money Laundering 130
Conclusion 137
Suggested Readings 138
Notes 139
CHAPTER 9 The Investigative Process 143
Introduction 143
Case Initiation 144
Case Evaluation 145
Solvability Factors 147
Goal Setting and Planning 148
Investigation 156
Background 158
Conclusion 166
Suggested Readings 167
Notes 167
CHAPTER 10 Interviewing Financially Sophisticated
Witnesses 169
Introduction 169
The Interview 170
Interviewing Financially Sophisticated
Witnesses 185
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Conclusion 188
Suggested Readings 189
Notes 190
CHAPTER 11 Proving Cases through Documentary Evidence 193
Introduction 193
Document Collection 194
Document Organization 207
The Process of Proof 211
The Logic of Argument 213
Proof through Inference 217
Conclusion 221
Suggested Readings 222
Notes 224
CHAPTER 12 Analysis Tools for Investigators 227
Introduction 227
Why Use Analysis Tools at All? 227
Associational Analysis 229
Temporal Analysis 246
Conclusion 252
Suggested Readings 252
Notes 253
CHAPTER 13 Inferential Analysis 255
Introduction 255
How Inferential Analysis Helps 255
What Is an Inference Network? 256
Investigative Inference Analysis 259
The Key List 263
Constructing an Investigative Inference Chart 264
Plotting the Chart 268
Some Tips for Charting Success 272
Applying the Chart to the Investigative Process 273
Conclusion 275
Suggested Readings 275
Notes 277
CHAPTER 14 Documenting and Presenting the Case 279
Introduction 279
Creating a System 279
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Contents xi
The Casebook System 280
Report Writing 287
Testifying as a Financial Expert 290
Conclusion 305
Suggested Readings 305
Notes 306
About the Authors 309
Index 311
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Preface
The demand for forensic accounting continues to grow almost on a daily
basis. Accounting and business publications alike predict the trend requiring more forensic accountants will only continue. Forensic accounting
has been described on many campuses and within many public accounting
firms’ recruiting offices as the hottest area of accounting sought by candidates eager to enter the field of accounting. In response, colleges and
universities have been feverishly adding courses and degree programs at
the certificate, undergraduate, and graduate levels, trying to address the
demands of students anxious to learn more about this field.
Simultaneously, more and more instances of financial crime and
accounting-related litigation have been occurring, expanding both the contexts and the venues in which the skill set of a forensic accountant or fraud
investigator can prove invaluable toward resolving the matter.
While most people may possess a basic understanding of what traditional accounting may entail, few have any understanding about forensic
accounting and fraud investigation. Financial and nonfinancial people alike
have an interest in learning more about these highly specialized fields of
accounting, as cases of corporate or individual greed regularly dominate the
media. Having a requisite background in accounting would be required for
most of the books and materials available for these topics, many of which
are excellent resources to those of us practicing in these fields.
Forensic Accounting and Fraud Investigation for Non-Experts, Third
Edition, was written with the non-accountant in mind, aimed to demystify what often is characterized as complicated. The reality is most fraud
and financial crime that occurs is not overly complicated, just made to
appear that way either for concealment purposes or as a means of defense for the suspect or suspects when it ultimately is uncovered. The
best forensic accountants and fraud investigators are those individuals who
can take what could be presented as complicated and explain it to a
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