Forensic Forensic Auditing Auditing

Ted Stehney, DirectorTed Stehney, Director

Office of Forensic AuditingOffice of Forensic Auditing

Office of Inspector General, Office of Inspector General, GSAGSA

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What is forensic auditingWhat is forensic auditing Why do we need itWhy do we need it Why does the government need itWhy does the government need it Why does GSA need itWhy does GSA need it What are our approaches What are our approaches What do we need to succeedWhat do we need to succeed

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What is forensic auditingWhat is forensic auditing

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DISCUSSION MEMORANDUMDISCUSSION MEMORANDUM

While many definitions exist for the general term forensic1, the AICPAs Forensic and Litigation Services Committee (FLS) believes that forensic accounting consists of two major components: litigation services that recognize the role of the CPA as an expert, consultant, or other role; and investigative services that make use of the CPAs skills that may or may not lead to courtroom testimony.

1 According to the Random House Websters College Dictionary, forensic is defined as pertaining to, connected with, or used in courts of law or public discussion and debate.

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Forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings.

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Forensic AccountingForensic Accounting

Professor D. Larry Crumbley, the KPMG Endowed Professor D. Larry Crumbley, the KPMG Endowed Professor in the Department of Accounting, LSU, Professor in the Department of Accounting, LSU, and a renown authority, defines forensic and a renown authority, defines forensic accounting as:accounting as:

The action of identifying recording, settling, The action of identifying recording, settling, extracting, sorting, reporting, and verifying extracting, sorting, reporting, and verifying past financial data or other accounting past financial data or other accounting activities for settling current or prospective activities for settling current or prospective legal disputes or using such past financial legal disputes or using such past financial data for projecting future financial data to data for projecting future financial data to settle legal disputessettle legal disputes..

D. Crumbley, L. Heitger and G. Smith, D. Crumbley, L. Heitger and G. Smith, Forensic and Investigative Accounting, 3Forensic and Investigative Accounting, 3rdrd Edition, Edition, (Chicago, IL: (Chicago, IL: CCH, 2007), p.1-5CCH, 2007), p.1-5

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Forensic AuditingForensic Auditing

“…“…a peremptory forensic accounting a peremptory forensic accounting engagement, engagement, should not be confused should not be confused with the more common review of with the more common review of internal controls or the likeinternal controls or the like. Forensic . Forensic accounting, whether peremptory or after-accounting, whether peremptory or after-the-fact engagements, is applied to the the-fact engagements, is applied to the evidence of first order activities, not evidence of first order activities, not secondary systems of controls.” secondary systems of controls.”

D. Larry Crumbley, "Forensic Accounting: The Evidentiary Nature of Accounting D. Larry Crumbley, "Forensic Accounting: The Evidentiary Nature of Accounting Data,” Journal of Forensic Accounting Data,” Journal of Forensic Accounting (http://www.rtedwards.com/journals/JFA/evidentiary.html)(http://www.rtedwards.com/journals/JFA/evidentiary.html)

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Why do we need itWhy do we need it

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ACFE ACFE Comments on Measuring Comments on Measuring

FraudFraud

Fraud, by its very nature, does not Fraud, by its very nature, does not lend itself to being scientifically lend itself to being scientifically

observed or measured in an observed or measured in an accurate manner. One of the accurate manner. One of the

primary characteristics of fraud is primary characteristics of fraud is that it is clandestine, or hidden; that it is clandestine, or hidden;

almost all fraud involves the almost all fraud involves the attempted concealment of the crime.attempted concealment of the crime.

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2008 ACFE Report to the 2008 ACFE Report to the Nation Nation Survey DataSurvey Data

•Estimated that U.S. organizations lose 7% of their annual revenues to fraud. •Applied to the projected 2008 US GDP, 7% translates to approximately $994 billion in fraud losses.•The median loss was $175,000.•More than one-quarter of the frauds involved losses of at least $1M.

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2008 ACFE Report to the 2008 ACFE Report to the Nation Nation Survey DataSurvey Data

The most common fraud schemes The most common fraud schemes werewere corruption, 27% and corruption, 27% and fraudulent billing schemes, 24%. fraudulent billing schemes, 24%.

The government was victimized The government was victimized in 12% of these fraud cases.in 12% of these fraud cases.

The implementation of anti-fraud The implementation of anti-fraud controls appears to have a controls appears to have a measurable impact on an measurable impact on an organization’s exposure to fraud. organization’s exposure to fraud.

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Center for Academic Integrity atCenter for Academic Integrity at Duke University Duke University

2006 survey results of 5,331 students at 32 2006 survey results of 5,331 students at 32 graduate schools across the USA and Canada graduate schools across the USA and Canada

56% of MBA students acknowledged 56% of MBA students acknowledged cheating, cheating,

54% in Engineering, 54% in Engineering, 45% in Law school 45% in Law school 48% of Education students48% of Education students 39% of Social Science and Humanities 39% of Social Science and Humanities

studentsstudentsAcademy of Management Learning & Education, 2006, Vol. 5, No. 3, 294–305.Academy of Management Learning & Education, 2006, Vol. 5, No. 3, 294–305.

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Example of $2.6 Billion Example of $2.6 Billion Undetected FraudUndetected Fraud

$2.6 Billion fraud over 9 years$2.6 Billion fraud over 9 years Year 1 $600KYear 1 $600K Year 3 $4 millionYear 3 $4 million Year 5 $80 millionYear 5 $80 million Year 7 $600 millionYear 7 $600 million Year 9 $2.6 billionYear 9 $2.6 billion In years 8 and 9, four of the world’s In years 8 and 9, four of the world’s

largest banks were involved and lost over largest banks were involved and lost over

$500 million $500 million Some of the organizations involved: Merrill Lynch, Chase, J.P. Some of the organizations involved: Merrill Lynch, Chase, J.P.

Morgan, Union Bank of Switzerland, Credit Lyonnaise, Sumitomo, Morgan, Union Bank of Switzerland, Credit Lyonnaise, Sumitomo, and others. and others.

Source: Dr. Conan Albrecht, Source: Dr. Conan Albrecht, Six-Step ApproachSix-Step Approach

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Why does the Why does the government need itgovernment need it

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Why Forensic Auditing Why Forensic Auditing NowNow

Substantial increases in contracted services and Substantial increases in contracted services and support by Federal agencies is raising the risk of support by Federal agencies is raising the risk of procurement fraud. procurement fraud.

The influx of $787 billion in stimulus funds to flow The influx of $787 billion in stimulus funds to flow through the Federal Government presents through the Federal Government presents unprecedented fraud opportunitiesunprecedented fraud opportunities

Acknowledging limitations of traditional approaches:Acknowledging limitations of traditional approaches: Heavy use of sampling - lack of detailHeavy use of sampling - lack of detail Lack of historical fraud detection instructionLack of historical fraud detection instruction Lack of fraud symptom expertiseLack of fraud symptom expertise Lack of fraud-specific toolsLack of fraud-specific tools Lack of analysis skillsLack of analysis skills Lack of expertise in technologyLack of expertise in technology Auditors do find 20-30 percent of fraudAuditors do find 20-30 percent of fraud

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Why does GSA need itWhy does GSA need it

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GSA’s BusinessGSA’s Business

If GSA were a public company, If GSA were a public company, our $17.7 billion in revenues our $17.7 billion in revenues would place us at 141 on the would place us at 141 on the Fortune 500, ahead of Google Fortune 500, ahead of Google and Nike, among others.and Nike, among others.

GSA GSA “A Report to Our Citizens”“A Report to Our Citizens”

http://www.gsa.gov/graphics/admin/Citizens_Report_011509_FINAL.pdfhttp://www.gsa.gov/graphics/admin/Citizens_Report_011509_FINAL.pdf17

GSAGSA GSA owns and leases over 352 million GSA owns and leases over 352 million

square feet of space in 8,600 buildings in square feet of space in 8,600 buildings in more than 2,200 communities nationwide. more than 2,200 communities nationwide.

In addition to office buildings, GSA In addition to office buildings, GSA properties include land ports of properties include land ports of entry, courthouses, laboratories, post entry, courthouses, laboratories, post offices, and data processing centers.offices, and data processing centers.

GSA Fleet provides 51 percent of Federal GSA Fleet provides 51 percent of Federal motor vehicles, excluding the United motor vehicles, excluding the United States Postal Service. Fleet’s total States Postal Service. Fleet’s total inventory consists of 225,000 vehicles; inventory consists of 225,000 vehicles; including almost 23,000 alternative fuel including almost 23,000 alternative fuel vehiclesvehicles

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Growth at GSAGrowth at GSA

MAS sales increased from $5.6 billion in 1997 MAS sales increased from $5.6 billion in 1997 to $36.7 billion by the end of fiscal year 2008.to $36.7 billion by the end of fiscal year 2008.

GSA’s consolidated balance sheet assets over GSA’s consolidated balance sheet assets over the same period of time have grown from the same period of time have grown from $17,743 million to $29,791 million$17,743 million to $29,791 million

Direct appropriation of stimulus funds in the Direct appropriation of stimulus funds in the amount of $5.5 billion, over and above the amount of $5.5 billion, over and above the current workload current workload

GSA is expecting $4 billion to $10 billion GSA is expecting $4 billion to $10 billion more in indirect stimulus money to flow more in indirect stimulus money to flow through GSAthrough GSA

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What are our approaches What are our approaches

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Common Methods for Common Methods for Collecting EvidenceCollecting Evidence

Traditional techniques are routine and recurringTraditional techniques are routine and recurring Designed to assess material weaknesses Designed to assess material weaknesses Provide reasonable assurance that financial Provide reasonable assurance that financial

statements are free from material misstatements, statements are free from material misstatements, whether caused by errors or fraudwhether caused by errors or fraud

Statistical samplingStatistical sampling EstimatesEstimates

Forensic techniques are aggressive and proactiveForensic techniques are aggressive and proactive Specifically designed to increase the detection of Specifically designed to increase the detection of

fraudfraud Objectives developed on a case-by-case basisObjectives developed on a case-by-case basis

Data mining Data mining Software for comparisonsSoftware for comparisons

IDEAIDEA PicoloPicolo AccessAccess

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GSA OIG GSA OIG Office of Forensic AuditingOffice of Forensic Auditing

Leading the way in taking a new approach to finding Leading the way in taking a new approach to finding fraud. fraud.

Utilizes the forensic auditing approaches to better Utilizes the forensic auditing approaches to better target the work of Inspectors General and to link target the work of Inspectors General and to link powerful analytic techniques for pinpointing fraud to powerful analytic techniques for pinpointing fraud to successful prosecutions of offenders.successful prosecutions of offenders.

Made up of auditors, management and program Made up of auditors, management and program analysts, IT specialists, statistician, and analysts, IT specialists, statistician, and investigators, the team is devoted to identifying, investigators, the team is devoted to identifying, assessing, and aiding prosecution of crimes, assessing, and aiding prosecution of crimes, especially procurement and contract fraud. especially procurement and contract fraud.

Employs complex, innovative strategies that enhance Employs complex, innovative strategies that enhance traditional audit and investigative practices to detect traditional audit and investigative practices to detect fraud, assess situations where fraud has occurred, fraud, assess situations where fraud has occurred, and produce evidence meeting criminal court and produce evidence meeting criminal court standards.standards.

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Forensic Auditing Forensic Auditing ApproachesApproaches

Detect potential fraud by examining Detect potential fraud by examining large populations of transactions large populations of transactions within a certain scope, or within a certain scope, or

Determine if a fraud has occurred by Determine if a fraud has occurred by examining records and conducting examining records and conducting interviews based on a specific fraud interviews based on a specific fraud allegationallegation

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What do we need to What do we need to succeedsucceed

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What Forensic Auditing What Forensic Auditing Needs to SucceedNeeds to Succeed

A commitment from our own A commitment from our own managementmanagement StaffingStaffing EquipmentEquipment TrainingTraining

Management needs to have a Management needs to have a realistic expectation of resultsrealistic expectation of results

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What Forensic Auditing What Forensic Auditing Needs to SucceedNeeds to Succeed

Partnership with Agency Partnership with Agency managementmanagement

It is in the best interests of the OIG, It is in the best interests of the OIG, the Agency, and its customers to the Agency, and its customers to maintain a cooperative relationshipmaintain a cooperative relationship Full and open access to all systemsFull and open access to all systems Unrestricted access to employees and Unrestricted access to employees and

recordsrecords

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What Forensic Auditing What Forensic Auditing Needs to SucceedNeeds to Succeed

At GSA, Forensic Auditing is able to At GSA, Forensic Auditing is able to work behind the scenes because of:work behind the scenes because of: The Agency’s willingness to work with The Agency’s willingness to work with

Forensic Auditing, andForensic Auditing, and The unrestricted access they have The unrestricted access they have

provided provided Kudos to GSA for embracing the Kudos to GSA for embracing the

concept of forensic auditingconcept of forensic auditing

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