Evidence-Based Examinations

To complete an examination, the fraud examiner or forensic accountant needs to answer the essential questions of who, what, where, when, how, and why—with evidence. Even in litigation support situations, the answers to these questions are required to convince a jury that you can explain each aspect of a case. In addition, the answers need to be woven into a coherent story. Critical thinking and analytical reasoning suggest that the fraud examiner or forensic accountant will have to make some intellectual connections to pull the various pieces of evidence and the answers to those questions into a compelling case. However, evidence-based decision making suggests that examiners need to ground their storyline in the evidence. A storyline grounded in the evidence is much more convincing to prosecutors, attorneys, judges, and juries.

The Hypothesis-Evidence Matrix

Incomplete evidence is a fact of life and an on-going challenge to examiners. Another fact is that fraud examiners typically prefer more evidentiary material. How does the fraud examiner deal with situations where the evidence is less than perfect? The answer is that fraud and forensic professionals always face the prospect of less-than-perfect evidence, and they address potential evidentiary shortcomings or holes in the storyline through their consideration of the alternative hypotheses (alternative fraud theories). In Chapter 1, this approach is referred to as the analysis of competing hypotheses and the specific tool is the Hypothesis-Evidence Matrix. A detailed application example is provided for readers in that chapter. Using a commitment to critical thinking and analytical reasoning, professionals attempt to identify all other hypotheses or theories that might fit at least some of the key pieces of evidence. Then the fraud or forensic professional identifies flaws in each alterative hypothesis by examining and focusing on the evidence. When the examiner identifies evidence that suggests that the alternative hypothesis does not withstand the scrutiny of the evidence, that hypothesis is disqualified as a possible explanation. The last remaining hypothesis that has not been disqualified is the most likely explanation of the case under examination. As long as more than one hypotheses are not disqualified, the identification and examination of evidence continue until only one hypothesis remains—the hypothesis most consistent with the evidence.

Professionals in this field need to understand that no one is better at generating alternative theories of the case than opposing attorneys. The question isn’t whether opposing attorneys will develop alternative theories of the case; rather, it’s what theories they are likely to propose. Often, if a forensic accountant is deposed as part of the civil litigation process, the opposing attorney will develop new and novel theories for trial, especially if the fraud or forensic professional has cast significant doubt on some of this attorney’s alternative theories during the deposition.

What tools are available to analyze evidence and develop a compelling storyline? First, the hypothesis–evidence matrix (analysis of competing hypotheses) should be used for considering alternative fraud theories in light of the evidence. By aligning alternative theories across the top of the matrix and by listing and considering each piece of evidence down the left-hand side of the matrix, the fraud examiner or forensic professional can highlight flaws in the various alternative theories.

With regard to suspected fraud, corruption or financial malfeasance, fraud examiners and forensic accountants need to develop evidence, to the extent possible, around the elements of fraud: the act, concealment, and conversion; the fraud triangle (particularly, opportunity). With regard to the fraud triangle, professionals know that, other than opportunity, they may never have compelling evidence of the other two aspects—perceived pressure and rationalization.

The following is an example Hypothesis Matrix. Assume that the matrix has evidence underlying the evaluation. Readers should note the following:

1. The H-E Matrix evaluates five hypotheses.
2. A key is provided to help readers understand the evaluation of evidence.
3. The evidence is presented in the left column of the matrix.
4. There are additional columns for the source of the evidence as well as an evaluation of its quality: reliability and validity, topics covered later in the chapter.
5. For an example implementation, see Chapter 1.

Predication

Prior to starting a fraud or forensic accounting examination, the professional needs predication. Predication is defined as the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe that a fraud has occurred, is occurring, or is about to occur. Essentially, predication is the starting point for a formal fraud examination. Suspicion in the absence of any corroborating circumstantial evidence is not a sufficient basis for conducting a fraud examination. Something as innocuous as an anonymous tip or complaint, with some supporting evidence to substantiate it, may be enough to meet the predication threshold. In other cases, discovery of missing cash or other assets is usually sufficient grounds for launching an examination.

What about red flags? Do red flags meet the requirement of predication? Typically, a few red flags are not in themselves sufficient as a basis for a fraud examination. Especially when dealing with financial statement fraud, where a materiality threshold is required, red flags require additional audit work. A major obstacle is that many red flags have reasonable explanations and do not result in the discovery of asset misappropriation, corruption, or attempted fraudulent financial reporting. The approach to red flags is that they should be investigated to their logical conclusion, at which point the fraud examiner or forensic accountant can base a conclusion on evidentiary material. When verbal explanations are provided by employees, managers, and executives, such explanations need to be corroborated by supporting evidence.

The Fraud Triangle: Opportunity, Perceived Pressure, and Rationalization

The profile of the typical fraudster is basically that of the average citizen. Notwithstanding predatory fraudsters, most are not habitual criminals, and very few have any criminal history. Fraudsters do not usually fit the characteristics of street criminals. Further, common fraud perpetrators often are well-educated and respected members of their community, regularly attend community events, are often married, and have children. Thus, the critical question remains: what causes good people to turn bad?

The three key characteristics that enable any fraud are captured by the fraud triangle shown in Figure 9-1: opportunity, perceived pressure, and rationalization. The first predicate is opportunity—or, at least, the perceived opportunity—to commit and conceal the fraud. Opportunity usually includes a position of trust within an organization, and the skill set required to carry out the fraud. Whether the issue is management override, collusion or a breakdown in internal controls, a fraudster requires opportunity. Without opportunity, fraud is highly improbable. Auditors and accountants often direct their fraud prevention and deterrence efforts toward using internal controls to minimize opportunity. Evidence of opportunity also encompasses training of clerical and supervisory personnel, supervision, executive-level management, monitoring by auditors, audit committees and boards of directors, assessment of the effectiveness of proactive antifraud programs, the ethical culture of the organization, results of fraud discovery audits, and tips from hotlines and whistleblowers. Many employees, with or without collusion, have the opportunity to take cash, checks, or other assets; yet, the majority of those individuals never commit fraud.

Perceived pressure is necessary to supplement internal control weaknesses and other opportunities that enable fraud. The challenge here is that pressure, at least to some extent, is unique to the individual. The pressure that might push one employee “over the edge” to commit fraud may not be enough for someone else in similar circumstances. Nevertheless, to the extent possible, fraud examiners and forensic accountants should gather various types of evidence:

• Evidence of financial pressures, such as
  • living beyond one’s means
  • greed
  • substantial debt
  • a poor credit rating
  • financial losses from unexpected sources—for example, health-care expenses for a loved one
  • investment losses
  • the need to pay for a child’s education at an expensive school
• Evidence of vices or similar problems, such as
  • gambling
  • drugs
  • marital discord
  • adultery
• Evidence of organizational pressure to achieve financial goals, such as
  • budget pressure
  • financial statement deadlines and year-end cutoff challenges
  • bonus opportunities
  • maintaining stock price
  • meeting analysts’ expectations
• Evidence of the challenge of getting away with the fraud
• Evidence of excessive ego
• Evidence of family or peer pressure

It is important to understand that because pressure is fundamentally a factor unique to the individual, only indirect evidence can be gathered, and even that evidence is generally circumstantial. Thus, fraud examiners and forensic accountants must not only keep their eyes open for symptoms but also keep their minds open as well.

The last condition facilitating fraud is rationalization. Because most fraudsters have no criminal history and do not think of themselves as criminals, fraud perpetrators typically have to develop some rationalization for their actions, at least initially. Like pressure, rationalization is an attribute unique to the individual. Rationalization is a manufactured, somewhat arbitrary justification for otherwise unethical or illegal behavior. In some cases, the fraud examiner or forensic accountant may be able to develop evidence of an employee’s feelings of job dissatisfaction, frustration with job recognition, low salary and other perquisites, and attitudes such as “they owe me,” “I am only borrowing the money,” “nobody will get hurt,” “they would understand if they only knew my situation,” “it’s for a good purpose,” and “I just need the money to get over this hump.”

M.I.C.E

Another approach to capturing the motivation of the typical fraudster is encapsulated in the acronym M.I.C.E.:

• Money
• Ideology
• Coercion
• Ego/entitlement

Money and ego are self-explanatory and are the two most commonly observed motivations. The roots of most fraud are greed (money) and power (ego). Less frequently, employees and others are victimized and unwillingly made part of a fraud scheme (coercion). Ideology is often an observed characteristic associated with taxpayer evasion schemes. In addition, ideology is often behind various kinds of terrorism—even terrorists require money to further their causes. The M.I.C.E. heuristic complements the fraud triangle and expands upon the element of pressure. Like pressure and rationalization, motivation is a personal attribute, but in some cases, evidence of M.I.C.E. can be documented during fraud and forensic accounting examinations.

The Problem of Intent: Examinations Centered on the Elements of Fraud

The fraud triangle provides the necessary conditions for fraud to occur. However, the examiner has to provide evidence of intent. Intent, like all aspects of the examination, must be grounded in the evidence. Short of a confession by the fraudster or a coconspirator, evidence of intent is circumstantial. But intent is a legal attribute to proving fraud. The difference between a mistake and a fraud is intent. If the fraud examiner or forensic accountant cannot prove intent, a civil or criminal conviction for fraud most likely cannot be sustained.

The elements of fraud as shown in Figure 9-2 include the act (e.g., fraud act, tort, and breach of contract), the concealment (i.e., hiding the act, or masking it to look like something different), and the conversion (i.e., the benefit to the perpetrator). The main benefit of using the elements of fraud in an investigation is that in virtually every fraud or financial crime, the evidence of each element can be developed.

More importantly, once the fraud examiner or forensic accountant has evidence that the alleged perpetrator (1) committed the act, (2) benefited from that act (conversion), and (3) concealed his or her activities, it becomes difficult for the alleged perpetrator to make the case that he or she did not intend to do something that would cause harm or injury. In particular, evidence of concealment provides some of the best circumstantial evidence that the act and conversion (benefits) were intentional. An important element of intent can be inferred from repetitive similar acts. In the simplest example, an employee may be able to explain how one check from an employer might have “accidently” ended up in a suspect’s personal bank account. It becomes much more difficult, though, to explain away multiple similar transactions. In civil litigation, especially damage claims based on torts and breach of contract, the elements of fraud remain integral to any examination. Reasoned evaluation of the evidentiary material often suggests that a tort or breach of contract occurred (the “act”), the tortuous actors benefited from the act (conversion), and the tortuous actors concealed the activities. Below, we discuss the various methodologies used to answer the questions who, what, when, where, how, and why. Although these are centered on the elements of fraud—the act, concealment, and conversion—the same evidence may also shed light on the attributes of the fraud triangle and M.I.C.E.

Related to conversion, there is a debate in the profession about whether tracing money to a perpetrator’s bank account is sufficient evidence of conversion, or whether the fraud examiner or forensic accountant needs to show how the ill-begotten money was used. Legal precedent indicates that tracing the money into the hands of the perpetrator or his or her bank account is sufficient. However, showing how the money was used and how the perpetrator benefited from the act and concealment provides a more powerful case and can provide evidence of attributes of the fraud triangle, such as pressure and rationalization, and other motivations included in M.I.C.E. Generally, fraud examiners should take the examination as far as the evidence leads.

Examples of circumstantial evidence that may indicate the act, concealment, or conversion include the timing of key transactions or activities, altered documents, concealed documents, destroyed evidence, missing documents, false statements, patterns of suspicious activity, and breaks in patterns of expected activity.

The Complete Story

To be successful, the investigator must be able to explain to prosecutors, attorneys, juries, judges, and other actors in the investigative process, the outcome of the investigation: who, what, when, where, and how—a complete story. Investigations centered on the triangle of fraud action, also known as the elements of fraud (the act, concealment, and conversion), have the greatest chances of being successful (assuming that these investigative outcomes are grounded in the evidence). Although fraud examination and forensic accounting use evidence-based decision making, critical thinking skills and careful analysis are essential to understanding what the numbers mean. The ability to use nonfinancial information, nonaccounting numbers, as well as financial data gathered from the books and records to tell a compelling story, is crucial to success. As fraud examiners or forensic accounting professionals move forward in their examinations, they shift from a world grounded in numbers and analysis to one where words carry the day (i.e., the courtroom). As such, when fraud examiners or forensic accountants reach the point of drawing conclusions, they must be able to tell a complete story that explains who, what, where, when, and how.

A data collection listing is offered as a resource in an appendix to this chapter. That material can be adjusted and supplemented as needed.

Evaluating the Quality of Evidence: Relevance, Reliability, and Validity

When one interprets evidence, it may not be what it initially seems. As noted earlier in the chapter, documents may be altered. Furthermore, witnesses, informants, and confidential sources may not always tell the truth. E-mail addresses made be faked or masked through programming tools and techniques. As such, all evidence must be evaluated for its information content. For example, what is the source of the information? Is the face value of the information reasonable or believable? Can the information be verified from another source? Is the other source independent of the organization or person under scrutiny?

The axiom of data evaluation is that data must be relevant, reliable, and valid. Before information goes into an evidence gathering system, it should be reviewed for specific relevancy to the examination and the issue at hand. Relevance means that the information will make a difference to a decision maker. Data must be relevant to constitute evidence. Reliability refers to the source providing the information. The following scale can be used to evaluate the reliability of information collected during an examination.

Validity refers to the underlying accuracy and integrity of the information. Interviewees may lie; documents may be altered; and general ledgers and other financial data may be manipulated. Depending on the importance to the examination, the fraud examiner or forensic accounting professional needs to take the necessary steps to ensure that the information, on its face, is what it seems. Similar to reliability, a four-category rating system is used to rate the validity or truthfulness of the information:

Documents

Documentary evidence is the backbone of most financial forensic examinations. Even examinations conducted using digital databases will need to be grounded in documentary and other physical evidence before the examination concludes. At trial, documents can sometimes be more reliable and dependable than eyewitnesses. Documents do not forget, cannot be cross-examined, cannot commit perjury, and—assuming the antifraud professional correctly interprets the meaning of the document’s content—tell the same story every time. In addition, documents provide the potential for fingerprints and other physical evidence.

Documentary evidence includes that gathered in both paper and electronic forms and includes invoices, contracts, deeds, titles, birth certificates, agreements, receipts, and forms. Documents may be collected from client company records, litigants, public records, and Internet searches, among many other sources. These records can become part of the evidentiary material or may become inputs for demonstrative evidence such as link charts, timelines, and flow diagrams. Documentary evidence also may become inputs for direct and indirect financial analysis discussed later in the chapter. Once obtained, the document is not only examined for content but also evaluated for authentication. Some items for which a document should be examined include:

• Signatures (forged)
• Handwriting (forged)
• Alterations
• Erasures
• Eradications
• Creation date
• Counterfeiting
• Indented writings
• Paper
• Examination Ink
• Examination
• Source of paper (e.g., did two pieces of paper come from the same source?)
• Folds, Tears, and cuts
• Restoration of damaged, burned, or charred documents
• Photocopy or original
• Facsimiles
• Notary, seals, (rubber) stamps, and cachets
• Envelope adhesives
• Typewriter sources and marks
• Sequence of creation
• Numbering sequence on the documents

Documents can provide evidence related to the act, concealment, or conversion. Related to the act, bank statements can show that checks written to the company were in fact deposited into the perpetrator’s or an accomplice’s bank account. Bank statements can also be altered, for example, by applying correction fluid to balances or adjusting amounts, thereby providing evidence of concealment. Finally, documents from public records, the Internet, and other sources may be included as part of an indirect financial profile method, such as the net worth method, to demonstrate that the person has income from unknown sources and thus has benefited from the act (conversion).

Bank, Credit Card, and Investment Statements

Bank, credit card, and investment statements can be integral evidence in fraud and forensic accounting cases. One would think that smart fraudsters would be unlikely to run their ill-gotten gains through their checking account, but examination of monthly financial information for known bank accounts, credit cards, and investment accounts may provide clues and other examination leads. For example, checking account activity may show deposits from sources other than known places of employment. Such deposits should be traced to determine whether additional, previously unknown, sources of income exist.

In addition, bank account disbursements may be made to previously unknown credit cards, installment accounts, and investment accounts. These disbursements may become leads that the fraud or forensic professional can follow as they continue to follow the money. Credit card statements may demonstrate that amounts spent far exceed the suspect’s known sources of income, and that those credit card payments must be made from a previously unknown source.

Investment accounts need to be scrutinized for transactions, for money flows to other accounts (e.g., credit cards, checking accounts, other investment accounts), for new leads, and also to ensure that money that appears to be coming from unknown sources is not coming from the person’s previously accumulated investment holdings. Thus, bank, credit card, investment, and other similar financial statements can provide evidence of the act, concealment, and conversion and can provide additional clues regarding lifestyle and where the missing money may have flowed.

Generally, obtaining victim company bank statements and other pertinent documentary records is a basic requirement for initiating an examination and providing evidence of a fraud act. Evidence of concealment and conversion related to a fraud, financial crime, or civil matter is more difficult, because they require financial documents of the alleged perpetrator. In such cases, a subpoena or search warrant is often necessary, and that requires probable cause. While the probable cause threshold is not overly burdensome, it prevents examiners from going on fishing expeditions in an attempt to identify the perpetrator.

In addition to bank statements, deposit tickets, and canceled checks, other items may be sources of potentially useful examination information:

• Account applications
• Signature cards
• Canceled check information beyond the payee, such as memo, endorsements, check cashing bank information, Magnetic Ink Character Recognition (MICR) information, numerical sequence, dates of transactions, wire transfers, electronic fund transfers (EFTs), ATM transactions, references to cashier’s and traveler’s checks, money orders, loans, mortgages, safe deposit boxes, certified checks, and bank drafts
• Credit card applications
• Mortgage applications
• Loan applications

Applications, in particular, provide useful information, including addresses, phone numbers, assets, liabilities, and associated persons, such as spouses, parents, siblings, children, and other cosignatories.

Invigilation

Invigilation is an examination technique that considers periods before, during, and after a suspected fraud has occurred. This method looks for changes in patterns of performance during the time that the suspicious activity occurred. It provides evidence of the act by helping to calculate how much money may be missing and provides powerful visual evidence that a fraud has occurred.

In Table 9-1, consider the following example of an invigilation. Jim is suspected of stealing money from a group of vending machines. Notice that the deposits from the vending machine revenue decline during the period of Jim’s employment until his termination at the end of 20x6. In 20x7, deposit levels rise almost to the level immediately prior to Jim’s pre-employment period. This pattern is clear and distinct, and it suggests a correlation between the pattern of deposits and the period of Jim’s employment. This is a compelling piece of evidence.

The three years when Jim was not employed—20x1, 20x2, and 20x7—can be used to estimate the amount of losses during Jim’s watch over the vending machines. The expected annual deposits, assuming no increase in vending prices, is about $51,401 ([53, 064 + 49, 511 + 51, 630]/3). Next, expected deposits are compared to those actually made into the bank account. Based on this analysis, it appears that Jim did not steal any money during 20x3, his first year on the job. However, more than $4,000 appears to be missing in 20x4. Furthermore, the estimated amount of losses due to Jim’s fraud rises to more than $22,000 in 20x6. The total estimated amount of losses for the four-year period is approximately $38,800. Of course, additional evidence would need to be gathered. For example, who had keys and other access to the vending machines besides Jim? Were any of the deposit tickets altered? Were the same number of vending machines in use during all seven years? Were there periods when a large number of machines were not available for use?

Invigilation becomes one piece of evidence that, when combined with additional evidence, can be presented as a compelling case. This technique can be used in a variety of situations where evidence exists to contrast periods during a suspected act versus periods before and after, including civil litigation cases where both the plaintiff and defendant explain the situation from their perspective. Those explanations have a beginning and an end, and the evidence can be examined before, during, and after to examine the assertions of both parties in a civil case.

Interviewing and Interrogation

Witness interviewing and interrogation can be integral aspects of a fraud and forensic accounting investigation. In a civil case, interviews are most often carried out in the form of depositions. This activity is used to find information and discover evidence in a case.

Although the common perception of an interrogation may conjure up images of bright lights and rubber hoses, an interrogation simply refers to an admission-seeking interview where the interviewer believes he or she has identified the perpetrator and is now attempting to get the subject to confess to the illegal activity.

Witness interviewing and interrogation skills are not normally developed in traditional accounting curricula. Because these skills are so important to fraud and forensic examinations, witness interviewing and interrogation are both covered in detail in Chapter 10. Note that interviewing can be used to gather evidence pertinent to the act, concealment, and conversion.

Surveillance and Covert Operations

As financial crimes have become more sophisticated and many nonfinancial crimes are investigated by following the money flow, examiners have adopted and adapted techniques, traditionally associated with the pursuit of organized crime and drug trafficking, to pursue white-collar criminals. Such techniques include electronic surveillance, search warrants, and undercover operations. Thus, surveillance and covert operations are used as part of the examination process for fraud and financial forensic examinations; although, these methods tend to be reserved for more sophisticated frauds with law enforcement involvement. Some of the objectives of this type of work are to gather evidence, identify those engaged in illegal activities, identify co-conspirators, recover money, and determine how an operation is conducted.

Generally, these techniques are not conducted by fraud examiners and financial forensic professionals, because they do not have the required training and skill set. Furthermore, such operations are more common when the activity is more complicated—involving multiple individuals, organizations, and jurisdictions. In these types of cases, surveillance and covert operations may be necessary to fully develop the case and identify all individuals involved. Many examination operations are conducted by “private investigators” or law enforcement officers who have the necessary training, experience, and legal authority (e.g., license or sworn oath) to engage in this type of activity. In fact, we recommend that the traditional fraud examiner and forensic accountant not perform these types of activities without proper training due to the dangers to both the professional and the outcome of the examination.

Several types of surveillance are possible. First, fixed-point surveillance (e.g., stakeout) involves observing activity from a stationary, discreet location. These types of observation activities are relatively simple and require the use of detailed activity logs, photographs, and videos. A more difficult surveillance approach is to track people and goods using mobile surveillance. Mobile surveillance requires considerably more skill than fixed-point surveillance, and the risk of examiner discovery by the perpetrators is real, especially when the target is suspicious of those around him or her. Although the risks could be higher, the potential rewards might also be greater, because the examiner may discover how goods are transported, as well as learning about previously unknown linkages between people, places, and things.

Videography during surveillance provides a visible evidence log that can be shared with other investigators, as well as with prosecutors, defense attorneys, judges, and juries. Keep in mind that if videos are used to document activity and linkages, in general, audio features should be disabled. Generally, as long as an individual’s reasonable expectation of privacy has not been violated, videography is legal. The theory is that what people do in public has the possibility of being observed by others, and thus, people acting in public have a lowered expectation of privacy. However, if audio is also captured during the surveillance, different state laws, rules, and regulations may apply—audio surveillance has more stringent requirements.

Most people typically think of wiretapping in connection with audio or electronic surveillance. Generally, unless an individual is speaking loudly in public, most conversations are considered private. While electronic surveillance is permissible in fraud and forensic examinations, the examiner must obtain court permission before such activities are carried out. Under federal law, individuals are allowed to video- or audio-tape conversations in which they are a part without telling the other party. State laws vary, however, so before recording your own conversations, check with counsel. Under no circumstances, is it legal to tape-record a conversation between two or more people if you are not a party to the conversation. Due to a person’s reasonable expectation of privacy, the ability to convince a judge that electronic surveillance other than previously described can be quite challenging. If successful, the examination technique can provide valuable information, because people are generally more willing to discuss sensitive information in private conversations.

The most extreme level of surveillance is the undercover operation. These operations are very costly due to the time commitment required, and they may put the examiner at personal risk. Generally, undercover operations are permissible as long as they are based on some reasonable level of probable cause and do not induce someone to commit a crime he or she would not otherwise commit (such an inducement, which is illegal, is called “entrapment”). Undercover operations are most effective with large-scale incidents, and when other methods fail to develop the case and the necessary evidence. Such operations should not be conducted unless the undercover work can be carefully monitored, the examination can remain secret, and the undercover operative safe, until the examination is completed. Typically, the undercover officer will face a variety of challenges related to legal and ethical conduct. The examination should end when sufficient evidence has been collected.

Confidential Sources and Informants

Confidential sources and informants can be used to gather information and evidence about a case. Generally, sources have no criminal involvement in the case and are good citizens who are providing information. Informants are more culpable and typically have a direct or indirect role in the criminal activity. Sources and informants are usually considered confidential, so efforts should be made to maintain their confidentiality. Their information is independently verified, and documentary evidence and other witnesses are developed based on their leads. Good examiners evaluate the motives of their confidential sources and informants, as well as the reliability and validity of their information.

CTRs, SARs, and FinCen 8300

Currency Transaction Reports (CTRs), Suspicious Activity Reports (SARs), and FinCen Form 8300 are excellent sources of information for law enforcement officers trying to identify and follow the flow of money from illegal and illicit sources. The CTR, FinCen Form 104, was a direct result of the 1970 Bank Secrecy Act. CTRs must be filed by financial institutions when transactions include $10,000 or more in currency in a single banking day.

Financial institutions are broadly defined as banks, other depository institutions, brokers and dealers in securities, money transmitters, currency exchangers, check-cashing organizations, issuers and sellers of money orders, and traveler’s checks. Casinos must file a form 103, rather than the normal CTR. Qualifying transactions include deposits, withdrawal, and currency exchange and wire transfers over the $10,000 limit.

Although privacy concerns were an issue for banks, this concern was alleviated in 1986 when the Money Laundering Control Act prevented banks from being held liable for releasing transaction information to law enforcement. In 2008, more than 15 million (15,449,549) CTRs were reviewed and posted into the Currency Banking and Retrieval System, as well as 733,543 SARs.²

SARs are used by financial institutions to report any suspicious activity or potentially suspicious activity to the Financial Crimes Enforcement Network (FinCen). If the suspected person is known and can be identified, the threshold to file a SAR is $5,000. If the suspicious activity is not associated with a known individual, the limit is raised to $25,000 of suspicious activity. SARs are particularly effective and are often used when currency transactions appear to be structured so that they fall just below the $10,000 reporting limit threshold for CTR reporting. The purpose of the SAR report is to help law enforcement identify individuals and organizations involved in money laundering, fraud, organized crime, drug trafficking, and terrorist financing. In order to protect themselves and limit liability, financial institutions often conduct due diligence work before filing a SAR to ensure that the transactions appear to be generated from illegal or illicit sources.

Form 8300 picks up where CTRs leave off, requiring any business receiving a cash payment in excess of $10,000 to report the transaction to FinCen using IRS Form 8300. Automobile dealers are one example of a business where a customer may pay for an expensive vehicle in cash, triggering the Form 8300 requirement. The Form 8300 instructions require businesses to accumulate multiple payments if in total the payments exceed the $10,000 threshold within a twenty-four-hour period.

The term “cash” means U.S. or foreign currency received in any transaction. Cash also includes a cashier’s check, money order, bank draft, or traveler’s check with a face amount of $10,000 or less and received in a designated reporting transaction, or any transaction in which the payer is attempting to avoid the filing of Form 8300. A cashier’s check, money order, bank draft, or traveler’s check with a face amount of more than $10,000 is not considered cash, since the bank or financial institute that issued such monetary instruments is required to file a Currency Transaction Report (CTR). A personal check is not considered cash, regardless of the amount.

Email, Text Messages, Social Media

Individuals will make statements, give instructions, and discuss many topics in electronic format, such as email, text messages and via various forms of social media that they would never memorialize in written documents. As a result, the value of email to include “smoking gun” evidence of financial crimes, fraud, motivations for activity, and other information cannot be overstated. In general, external to an organization, email is accessible only if the organization volunteers the information or it is gathered from a resulting subpoena or court authorized warrant. However, U.S. courts have generally held that emails within an organization that are generated by employees are not private, and that employees should have no reasonable expectation of privacy with regard to emails generated or received on an employer’s computer. However, there are exceptions. For example, some courts have held that it is illegal to intercept email “in transit” to the recipient. Accordingly, it is best to review your procedures for accessing emails with legal counsel.

Email, text messages and social media accounts provide useful content, and evidence of linkages among people, transactions, or other activity. For example, an email with the extension “.edu” implies that the person has some association with an educational institution. In addition, email headers contain information about the servers that have processed and transported the email and can often be traced to the source. More sophisticated criminals can use anonymous re-mailers that prevent the source of the email from being discovered.

Big Data, Data Analytics, Textual Analysis, Pattern Recognition, and Other Digital Tools

The world in which we live is impacted by digital information every day. Our names, addresses, phone numbers, and other personal information are captured in numerous databases around the world. In addition, cheap electronic storage has made the ability to capture more and more information less costly. This information, when sorted and analyzed in different ways, often has numerous uses. As a result, the amount of information captured electronically has ballooned to staggering levels.

This same phenomenon has also occurred in transaction detail captured by various organizations, whether for-profit or not-for-profit. Transactions that are coded for the general ledger for accounting purposes also often have additional coding for costs centers and projects that allow the data to be pulled and analyzed, after-the-fact. Large American corporations process billions of transactions annually. As a result, only through the use of effective and efficient digital tools and techniques can fraud examiners and forensic professionals complete their work.

Some of these tools include big data, data analytics, and data mining software; software that looks for hidden patterns in data that can be used to predict future behavior. For example, data mining software can help retail companies find customers with common interests. The term is commonly misused to describe software that presents data in new ways. True big data, data analytics, and data mining software doesn’t just change the presentation, but actually discovers previously unknown relationships among the data. An important field of computer science concerns recognizing patterns. Such software is central to optical character recognition (OCR), voice recognition, and handwriting recognition but can also be applied to financial data to look for unusual and nonfinancial (e.g., text data) activity that is suggestive of fraud.

In this regard, the results of pattern recognition searches and data analytics provide evidence of who, what, where, when, how, and why. Like most evidence, individually, the data simply provide information, but in the context of other evidence gathered as part of the examination process, the results of digital analysis might provide compelling and powerful insight into the act, as well as how it was perpetrated, concealed, and who benefited. In organizations with large financial transaction databases, one way to analyze data is with sophisticated pattern recognition and big data software. These application programs can “see” things in the data that the average examiner couldn’t without extensive amounts of examination time.

Other Physical Evidence

Although the bulk of the fraud examiner’s and forensic accountant’s work is usually completed using physical and electronic documents and electronic data, other physical evidence is also important. For example, forensic auditors from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) regularly work crime scenes along with nonfinancial investigators. Although ATF forensic audit personnel are not normally the first responders, they are knowledgeable about what financial documents should be bagged and tagged. ATF training for financial personnel includes crime scene examination tools and techniques.

Other physical evidence may include fingerprints on documents to establish that a person has had contact with the document, and possibly even reviewed it. This would demonstrate that the individual has knowledge of the document’s existence, and perhaps its content. Charred and partially burned financial books and records can provide valuable clues during an examination. Phony documents, forgeries (including signatures), a typewriter’s unique identifiers, photocopies, indentations, and paper age are some examples of physical evidence that may become part of a financial examination.

Further, nonfinancial information can provide invaluable clues. Addresses and phone numbers can provide proof of linkages between people and organizations. For example, two businesses using the same phone number suggest some association between those organizations. Dates and times can provide important evidence about who, when, where, what, why, and how. This sequencing of events is not financial evidence but can help put the financial examination into context. For example, a timeline may show that an individual had nonsharable financial burdens from severe and costly health problems of a family member prior to a fraud. The existence of the medical condition is not financial evidence but could provide some insight into the financial pressure on the alleged perpetrator.

Altered Documents

Accounting books and records that are found during the course of an examination to have been altered provide compelling evidence of concealment. The methods by which documents can be altered are almost limitless, but include:

• Forged signatures
• Forged handwriting
• Restored erasures
• Erasures
• Eradications
• Recently created documents supposedly created years ago
• Counterfeiting of documents with copy machines
• Counterfeiting of documents with typewriters
• Counterfeiting of documents with (color) printers and matched paper. The methods by which documents can be examined for forgery include³:
• Examining signatures and handwriting
• Examining documents for erasures and eradications
• Determining document age
• Looking for telltale signs of copy machine use
• Looking for telltale signs of a typewriter’s unique typing characteristics
• Looking for signs of printing, and for paper with characteristics different than expected
• Examining documents for indented writing
• Comparison of inks, paper, and writing style
• Determining whether separate papers came from the same source (e.g., the same writing pad)
• Examining paper folds
• Examining documents for tears and cuts, both expected and unexpected
• Restoring burned and partially burned documents
• Identifying the source typewriter, copying machine, or printer
• Examining facsimiles
• Examining notary seals and stamps
• Looking for envelopes that have been opened and subsequently resealed
• Looking for inserted text
• Looking for issues with numbering sequences (e.g., of checks)
• Examining rubber stamp impressions

Although fraud examiners and forensic accountants are not experts in these areas, they provide a first line of defense in an effort to identify possible alterations. If there is any indication that the books and records have been altered, antifraud professionals and forensic accountants should take steps to verify the alteration by having a qualified professional examine the documents in question.

General Ledger, Journal Entries, and Reconciling Items

The general ledger is an excellent resource for fraud examiners and forensic accountants, assuming that the transactions associated with the fraud have been processed through the entity’s books and records. For example, disbursements must pass through the general ledger, so a money trail exists. Assuming that the fraudster wants to conceal his or her activity, he or she needs to post a debit to some account while the reduction in cash is posted via a credit to cash. Because stockholders’ equity accounts typically have very little activity, most fraud perpetrators would avoid these. However, no stone should be left unturned; balances and activity levels should be checked for all accounts, because even stockholders’ equity accounts can be used as a temporary hiding place.

Assuming that stockholders’ equity is unlikely to be used to conceal fraudulent transactions that leaves assets, liabilities, revenues, and expenses. Revenue accounts, other than returns and allowances, typically would not have debit entries. Thus, debits to revenues would likely draw a great deal of attention. This being the case, any debit to revenues would and should be carefully scrutinized.

Debits to liabilities are a stronger possibility than to revenue or stockholders’ equity, and the effect would be an understatement of liabilities. Debits to specific liabilities may be caught through the audit confirmation process and by examining reconciliations of vendor subsidiary account balances to vendor statements. Journal entry debits to liability general ledger accounts should be examined for appropriate backup and approval to ensure that the transactions are legitimate.

Debits to assets and expense accounts are the most common places for concealment. Debits to assets create an overstatement of assets. Assuming that the victim company takes reasonable steps to verify and reconcile assets balances, this approach to conceal a fraud creates irreconcilable balances. Thus, to catch concealment on the asset side, the antifraud professional or forensic accountant needs to reconcile asset details to the general ledger balance. If reconciliations are prepared as part of the company’s normal accounting procedures, reconciling items should be carefully scrutinized for appropriate backup, appropriate review and approval by management, and the age and size of the reconciling items.

Debits to expense accounts are the most common method of concealment. Assuming that expense account balances do not exceed budgeted amounts or exceed budgets by only a relatively small amount, the activity is not likely to raise red flags. Then, once expenses are closed into retained earnings as part of the annual closing process, the chance that the overstated expense balance will be caught decreases substantially. Whereas assets present an ongoing concealment problem for the fraud perpetrator, expenses are problematic for only one period. Some of the items that the antifraud professional and forensic accountant need to scrutinize are the existence of reconciliations and reconciling items for source, backup, and approval.

Closely related to the general ledger, journal entries are a potential source of fraud concealment. Journal entries can be used to eliminate unreconciled balances and to hide inappropriate removal of cash and other entity resources. Thus, period-end and year-end journal entries also need to be examined. The review of journal entries includes looking for too many journal entries, as well as too few—and for missing journal entries. Journal entries need to be scrutinized as to source, backup, and approval.

Examination of the general ledgers, account balances, account activities, reconciliations, reconciling items, and journal entries are also often relevant in forensic accounting examinations. These items need to be evaluated in the context of the written complaints and relevant deposition testimony.

Tax Returns

Tax returns are an important source of information for fraud and forensic accounting engagements. Personal and business tax filings contain representations put forth by the taxpayer related to their taxable income. This information can be correlated with activity in bank accounts and corporate books and records and used as a source of examination leads. Schedule M in corporate tax returns requires reconciliation between book income and taxable income. Then, book income on the tax return can be reconciled to financial statement income. Furthermore, the new M-3 reconciliation for larger public companies provides a detailed reconciliation between book income and taxes. Schedule M-3 is required for corporations and partnerships with $10 million or more in assets. According to Deborah M. Nolan, IRS Large and Mid-Size Business Division Commissioner, “Schedule M-3 will enable the IRS to focus more quickly on high risk issues and taxpayers requiring our attention, and reduce our time spent with compliant taxpayers.”

Tax returns may provide evidence of involvement in businesses not previous known or disclosed by the target. In addition, interest and dividend income may suggest investment, banking, hidden CDs, and other income-generating accounts of which the examiner was not aware. Deductions can also be a source of information. For example, deductions for real estate taxes may reveal ownership interests in property that were not previously disclosed. Furthermore, the amounts and types of deductions might raise questions about whether that particular business operation should need that level of support, a possible indicator of illegal or illicit payments. For example, a small laundry business paying large consulting fees does not make sense and serves as a clue that requires additional examination. If warranted, in some cases, the tax preparer can be interviewed, and his or her work papers subpoenaed.

Error or Fraud?

Jimmy Vaughn, retired forensic auditor for the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), asks West Virginia University students, “How can you tell the difference between a legitimate mistake and fraud? For example, if the evidence suggests that a person cheated on their taxes for three years, what does it mean? How do you interpret it?” His suggestion to the students, “If you do it once, it’s a mistake. If you do it twice, you might be a little sloppy or careless. Three times, we have a pattern. A pattern is pretty indicative that the act was probably deliberate and less likely to be a mistake.”

Locating Hidden Assets and Unknown Sources of Income

Assets can be hidden through several methods: hidden bank accounts, hidden investment accounts, purchasing of assets through straw men or front organizations, and transferring assets to individuals or accounts where detection can be difficult. The most common means for hiding real estate and business ownership are to transfer those assets to another party over which the person holding the assets has some element of control. Family members, such as a child or spouse, are a common technique used for hiding such ownership. Wives in particular make a good haven for hidden asset ownership, because they bring a maiden name to the marriage that has a complete history. Thus, examiners need to search for hidden assets using not only family members’ names but also the spouse’s maiden name. Identification of the spouse’s maiden name can be made using voter registration and marriage records filed at the state and local levels.

To identify assets that may have been transferred, the examiner needs to carefully examine tax returns and business and personal financial records to look for transfer activity. When assets from one period disappear in the next period’s records, the examiners have a clue that assets may have been transferred.

Another problem may be income that is diverted away from known accounts to unknown accounts. The examiner needs to search for transactions between the target’s known accounts and accounts not previously identified by going through check registers, canceled checks, account statements, and other records obtained during the examination to identify suspicious activity that may suggest hidden assets or income diversion.

Other places where assets can be directed include children’s trusts, mortgage payments, insurance policies, prepaid credit cards, savings bonds, traveler’s checks, and money orders. Money transferred directly into a child or family trust without passing through known bank accounts can be an effective tool for hiding income and assets, provided the examiner does not discover the existence of the trust. Another mechanism for hiding assets is to pay down mortgages without running the payments through known bank accounts. If the examiner does not inquire about the existence of mortgages or examine mortgage statements to tie the payment of interest and principal to known accounts, an important clue suggesting unknown income sources or hidden assets may be missed.

Insurance policies can be used to accumulate wealth that does not show up on most financial statements. An individual trying to hide income may make payments to insurance policies from unknown accounts and obtain good investment returns, and the examiner would be none the wiser. Prepaid credit cards, savings bonds, cashier’s checks, traveler’s checks, and money orders are assets that do not show up on traditional account statements, take up little space, and can be securely held in a safe deposit box. Without appropriate inquiry and search for the existence of safe deposit boxes, the examiner may come up empty when it comes to hidden assets and concealed sources of income. Clues about the existence of safe deposit boxes can come from bank statements where annual fees may appear.

Concealed Offshore Financial Accounts, Transactions, and Loans

More sophisticated individuals or organizations with significant hoards of ill-gotten gains often use offshore bank accounts to hide assets and conceal sources of income. Typically, offshore financial institutions are chosen for their favorable tax treatment and commitment to secrecy. For example, Nevis and its sister country St. Kitts form the Independent Federation of St. Kitts and Nevis. They are located in the Leeward Islands, approximately 1,200 miles southeast of Miami, Florida. St. Kitts–Nevis offer complete confidentiality if foreign authorities seek private banking and financial records. Prison terms are mandatory for violation of the statute. As another example, www.henleyglobal.com provides information on the best jurisdictions for companies, trusts, foundations, and private residences. This website reviews information on these types of services for more than thirty countries. Favorite offshore countries change from time to time, so it is prudent for the examiner who needs such information to keep current.

Indirect Methods of Income Reconstruction

Using indirect methods to estimate assets controlled by an entity, or income to an entity, is referred to as “financial profiling.” These analyses are methods for developing indicators of concealed income and hidden assets. In many cases, fraudsters or individuals subject to civil litigation, such as divorce, may not run all of their cash income through bank accounts or the books and records of companies. As such, indirect financial profiling may be the only means to establish illegal sources of income or the existence of hidden assets. Furthermore, prior court decisions have concluded that establishing illegal or illicit sources of income and hidden assets through the use of indirect methods can be admissible as evidence in court. Indirect approaches often provide circumstantial evidence.

Legitimate individuals generally run their income through one or more known bank accounts. Similarly, legitimate businesses utilize known bank accounts, and they also track financial transactions using detailed books and records and maintain backup documentation to support posted transactions. In many fraud and forensic accounting cases, the books and records are incomplete or otherwise inadequate. In such cases, the examiner must resort to other methods to establish estimated income levels and the existence of hidden assets.

An indirect method is generally used when

• The person or entity of interest has inadequate books and records
• The books do not clearly reflect taxable or other known income
• There is reason to believe that the taxpayer has omitted taxable income
• There appears to be a significant increase in year-to-year net worth
• Gross profit percentages appear to change significantly from period to period
• The person of interest’s expenses (both business and personal) exceed known income, with no obvious cause for the difference

Other clues that may arise during an examination that suggest further work and the need to use the indirect method include:

• Few or no original invoices or other supporting documentation
• Unusual or large transactions with little or no support
• A/P or A/R too large for the size of the business
• Missing check numbers
• Business checks that have been endorsed by individuals
• Business disbursements that have been used for personal expenses
• Checks to “cash” for large dollar amounts

The primary challenge related to using the financial profiling methods is the amount of legwork involved in developing sources of information. The examiner is likely to start with a tour of any known businesses, drive-bys of the home and other known real estate locations, and a review of any books and records that are available (e.g., tax returns). From there, the examiner can get an idea of income levels.

For example, suppose that a person of interest has reported taxable income of $50,000 and has corresponding bank account activity to support that income amount, but when the examiner drives by the person’s home, he sees a Mercedes in the driveway of a $500,000 home. The examiner would appropriately conclude that something doesn’t make sense. The examiner would likely go to the county courthouse to look for deeds of ownership, titles, liens, and UCC filings and could also visit the secretary of state’s office to determine business ownership. Some of the sources for determining the inputs for the indirect methods include⁴:

• The subject of the examination
• Informants and confidential sources
• Real estate records
• Judgment and lien records
• Bankruptcy records
• State motor vehicle records
• Loan applications
• Financial statements
• Accountant’s work papers
• Lawsuits and depositions
• Surveillance
• Credit card applications or statements
• Tax returns
• Insurance records
• Child support and divorce records
• Employment applications, salary check stubs, and W-2s
• Companions and known associates
• Canceled checks and deposit tickets

Databases, Sources of Information, and Extra-organization Intelligence

Data availability increases every day. County courthouse records are being brought online. The number of electronic databases, whether free or by subscription, are ever increasing, as is the amount of data being tracked, gathered, organized, and made available for interested parties. The Internet has made access to public data easier than ever before. In fact, public data has become a controversial issue, because would-be perpetrators can easily access large quantities of sensitive data on the Internet during a single session online.

The primary benefit of using public sources of data such as the local county court house and extra-organizational sources of information are twofold. First, fundamental to an examination—which is centered on the act, the concealment, and the conversion—is that open sources of data provide evidence of conversion. These sources of information contain data about addresses, home ownership, registered boats and motor vehicles, debts, and similar indicators of credit obligations and their status. In examinations in which traditional bank, credit card, and investment records are scarce, the best way to develop convincing circumstantial evidence that the target is spending more than amounts obtained from known sources is by piecing together assets and liabilities from external data sources. The same is true when the target operates almost exclusively with cash. Although often incomplete, if the evidence demonstrates higher net worth or spending patterns than that from known sources, the examiner can conclude that conversion (benefit) has occurred.

The second major advantage derived from database searches, Internet searches, and other extra-organizational sources of data is developing new leads. For example, the names of spouses, former spouses, business associates, and businesses where the perpetrator is named as an officer or director can all be discovered by searching open sources of data. Still other benefits include leverage during witness interviews and interrogations, because information helps the examiner listen better, and know what to listen for. Searching for data about targets provides a richer understanding of the target and often new examination ideas. Examiners tend to be honest, but crooks are not! Although we practice thinking critically, as well as how to think like a fraudster, using all our tools, including extra-organizational sources of data, makes antifraud professionals more productive, effective, and efficient. Places where fraud examiners and forensic accountants may find data include:

• Mail
• Newspapers
• Public records
• Conversations
• Documents
• Trash (public domain once on the curb)
• Computer files
• Internet sites and records sites

When gathering data, the issue of ethics arises. Data and information are ethically neutral! Where ethical conundrums arise depends on how you collect data and what you do with it once gathered. Just because you are able to get information doesn’t mean you should. The bottom line is that examiners need to be ethical in how they use sensitive information.

The following tables (Tables 9-4 through 9-9) provide an overview of various sources of data. For a more detailed explanation of other types of data than those included here, please see Section 3.4 of the ACFE’s Fraud Examiners Manual. Fraud examiners and forensic accountants should understand that data sources and availability change constantly. This being the case, fraud and forensic professionals should make a habit of periodically looking for new sources, talking with fellow examiners about sources of data, and attending seminars to learn such things. Information is critical, so maintaining and improving knowledge of data information sources is essential to the long-term success of the examiner.

Although much data are available from various local, county, state, and federal governments, a challenge that the fraud examiner or forensic professional will encounter is the need for a subpoena to obtain the records. Another challenge is that publicly accessible data are disparate and located in many places, and thus requires significant time and expense to pull together. In response, commercial databases have been created to simplify and organize information, thereby making it easier to locate and obtain, provided that the examiner has the budget to pay for such resources. Some commercial sources of data and databases are listed in Table 9-9.

Internet Searching

Individuals are often shocked at the amount of data that are available about them on the Internet with just a few short keystrokes. With the addition of blogs, chat rooms, and websites such as Facebook and Instagram, individuals provide sensitive information about themselves for anyone with the curiosity to read. Newsgroups and chat rooms are worldwide electronic discussion groups and permit the sharing of information between people who share similar interests. Even for those individuals not participating in Internet discourse and information sharing, a tremendous amount of information is available from other public and private sources. Google and other search engines can be used to search an e-mail address, name, user name, nickname, address, or phone number. As a simple experiment, type a person’s name in Google with quotation marks around it and see what comes up. This is easier for unique names than for those that are more common, but information abounds on the Internet, regardless. By simply using various Internet search engines, anyone can create a profile for another individual, business, or organization by searching name, address, phone number, or e-mail address.

E-mail is the most widely used application of the Internet and may provide clues to an investigator about a subject’s background. For example, [email protected] has some association with West Virginia University. Free e-mail is available from companies such as Yahoo!, Hotmail, and other e-mail service providers and may be used to engage in anonymous communications through the choice of the user portion of the e-mail address (i.e., [email protected]). Anonymous remailers can be used to send and receive e-mail communications around the world. Such services work by stripping all traces of the author’s identity from the original e-mail before forwarding it through a series of anonymous servers. Sophisticated parties may hide behind a series of remailers. Text messages, instant messages, Instagram, Snap Chat, Social Media, and other Internet sources are also available, some of which require legal approval and possibly technological support to harness the value of the information source.

Here are some of the various types of information available on the Internet:

• Corporate
• Criminal
• Licenses
• Sex offenders
• Court dispositions
• Financial
• SSDI
• Real estate records
• Personal property
• Military records
• Inmate records
• School information

We have eight types of assignments for instructors to choose from:

1. Critical Thinking
2. Review Questions
3. Multiple Choice Questions
4. Fraud Casebook
5. Brief Cases
6. Major Case Investigation (MCI)
7. IDEA Exercises
8. Tableau Exercises

1. CT-1 The Fish. There are 5 different color houses, occupied by people of 5 different nationalities, who smoke 5 different cigar brands, drink 5 different types of alcohol, and have 5 different pets. The houses are lined up in a row. THE QUESTION IS: WHO OWNS THE FISH?

1. The Brit lives in the red house.
2. The Swede keeps dogs as pets.
3. The Dane drinks tea.
4. The green house is on the left of the white house.
5. The green house’s owner drinks coffee.
6. The person who smokes Pall Mall rears birds.
7. The owner of the yellow house smokes Dunhill.
8. The man living in the center house drinks milk.
9. The Norwegian lives in the first house.
10. The man who smokes Blends lives next to the one who keeps cats.
11. The man who keeps the horse lives next to the man who smokes Dunhill.
12. The owner who smokes Bluemasters drinks beer.
13. The German smokes prince.
14. The Norwegian lives next to the blue house.
15. The man who smokes Blends has a neighbor who drinks water.

Short Answer Questions

Discussion Questions

1. Cash T Account Analysis

Assume the following information appeared on a 201x tax return:

Assignment: use the above chart to estimate the sources and uses of cash as well as the total cash that can be compared to activities and balances in known accounts.

2. Indirect Methods of Income from Unknown Sources

Assume the following information was derived from reliable sources:

Assignments:

1. Use the above chart to estimate the assets, liabilities, sources, applications, income from known sources, estimated net worth and the estimated net cash income.
2. Given the income from known sources, estimate the income from unknown sources from the Lifestyle Approach.
3. Assume that the suspect declared bankruptcy and that the bankruptcy judge closed the case on December 31 of the prior year, confirming that the suspect had no assets and forgave all of the suspects liabilities on the date the bankruptcy was closed. What is your estimated income from unknown sources using the net worth method?
4. Assume that the sources have been rated as reliable, what is your assessment of the validity of your estimate of income from unknown sources? Why?