Forensic Accounting Final

Front 1

Internal Revenue Code

Civil Fraud

Back 1

-Fraudulent intent to evade tax
-IRS burden of proof: clear and convincing evidence (75%)
-Penalty: 75% of understatement attributable to fraud

Front 2

Internal Revenue Code

Criminal Fraud

Back 2

-Tax evasion (felony): willful attempt to evade tax
-IRS burden of proof: beyond a reasonable doubt
-penalty: fine of up to $100 K and/or 5 years imprisonment

Front 3

IRS Criminal Investigation Division

Back 3

1. Conducts criminal investigations of alleged violations of Internal Revenue Code

2. Sources
-Revenue agents (auditors)
-Public
-Ongoing investigations by other law enforcement agencies (ex. SEC might be investigating and could discover tax issue)

3. Special Agent may recommend prosecution after investigation

Front 4

Indicators of Possible Hidden Assets/income

Back 4

1. Lifestyle indicators
2. Financial Analysis

Front 5

Lifestyle indicators

Back 5

1. Known to carry large amounts of cash
2. Clothing, jewelry
3. Lodging
4. Transportation
5. Vacations, leisure activities

Front 6

Financial analysis

Back 6

1. Horizontal, Vertical, and Ratio analysis
2. What subject owns, owes, earns, spends

Front 7

Hiding Assets

Methods of Hiding Currency

Back 7

1. Cash hoards (and not putting amount of cash on tax returns)
2. Buy cashiers checks/travelers checks (very negotiable and liquid)
3. Deposits to Financial institutions
a) shell company (get DBA, open bank acct, p.o. box)
b) safe deposit boxes (stuff inside is confidential)

Front 8

Hiding Assets

Disposing of Hidden Assets

Back 8

1. Financial Investments
2. Loans
3. Transfers and gifts
4. Purchase other assets (gold, jewelry, collectibles, single premium whole life policy or annuity)

Front 9

Hiding Assets

Money Laundering

Back 9

1. disguising illegal income to make it appear legitimate
2. IRS-includes hiding legitimate income to avoid taxation

ex. launder money in bars/restaurants because cash type of business so looks legitimate (can inflate tips or sales)

Front 10

Indirect Methods used to prove unreported income/hidden assets

Back 10

1. Net worth method
2. Sources & Applications of funds method (expenditures approach)
3. Bank deposits method

Front 11

Net Worth Method (Balance sheet approach)

Back 11

Assets
-Liabilities
=Net Worth
-Prior Year's Net worth
=Net worth increase from previous year
+Known expenses
=Total to be accounted for
-funds from known sources
=Funds from unknown sources

Front 12

Sources & Applications of Funds Method (expenditures approach)

Back 12

Known Expenditures
- Known sources of funds
= Funds from Unknown sources

**assuming perfect information
**cash T account (cash transactions method)

Front 13

Cash T account (cash transactions) method

Back 13

1. type of expenditures method
2. Used in preliminary stages of audit for business tax returns

-do this to see if even want to investigate

Front 14

Communication Analysis

Deception Indicators

Back 14

1. Nonverbal cues
2. Verbal Cues

Front 15

Nonverbal cues-Deception indicators

Back 15

1. Changing body position
2. Crossing legs or arms
3. Physical responses to stress (flushed, sweating)
4. Mouth, nose, eyes
5. Use of manipulators

Front 16

Verbal cues-Deception indicators

Back 16

1. Change in speech pattern
2. Comments regarding interview (talking about room temp)
3. Selective memory (foggy memory when lying)
4. Delay in answering/stalling; repeating question
5. Oaths (to add force to denial-"I swear", "honest to god")
6. Elaborate story
7. Feigned lack of concern
8. Qualified denial ("as far as I recall..."; "from what I remember...") (answer the question without answering the Q)

Front 17

Communication Analysis

Contaminants (by interviewer)

Back 17

1. Nonverbal Contaminants
2. Verbal Contaminants
3. Emotional Contaminants

Front 18

Nonverbal Contaminants

Back 18

1. Physical appearance (intimidating interviewer)
2. Multiple subjects (listening to other person; feed off of the other person)
3. Notetaking (less time observing person; may not hear some facts)

Front 19

Verbal Contaminants

Back 19

1. Question construction
2. Small talk/humor (may be good to get a feel for them under normal conditions)
3. Interruptions (let them talk)

Front 20

Emotional Contaminants

Back 20

1. Lack of objectivity
2. Level of communication

Front 21

Question Construction

Back 21

1. Content (information contained in question)
2. Form (structure of question)
3. Timing (order of questions/time at which questions are asked)

Front 22

Content

Back 22

1. Short, dealing with only one issue-don't ask complex or compound questions
2. Use "Tell me about..."' "Describe.." rather than phrasing a question ("Can you tell me what happened")
3. If subject asks for clarification
4. Avoid use of sensitive terms

Front 23

If subject asks for clarification

Back 23

1. restate original question, use subject's own language (pick up from where they left off..."I left work at 8" OK where did you go after work?"
2. Common questions
a) "What do you want to know?"..."I want to know everything"
b) "Where do you want me to start?"..." I want you to start at the beginning"

Front 24

Avoiding use of sensitive terms

Back 24

instead of:
1. "investigation", use "inquiry"
2. "interview," use "ask a few questions"
3. "embezzle/steal/theft", use "shortage"

Front 25

Form

Back 25

1. Types of questions (open, closed, leading)
2. Open-ended and neutral: allow subject to explain in his/her own words
3. Try to have subject provide "what, where, when, how, who"
4. Avoid certain types of questions

Front 26

Types of questions to avoid

Back 26

1. "why" questions (use only toward close and if crucial)
2. "Do you..." questions (may let subject off the hook)
3. questions in the negative ("You didn't...,did you?")

Front 27

Timing

Sensitive or Difficult questions

Back 27

1. save for later in interview
2. do not apologize or use prefacing comments
3. "I really hate to ask you this question...", or "I know you may not want to answer this question.." (setting them up to let them off the hook)

Front 28

Timing

Follow-Up Questions

Back 28

1. Every question should be narrower than the previous one
2. Prodding ("Go on"; "What else?")
3. Construct question using subject's own words
4. Start with some piece of information provided by subject ("you said____. Give me an example." or "tell me about that.")

Front 29

The Interview

Back 29

1. Venue
2. Introduction
3. Questioning Subject
4. Notetaking
5. Closing
6. Prepare Report

Front 30

Interview

Venue

Back 30

1. Location (set outside their comfort zone and into your zone; neutral place with no distractions
2. Seating arrangement
3. NO physical or psychological barriers esp between them and door

Front 31

Interview

Introduction

Back 31

1. Establish rapport (norming:for communication analysis); see how they act under normal conditions
2. Purpose of interview

Front 32

Interview

Questioning Subject

Back 32

1. interview should spend minimal amt of time talking (max 15%)
2. allow interviewee opportunity to answer questions thoroughly and without interruption (let them keep talking to tell whatever they know)

Front 33

Interview

Closing

Back 33

1. Confirm with interviewee information he/she provided
2. Blanket question: Anything else?
3. Inform interviewee that you may need to follow-up with additional questions

Front 34

Admission Seeking Interviews of Suspect

Legal Issues related to accusation

Back 34

1. Adequate predication (culpability is pretty certain)
2. Privacy (close door but don't lock it)
3. Reasonable tactics (ex. have someone else in room so have witness, don't let note taking be distracting)
4. Miranda warning generally NOT required

Front 35

Miranda warning

Back 35

1. required during interviews in custodial setting
2. Questioning by law enforcement officers after taken into custody

Front 36

Admission seeking interviews of suspect

Steps in admission-seeking interview

Back 36

1. Direct accusation (make statement in form of specific accusation)
2. Denials (hardest to get past)
3. Establish rationalization (to get them to confess)
4. Diffuse Alibis
5. Present Alternative Question (Benchmark Admission) (ex. using morally acceptive reasons for crime; good motive vs bad motive question)
6. Seek admission
7. Written confession with person's signature

Front 37

Direct accusation

Back 37

1. observe reaction
2. weak denials; silence
3. repeat accusation

Front 38

Denials

Back 38

1. Interrupt denial
2. delay denial by keep talking
3. reasoning (convince them that reasoning is overwhelming)
4. cut off denials!

Front 39

Establish rationalization

Back 39

1. explain away misdeeds
2. NOT legal consequences

Front 40

Diffuse alibis

Back 40

1. display physical evidence (don't until you have to)
2. discuss previous deceptions (but don't call them a liar)
3. Discuss witness testimony

Front 41

Seek Admission

Back 41

1. Sprinkle with facts (give impression you know the whole story because has more of an effect)
2. Show evidence only as necessary; only one piece at a time
3. benefits vs consequences
4. confident accusation: maximize sympathy/minimize perception of moral wrongdoing (ex. congratulate them: "I am glad we got to this point")

Front 42

Stages of a Trial (civil or criminal)

Back 42

1. Jury selection
2. Opening arguments (preview attorney's evidence)
3. Prosecution or plaintiff witness (direct and cross)
4. Defense witness (direct and cross)
5. Closing Arguments
6. Jury Instructions
7. Jury deliberation and verdict
8. Appeal?

Front 43

Jury Selection (voir dire)

Back 43

1. Judge's questions for potential juror pool (qualifications, connection to parties, bias)
2. Challenges for cause (other attorney can challenge an unlimited amount of times)
3. Preemptory challenges (limited to 3; can ask to have potential juror removed with no reason or cause)

Front 44

Fact witness

Back 44

-testify as to facts of which witness had personal knowledge

Front 45

expert witness

Back 45

-specialized "expertise"; testify to help judge/jury understand technical evidence
-all work is discoverable
-certified with credential
-gives opinion
-help jury to understand evidence

Front 46

Qualifying as expert witness

Back 46

1. Qualification process
2. Frye test (frye v. U.S. 1923)
3. Daubert (1993) Test- 4 factors

Front 47

Expert Witness

Qualification process

Back 47

1. Trial court judge decides whether expert can testify as expert witness
2. judge looks at foundation of expert's testimony
a) Will expert's testimony assist the trier of fact in understanding evidence?
b) Does the expert have expertise on the subject based on knowledge, skills, experience, training, and education?
c) is testimony based on sufficient facts/data and reliable methods applied to facts of the case?

**expert witness must submit in court documentation of credentials
**judge may disqualify him if credentials not accredited (undermine expertise of witness)

Front 48

Frye Test

Back 48

1. Superceded by Daubert in federal court, still used in some state courts
2. Evidence must be based on "generally accepted" principles of relevant professional community

Front 49

Daubert Test

Back 49

1. whether techniques/theory can be (and have been) tested
2. Whether techniques/theory has been subjected to peer review and publication (if hasn't been published, then prob not use it)
3. whether techniques employed by expert have a known or potential rate of error and standards controlling their operations
4. whether techniques/theory employed by expert has been generally accepted by scientific community

Front 50

Expert Report

Back 50

1. Must provide report to opposing party at least 90 days before trial; must be prepared by expert, NOT attorney, investigative team
2. Content of Report
3. Tips on Preparing an expert report
4. Also evaluate other experts' reports
a) assist attorney with questions to ask other experts
b) help attorney understand the technical area at issue

Front 51

Content of Expert Report

Back 51

1. qualifications
2. list of other cases in which expert testimony provided
3. compensation to be received for expert testimony (is amount typical? and if not why?)
4. data and information considered in formulating opinions
5. opinions to be expressed and reasons for those opinions

Front 52

Direct Examination

Fact witness testimony

Back 52

1. only testify as to personal observations
2. first, who witness is and relationship to case (establish personal knowledge)
3. testimony elicited in question-and-answer format (not narrative)
4. no leading questions (hinting at the answer you want to hear.."you took the money right")

Front 53

Direct examination

expert testimony

Back 53

1. establish qualifications
2. usually ask narrative questions (broad, open-ended)
3. can ask hypothetical questions

Front 54

Cross examination

Back 54

1. Cross examination of opposing witnesses
2. Impeaching fact witness
3. impeaching expert witness

Front 55

Cross examination of opposing witnesses

Back 55

1. cast doubt on witness's credibility
2. highlight weaknesses in testimony (contradictions in depositions)
3. use of leading questions allowed (and preferred)

Front 56

Impeaching fact witness

Back 56

1. bias/prejudice
2. ability to observe impaired
3. inconsistency (prior statements, deposition)
4. exploit personality traits to undermine witness' persuasiveness

Front 57

Impeaching expert witnesses

Back 57

1. discredit expert (see above)
2. discredit foundation of opinion
3. discredit conclusion

Front 58

Role of the Judge

Back 58

managing trial
the parties do the work

Front 59

Evidence

Back 59

Can't: character
Can: impeachment

Front 60

Character evidence

Back 60

-evidence to establish a trait of character or propensity to behave in a particular way.
-generally not admissable to prove action conforming with taht trait on a particular occasion

eg. person is dishonest showing this person is violent
-this is violent crime
-so can't use the persons traits to show they are violent

Front 61

Impeachment evidence

Back 61

1.) bringing out matters that attack witness's credibiltiy
2. Testimony may be impeached by showing:
a. bias or self interest
b. prior inconsistent statements
c. reputation for untruthfulness

-something that attacks credibility
-can show they are dishonest to undermine their credibility (eg they are a liar)
-use leading question "Isn't it true that?)

Front 62

Testimonial Evidence

Back 62

1. Personal knowledge
2. hearsay
3. impeachment

Front 63

Personal knowledge

Back 63

1. no opinion, speculations-just factual observations (based on 5 senses)
2. exception: expert witness

Front 64

Hearsya

Back 64

1. out of court statement offered to prove the truth of the matter asserted
2. not admissible
3. exceptions:
-former testimony udner oath
-public records
-business records IF prepared as a usual part of doing business (not specifically for litigation)