Solution Manual For Forensic Accounting and Fraud Examination, 2nd Edition
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Chapter 01 - Introduction to Forensic Accounting and Fraud Examination
1-1
Chapter 1
Introduction to Forensic Accounting and Fraud Examination
Teaching Notes
This chapter presents the opportunity to get students excited about the fields of forensic
accounting and fraud examination. Suggested points to stress:
• General
o Forensic Accounting breaks out from the traditional image of accounting as
boring.
o There are many specialty opportunities within forensic accounting.
o Fraud Examination is one very important opportunity within forensic
accounting.
o Forensic accounting is a challenging field that requires many special skills.
• Learning Objectives
o LO1: Define forensic accounting and fraud examination.
▪ Differentiate from traditional accounting
o LO2: Describe the difference between forensic accounting and auditing.
▪ Forensic accounting includes auditing, special auditing methods, and
other services in additional to auditing (e.g., litigation support)
o LO3: Explain the role of forensic accountants and fraud examiners.
▪ Forensic accountants are needed in almost every area of business.
Where there is money involved, a forensic accountant can play a role.
Fraud examiners are needed to assist in preventing, detecting,
investigating, and reporting on fraud.
o LO4: Identify the knowledge and skills that forensic accountants and fraud
examiners are expected to possess.
▪ Must not only be good with accounting numbers, but also with
psychology, IT, and so on. The AICPA offers a special forensic
accounting certification to CPAs.
o LO5: Describe the opportunities that exist for those who choose to work as
forensic accountants and fraud examiners.
▪ Some specialties within forensic accounting (e.g., expert testimony,
expert consultant) can result in some of the highest-paying career
opportunities in business.
o LO6: Identify the organizations that support the work of forensic accountants
and fraud examiners.
▪ The organizations and professional certifications demonstrate that
forensic accounting is a well-recognized accounting specialty.
1-1
Chapter 1
Introduction to Forensic Accounting and Fraud Examination
Teaching Notes
This chapter presents the opportunity to get students excited about the fields of forensic
accounting and fraud examination. Suggested points to stress:
• General
o Forensic Accounting breaks out from the traditional image of accounting as
boring.
o There are many specialty opportunities within forensic accounting.
o Fraud Examination is one very important opportunity within forensic
accounting.
o Forensic accounting is a challenging field that requires many special skills.
• Learning Objectives
o LO1: Define forensic accounting and fraud examination.
▪ Differentiate from traditional accounting
o LO2: Describe the difference between forensic accounting and auditing.
▪ Forensic accounting includes auditing, special auditing methods, and
other services in additional to auditing (e.g., litigation support)
o LO3: Explain the role of forensic accountants and fraud examiners.
▪ Forensic accountants are needed in almost every area of business.
Where there is money involved, a forensic accountant can play a role.
Fraud examiners are needed to assist in preventing, detecting,
investigating, and reporting on fraud.
o LO4: Identify the knowledge and skills that forensic accountants and fraud
examiners are expected to possess.
▪ Must not only be good with accounting numbers, but also with
psychology, IT, and so on. The AICPA offers a special forensic
accounting certification to CPAs.
o LO5: Describe the opportunities that exist for those who choose to work as
forensic accountants and fraud examiners.
▪ Some specialties within forensic accounting (e.g., expert testimony,
expert consultant) can result in some of the highest-paying career
opportunities in business.
o LO6: Identify the organizations that support the work of forensic accountants
and fraud examiners.
▪ The organizations and professional certifications demonstrate that
forensic accounting is a well-recognized accounting specialty.
Chapter 01 - Introduction to Forensic Accounting and Fraud Examination
1-1
Chapter 1
Introduction to Forensic Accounting and Fraud Examination
Teaching Notes
This chapter presents the opportunity to get students excited about the fields of forensic
accounting and fraud examination. Suggested points to stress:
• General
o Forensic Accounting breaks out from the traditional image of accounting as
boring.
o There are many specialty opportunities within forensic accounting.
o Fraud Examination is one very important opportunity within forensic
accounting.
o Forensic accounting is a challenging field that requires many special skills.
• Learning Objectives
o LO1: Define forensic accounting and fraud examination.
▪ Differentiate from traditional accounting
o LO2: Describe the difference between forensic accounting and auditing.
▪ Forensic accounting includes auditing, special auditing methods, and
other services in additional to auditing (e.g., litigation support)
o LO3: Explain the role of forensic accountants and fraud examiners.
▪ Forensic accountants are needed in almost every area of business.
Where there is money involved, a forensic accountant can play a role.
Fraud examiners are needed to assist in preventing, detecting,
investigating, and reporting on fraud.
o LO4: Identify the knowledge and skills that forensic accountants and fraud
examiners are expected to possess.
▪ Must not only be good with accounting numbers, but also with
psychology, IT, and so on. The AICPA offers a special forensic
accounting certification to CPAs.
o LO5: Describe the opportunities that exist for those who choose to work as
forensic accountants and fraud examiners.
▪ Some specialties within forensic accounting (e.g., expert testimony,
expert consultant) can result in some of the highest-paying career
opportunities in business.
o LO6: Identify the organizations that support the work of forensic accountants
and fraud examiners.
▪ The organizations and professional certifications demonstrate that
forensic accounting is a well-recognized accounting specialty.
1-1
Chapter 1
Introduction to Forensic Accounting and Fraud Examination
Teaching Notes
This chapter presents the opportunity to get students excited about the fields of forensic
accounting and fraud examination. Suggested points to stress:
• General
o Forensic Accounting breaks out from the traditional image of accounting as
boring.
o There are many specialty opportunities within forensic accounting.
o Fraud Examination is one very important opportunity within forensic
accounting.
o Forensic accounting is a challenging field that requires many special skills.
• Learning Objectives
o LO1: Define forensic accounting and fraud examination.
▪ Differentiate from traditional accounting
o LO2: Describe the difference between forensic accounting and auditing.
▪ Forensic accounting includes auditing, special auditing methods, and
other services in additional to auditing (e.g., litigation support)
o LO3: Explain the role of forensic accountants and fraud examiners.
▪ Forensic accountants are needed in almost every area of business.
Where there is money involved, a forensic accountant can play a role.
Fraud examiners are needed to assist in preventing, detecting,
investigating, and reporting on fraud.
o LO4: Identify the knowledge and skills that forensic accountants and fraud
examiners are expected to possess.
▪ Must not only be good with accounting numbers, but also with
psychology, IT, and so on. The AICPA offers a special forensic
accounting certification to CPAs.
o LO5: Describe the opportunities that exist for those who choose to work as
forensic accountants and fraud examiners.
▪ Some specialties within forensic accounting (e.g., expert testimony,
expert consultant) can result in some of the highest-paying career
opportunities in business.
o LO6: Identify the organizations that support the work of forensic accountants
and fraud examiners.
▪ The organizations and professional certifications demonstrate that
forensic accounting is a well-recognized accounting specialty.
Chapter 01 - Introduction to Forensic Accounting and Fraud Examination
1-2
Review Questions
1. To what does the word forensic pertain?
a. Financial audits when fraud is involved.
These types of audits are forensic audits, but the term “forensic” applies in a more
general sense.
b. A particular type of accounting
Forensic accounting is one type of accounting, but the term “forensic” applies in a more
general sense.
c. Matters relating to law and courts of law.
Correct. Forensic is a general term that relates to law and courts of law.
d. Prosecutorial investigations.
These represent forensic investigations, but the term “forensic” is more broadly
applicable.
2. For an act to be considered fraud, which of the following ingredient is required?
a. Large loss.
Fraud can involve losses of any size.
b. Legal entity (e.g., a corporation, partnership, or trust).
Fraud can be committed against both legal entities and individuals.
c. Intentional harm.
Fraud can involve accidental harm or harm not realized by the victim. For example, if by
fraud one steals an object from someone, that someone is still a victim of fraud even if
she never misses the stolen object.
d. Intentional action or inaction.
Correct. Fraud generally does not include accidents.
3. Which of the following is outside the area of forensic accounting?
a. Corporate acquisitions.
Forensic accountants routinely review documents and provide consulting services in
relation to acquisitions.
b. Divorce.
For example, forensic accountants might search for hidden assets in a divorce proceeding.
c. Contract disputes.
For example, forensic accountants might search for evidence of fraud in contract
disputes.
d. None of the above.
Correct. None of the above is outside of the area of forensic accounting.
1-2
Review Questions
1. To what does the word forensic pertain?
a. Financial audits when fraud is involved.
These types of audits are forensic audits, but the term “forensic” applies in a more
general sense.
b. A particular type of accounting
Forensic accounting is one type of accounting, but the term “forensic” applies in a more
general sense.
c. Matters relating to law and courts of law.
Correct. Forensic is a general term that relates to law and courts of law.
d. Prosecutorial investigations.
These represent forensic investigations, but the term “forensic” is more broadly
applicable.
2. For an act to be considered fraud, which of the following ingredient is required?
a. Large loss.
Fraud can involve losses of any size.
b. Legal entity (e.g., a corporation, partnership, or trust).
Fraud can be committed against both legal entities and individuals.
c. Intentional harm.
Fraud can involve accidental harm or harm not realized by the victim. For example, if by
fraud one steals an object from someone, that someone is still a victim of fraud even if
she never misses the stolen object.
d. Intentional action or inaction.
Correct. Fraud generally does not include accidents.
3. Which of the following is outside the area of forensic accounting?
a. Corporate acquisitions.
Forensic accountants routinely review documents and provide consulting services in
relation to acquisitions.
b. Divorce.
For example, forensic accountants might search for hidden assets in a divorce proceeding.
c. Contract disputes.
For example, forensic accountants might search for evidence of fraud in contract
disputes.
d. None of the above.
Correct. None of the above is outside of the area of forensic accounting.
Chapter 01 - Introduction to Forensic Accounting and Fraud Examination
1-3
4. Which area of accounting is most closely associated with forensic accounting?
a. Information systems.
b. Managerial accounting.
c. Consulting.
d. Auditing.
Correct. Fraud investigation and examination, a primary area within forensic accounting
relies heavily on auditing techniques. All of the above areas of accounting are at least
somewhat related to forensic accounting, although strictly speaking consulting is not an
area of accounting but rather a mode of accounting practice.
5. The Sarbanes-Oxley Act requires which of the following?
a. Auditors to receive specialized training in the act.
Auditors must be familiar with PCAOB standards relating to the act, but such familiarity
is not really specialized training.
b. The CEO to certify the financial statements.
Correct. One of the primary requirements of the act is to require ceos and ceos to certify
the financial statements under liability for criminal penalty.
c. Management to institute a zero tolerance policy for fraud.
d. None of the above.
6. How do the objectives differ for forensic accountants (fas) and external financial
auditors (efes)?
a. Fas are more thorough.
Both fas and efas must do their work thoroughly.
b. Efas audit a broader range of transactions.
Although this may be correct in a particular case of fraud, fas must potentially audit the
full range of transactions.
c. Efas tend to concentrate their work more.
The opposite is true.
d. Fas tend to concentrate their work more.
Correct. Fas tend to focus on particular problem areas, such as areas of suspected fraud.
7. How many categories does the American Institute of Certified Accountants use to
classify forensic accounting?
a. 1.
b. 2.
Correct. The 2 categories are investigative services and litigation services.
c. 3.
d. 4.
1-3
4. Which area of accounting is most closely associated with forensic accounting?
a. Information systems.
b. Managerial accounting.
c. Consulting.
d. Auditing.
Correct. Fraud investigation and examination, a primary area within forensic accounting
relies heavily on auditing techniques. All of the above areas of accounting are at least
somewhat related to forensic accounting, although strictly speaking consulting is not an
area of accounting but rather a mode of accounting practice.
5. The Sarbanes-Oxley Act requires which of the following?
a. Auditors to receive specialized training in the act.
Auditors must be familiar with PCAOB standards relating to the act, but such familiarity
is not really specialized training.
b. The CEO to certify the financial statements.
Correct. One of the primary requirements of the act is to require ceos and ceos to certify
the financial statements under liability for criminal penalty.
c. Management to institute a zero tolerance policy for fraud.
d. None of the above.
6. How do the objectives differ for forensic accountants (fas) and external financial
auditors (efes)?
a. Fas are more thorough.
Both fas and efas must do their work thoroughly.
b. Efas audit a broader range of transactions.
Although this may be correct in a particular case of fraud, fas must potentially audit the
full range of transactions.
c. Efas tend to concentrate their work more.
The opposite is true.
d. Fas tend to concentrate their work more.
Correct. Fas tend to focus on particular problem areas, such as areas of suspected fraud.
7. How many categories does the American Institute of Certified Accountants use to
classify forensic accounting?
a. 1.
b. 2.
Correct. The 2 categories are investigative services and litigation services.
c. 3.
d. 4.
Chapter 01 - Introduction to Forensic Accounting and Fraud Examination
1-4
8. A forensic accountant who determines the amount of lost profits due to business
interruption would be working in which of the following areas?
a. Valuation.
Correct. In this case, the forensic accountant would be assigning a value to lost profits.
b. Estimation.
c. Financial determination.
d. Auditing.
9. Corporate scandals prompted companies to begin using which of the following?
a. Forensic audits.
Forensic audits are focused and intensive, and most useful when a particular area of focus
can be identified from the circumstances.
b. Fraud-intensive audits.
Fraud-intensive audits are most applicable when fraud is suspected in a particular area.
c. Proactive fraud checkups.
Correct. Corporate executive are eager take proactive measures to avoid becoming
another scandal.
d. Internal control systems.
This answer is also correct to a letter extent. Further, companies don’t just begin using
internal control systems because of the scandals. Companies have always used internal
control systems.
10. Which of the following is the most recognized fraud credential?
a. CPA.
While CPAs may be generally competent to investigate fraud, the CPA is not a fraud-
specific credential.
b. CMA.
c. CFE.
Correct. The CFE is a fraud-specific credential, and it happens to be the most widely-
recognized fraud-specific credential.
d. None of the above.
Discussion Questions
11. Contrast and compare the role of the following:
a. The internal auditor.
b. The external auditor.
c. The external forensic accounting consultant in an external audit.
The internal auditor focuses on maintaining adequate internal control processes. The
external auditor focuses on attesting to financial statements. The external forensic
accounting consultant in an external audit is likely to focus on a specific area of
concern, one that is likely to involve suspected or actual fraud.
1-4
8. A forensic accountant who determines the amount of lost profits due to business
interruption would be working in which of the following areas?
a. Valuation.
Correct. In this case, the forensic accountant would be assigning a value to lost profits.
b. Estimation.
c. Financial determination.
d. Auditing.
9. Corporate scandals prompted companies to begin using which of the following?
a. Forensic audits.
Forensic audits are focused and intensive, and most useful when a particular area of focus
can be identified from the circumstances.
b. Fraud-intensive audits.
Fraud-intensive audits are most applicable when fraud is suspected in a particular area.
c. Proactive fraud checkups.
Correct. Corporate executive are eager take proactive measures to avoid becoming
another scandal.
d. Internal control systems.
This answer is also correct to a letter extent. Further, companies don’t just begin using
internal control systems because of the scandals. Companies have always used internal
control systems.
10. Which of the following is the most recognized fraud credential?
a. CPA.
While CPAs may be generally competent to investigate fraud, the CPA is not a fraud-
specific credential.
b. CMA.
c. CFE.
Correct. The CFE is a fraud-specific credential, and it happens to be the most widely-
recognized fraud-specific credential.
d. None of the above.
Discussion Questions
11. Contrast and compare the role of the following:
a. The internal auditor.
b. The external auditor.
c. The external forensic accounting consultant in an external audit.
The internal auditor focuses on maintaining adequate internal control processes. The
external auditor focuses on attesting to financial statements. The external forensic
accounting consultant in an external audit is likely to focus on a specific area of
concern, one that is likely to involve suspected or actual fraud.
Chapter 01 - Introduction to Forensic Accounting and Fraud Examination
1-5
12. Mary Soto, the controller of the My Citizens Company, has gone over its inventory
records many times and is concerned that one or more company employees has stolen
large amounts of the company’s inventory. However, she is not absolutely sure that any
theft has actually taken place because large portions of the written and computer records
are missing for unknown reasons. Still, rough calculations, based on total purchases and
sales, show that perhaps 20% of the inventory is missing. Mary spoke to her internal
auditors and demanded that they give her an explanation, but they said no explanation
was possible without the missing records.
What should Mary Soto do? Should she contact the police? Should she hire an
external forensic accountant? How might a forensic accountant help in this case?
Specifically, what could the forensic accountant do that the Mary’s internal
auditors could not do?
It is unlikely that the police would respond to this situation, since there is no
strong evidence that any fraud has been committed. The police aren’t likely to
spend significant amounts of resources without any evidence that any crime has
been committed. A forensic accounting consultant might be able to help in
reconstructing the records, but in the absence of sufficient records it may be
impossible to ever find out what happened. However, if the fraud is ongoing, the
forensic accountant might be helpful in providing sufficient documentation for the
police to investigate or even make an arrest. The forensic accountant might also
advise Mary on how to make proper off-site backups of critical accounting data.
13. Section 404 of the Sarbanes-Oxley Act requires companies to perform self-
assessments of risks for business processes that affect financial reporting.
What are some business processes that could result in risks affecting financial reporting?
The accounting system itself is a business process. Poor security and weak
controls in the accounting system could lead to errors or intentional
miscalculations in reporting. Failures in other business processes could also lead
to incorrect financial reporting: internal auditing and management review of
reports.
14. List the various elements of fraud within the organization. Give several examples of
each.
This is a thinking question, since the various types of fraud are not discussed in
this chapter. But common sense provides a basic list. Various types of fraud
include, for example, theft of assets, theft of information, improper purchases, and
improper hiring. Assets can be stolen by their unauthorized conversion to personal
use and embezzlement. Information can be stolen in a variety of ways; examples
of such ways include by smuggling disks out of the office and by emailing
information to unauthorized. Improper hiring may include, for example, hiring
friends or family without disclosing the relationship, or by hiring friends or family
and improperly inflating their salaries or wage rates.
1-5
12. Mary Soto, the controller of the My Citizens Company, has gone over its inventory
records many times and is concerned that one or more company employees has stolen
large amounts of the company’s inventory. However, she is not absolutely sure that any
theft has actually taken place because large portions of the written and computer records
are missing for unknown reasons. Still, rough calculations, based on total purchases and
sales, show that perhaps 20% of the inventory is missing. Mary spoke to her internal
auditors and demanded that they give her an explanation, but they said no explanation
was possible without the missing records.
What should Mary Soto do? Should she contact the police? Should she hire an
external forensic accountant? How might a forensic accountant help in this case?
Specifically, what could the forensic accountant do that the Mary’s internal
auditors could not do?
It is unlikely that the police would respond to this situation, since there is no
strong evidence that any fraud has been committed. The police aren’t likely to
spend significant amounts of resources without any evidence that any crime has
been committed. A forensic accounting consultant might be able to help in
reconstructing the records, but in the absence of sufficient records it may be
impossible to ever find out what happened. However, if the fraud is ongoing, the
forensic accountant might be helpful in providing sufficient documentation for the
police to investigate or even make an arrest. The forensic accountant might also
advise Mary on how to make proper off-site backups of critical accounting data.
13. Section 404 of the Sarbanes-Oxley Act requires companies to perform self-
assessments of risks for business processes that affect financial reporting.
What are some business processes that could result in risks affecting financial reporting?
The accounting system itself is a business process. Poor security and weak
controls in the accounting system could lead to errors or intentional
miscalculations in reporting. Failures in other business processes could also lead
to incorrect financial reporting: internal auditing and management review of
reports.
14. List the various elements of fraud within the organization. Give several examples of
each.
This is a thinking question, since the various types of fraud are not discussed in
this chapter. But common sense provides a basic list. Various types of fraud
include, for example, theft of assets, theft of information, improper purchases, and
improper hiring. Assets can be stolen by their unauthorized conversion to personal
use and embezzlement. Information can be stolen in a variety of ways; examples
of such ways include by smuggling disks out of the office and by emailing
information to unauthorized. Improper hiring may include, for example, hiring
friends or family without disclosing the relationship, or by hiring friends or family
and improperly inflating their salaries or wage rates.
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Chapter 01 - Introduction to Forensic Accounting and Fraud Examination
1-6
15. How important are information technology skills to the forensic accountant? Give
five examples of ways that forensic accountants use information technology skills.
IT skills are very important to the forensic accountant. The main areas of forensic
accounting include auditing and investigation. Both these areas involve computers
and information technology. Examples: 1) forensic auditing in an IT environment,
3) security consulting, 3) expert testimony in computer crimes, 4) recovering
erased data from computers used in computer crimes, 5) tracing the source of an
email message relating to a computer crime.
16. Explain the roles played by forensic accountants in areas besides those relating to
fraud.
Examples of non-fraud-related forensic accounting roles include valuation,
dispute resolution, due diligence in mergers and acquisitions, expert testimony in
divorce or bankruptcy proceedings.
17. List and explain the most important skills required of forensic accountants.
Forensic accountants must be skilled a working with people, with
communications, must have excellent analytical and investigative skills, and have
good overall accounting skills. Forensic accountants must also have various
specialized skills, including those in the areas of valuation and expert consulting
and expert testimony. Results of investigations and analyses are of little value
unless the forensic accountant is skilled at communicating such results to others.
18. What are some special considerations for forensic accountants in working with law
enforcement investigations?
Evidence and the chain of custody for evidence must not be compromised in any
way. Suspects’ rights must be protected.
19. Westag Mills Company is considering a merger with a competitor. Westag’s CEO has
hired a forensic accounting firm to investigate the competitor. What types of
investigations could the forensic accounting firm conduct? What types of external
assistance could the forensic accounting firm need?
The forensic accountant might investigate the competitor’s financial statements
for possible fraud. The forensic accountant might also provide valuation estimates
for the competitor, for assets the competitor proposes to offer in consideration for
the merger. In the case of valuing the competitor’s assets, the forensic accountant
might need to hire specialized appraisers to estimate the value of specific assets.
1-6
15. How important are information technology skills to the forensic accountant? Give
five examples of ways that forensic accountants use information technology skills.
IT skills are very important to the forensic accountant. The main areas of forensic
accounting include auditing and investigation. Both these areas involve computers
and information technology. Examples: 1) forensic auditing in an IT environment,
3) security consulting, 3) expert testimony in computer crimes, 4) recovering
erased data from computers used in computer crimes, 5) tracing the source of an
email message relating to a computer crime.
16. Explain the roles played by forensic accountants in areas besides those relating to
fraud.
Examples of non-fraud-related forensic accounting roles include valuation,
dispute resolution, due diligence in mergers and acquisitions, expert testimony in
divorce or bankruptcy proceedings.
17. List and explain the most important skills required of forensic accountants.
Forensic accountants must be skilled a working with people, with
communications, must have excellent analytical and investigative skills, and have
good overall accounting skills. Forensic accountants must also have various
specialized skills, including those in the areas of valuation and expert consulting
and expert testimony. Results of investigations and analyses are of little value
unless the forensic accountant is skilled at communicating such results to others.
18. What are some special considerations for forensic accountants in working with law
enforcement investigations?
Evidence and the chain of custody for evidence must not be compromised in any
way. Suspects’ rights must be protected.
19. Westag Mills Company is considering a merger with a competitor. Westag’s CEO has
hired a forensic accounting firm to investigate the competitor. What types of
investigations could the forensic accounting firm conduct? What types of external
assistance could the forensic accounting firm need?
The forensic accountant might investigate the competitor’s financial statements
for possible fraud. The forensic accountant might also provide valuation estimates
for the competitor, for assets the competitor proposes to offer in consideration for
the merger. In the case of valuing the competitor’s assets, the forensic accountant
might need to hire specialized appraisers to estimate the value of specific assets.
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Chapter 01 - Introduction to Forensic Accounting and Fraud Examination
1-7
20. Whom should you call first if you suspect fraud in your company, your forensic
accounting firm, or your external audit firm? Why?
You could contact either firm first. If your external audit firm is large, there is a
good chance it provides forensic accounting services. Further, if the suspected
fraud is likely to materially affect the financial statements, then it is important to
at least notify the external audit firm. On the other hand, if your audit firm is
small, it might be best to call your forensic accountant first, though you should
still notify your external auditor of any events that could have a material impact
on the financial statements.
1-7
20. Whom should you call first if you suspect fraud in your company, your forensic
accounting firm, or your external audit firm? Why?
You could contact either firm first. If your external audit firm is large, there is a
good chance it provides forensic accounting services. Further, if the suspected
fraud is likely to materially affect the financial statements, then it is important to
at least notify the external audit firm. On the other hand, if your audit firm is
small, it might be best to call your forensic accountant first, though you should
still notify your external auditor of any events that could have a material impact
on the financial statements.
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Chapter 02 - The Forensic Accounting Legal Environment
2-1
Chapter 2
The Forensic Accounting Legal Environment
Teaching Notes
This chapter presents the opportunity for students to get their first view of the “forensic”
side of forensic accounting. Suggested points to stress:
• General
• Chapter 1 should have developed the students’ enthusiasm for forensic
accounting. In that chapter they learned that forensic accountants need specialized
skills and knowledge. The logical place to begin with specialized knowledge is
the legal system, since, as students learned, “forensic” refers to legal matters.
• This chapter focuses on criminal versus civil procedures, though both are
discussed in parallel. This is because business schools routinely offer business law
courses, which covers civil procedures. It’s also the authors’ experience that the
criminal side of the law tends to generate more enthusiasm in accounting students,
much because of their experience with television shows and movies.
• Finally, many courses in law devote little or no attention to trial procedures and
rules of evidence. But such information is critical to forensic accountants who are
likely to gather evidence for trials, and possibly serve as expert consultants and
witnesses for trials.
• Students can be motivated by explaining to them how expert witnesses can garner
thousands of dollars for a brief amount of court testimony as an expert witness. Of
course, accountants have to establish themselves as experts and develop their
experience and training, but the place to begin is in understanding how the legal
processes work.
• Learning Objectives
• LO1: Explain the sources of U.S. law.
o The procedures relating to arrests (e.g., Miranda rights), investigations
(e.g., search warrants), and trials (e.g.) are shaped by the Bill of Rights
• LO2: Explain the basic structure of the U.S. court systems.
o Forensic accountants need to be able to work with attorneys, and to
communicate well with them they need to have some basic understanding
of the court systems.
o Forensic accountants don’t need to be attorneys, but they do need to have
a basic understanding of the law.
2-1
Chapter 2
The Forensic Accounting Legal Environment
Teaching Notes
This chapter presents the opportunity for students to get their first view of the “forensic”
side of forensic accounting. Suggested points to stress:
• General
• Chapter 1 should have developed the students’ enthusiasm for forensic
accounting. In that chapter they learned that forensic accountants need specialized
skills and knowledge. The logical place to begin with specialized knowledge is
the legal system, since, as students learned, “forensic” refers to legal matters.
• This chapter focuses on criminal versus civil procedures, though both are
discussed in parallel. This is because business schools routinely offer business law
courses, which covers civil procedures. It’s also the authors’ experience that the
criminal side of the law tends to generate more enthusiasm in accounting students,
much because of their experience with television shows and movies.
• Finally, many courses in law devote little or no attention to trial procedures and
rules of evidence. But such information is critical to forensic accountants who are
likely to gather evidence for trials, and possibly serve as expert consultants and
witnesses for trials.
• Students can be motivated by explaining to them how expert witnesses can garner
thousands of dollars for a brief amount of court testimony as an expert witness. Of
course, accountants have to establish themselves as experts and develop their
experience and training, but the place to begin is in understanding how the legal
processes work.
• Learning Objectives
• LO1: Explain the sources of U.S. law.
o The procedures relating to arrests (e.g., Miranda rights), investigations
(e.g., search warrants), and trials (e.g.) are shaped by the Bill of Rights
• LO2: Explain the basic structure of the U.S. court systems.
o Forensic accountants need to be able to work with attorneys, and to
communicate well with them they need to have some basic understanding
of the court systems.
o Forensic accountants don’t need to be attorneys, but they do need to have
a basic understanding of the law.
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• LO3: Understand the general issues relating to investigations.
o The section covers basic concepts (such as the fraud triangle and chain of
custody) that are developed more in later chapters.
• LO4: Describe arrest and pretrial procedures.
o Before students read this chapter, ask them how they define “being
arrested.” Many will not realize that no arrest really takes place unless
there is a formal booking process. Some might also be surprised to learn
that one can be charge with a crime (by an indictment or citation) without
first being arrested.
• LO5: Explain basic criminal trial procedures.
o The discussion on the rules of evidence is especially relevant to later
chapters. The discussion explains how the expert witness is given a
privileged position in court by being exempted from the personal
knowledge rule.
• LO6: Describe and contrast and compare various common law financial crimes.
o Before beginning this chapter, ask students to define embezzlement. Then
ask them if the secretary for a finance manager commits embezzlement
when she secretly uses her boss’s password to send her checks in the mail.
She covers up the fraud by using the same account to add false supporting
details for the payment transactions. This isn’t embezzlement because the
secretary never has legal custody of the funds she steals. The main point is
that student will typically not know the difference between larceny,
embezzlement, and, perhaps, robbery.
o Many students will be surprised with the degree of criminal liability that
can derive from participating in a conspiracy.
• LO7: Explain various major federal criminal statutes relating to financial crimes.
Review Questions
1. The usual penalty in a civil case is:
a. Monetary damages.
b. Imprisonment.
c. Equitable relief.
d. Any of the above.
e. Only a and c.
Correct. In civil cases, courts routinely award monetary damages or equitable relief.
Imprisonment applies to criminal cases.
2-2
• LO3: Understand the general issues relating to investigations.
o The section covers basic concepts (such as the fraud triangle and chain of
custody) that are developed more in later chapters.
• LO4: Describe arrest and pretrial procedures.
o Before students read this chapter, ask them how they define “being
arrested.” Many will not realize that no arrest really takes place unless
there is a formal booking process. Some might also be surprised to learn
that one can be charge with a crime (by an indictment or citation) without
first being arrested.
• LO5: Explain basic criminal trial procedures.
o The discussion on the rules of evidence is especially relevant to later
chapters. The discussion explains how the expert witness is given a
privileged position in court by being exempted from the personal
knowledge rule.
• LO6: Describe and contrast and compare various common law financial crimes.
o Before beginning this chapter, ask students to define embezzlement. Then
ask them if the secretary for a finance manager commits embezzlement
when she secretly uses her boss’s password to send her checks in the mail.
She covers up the fraud by using the same account to add false supporting
details for the payment transactions. This isn’t embezzlement because the
secretary never has legal custody of the funds she steals. The main point is
that student will typically not know the difference between larceny,
embezzlement, and, perhaps, robbery.
o Many students will be surprised with the degree of criminal liability that
can derive from participating in a conspiracy.
• LO7: Explain various major federal criminal statutes relating to financial crimes.
Review Questions
1. The usual penalty in a civil case is:
a. Monetary damages.
b. Imprisonment.
c. Equitable relief.
d. Any of the above.
e. Only a and c.
Correct. In civil cases, courts routinely award monetary damages or equitable relief.
Imprisonment applies to criminal cases.
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2. The burden of proof in a criminal case is:
a. Beyond a reasonable doubt.
Correct. For civil cases the burden of proof is the preponderance of the evidence.
b. The preponderance of the evidence.
c. More than 50 percent of the evidence.
d. 100 percent assurance.
e. Probable cause.
f. All of the above.
3. Which of the following is/are a source of law in the United States?
a. Case law.
b. Constitutional law.
c. Administrative law.
d. Statutory law.
e. a, b, and d only.
f. All of the above.
Correct.
4. The first 10 amendments to the U.S. Constitution are commonly referred to as:
a. The Privileges and Immunities clauses.
b. The Bill of Rights.
Correct. The Bill of Rights provides many of the rights applicable to criminal
proceedings.
c. The enabling clauses.
d. The Declaration of Independence.
5. Direct appeals of U.S. district court cases are heard by the:
a. U.S. Supreme Court.
The Supreme Court hears very few cases relative to the total number of cases.
b. State Supreme Court.
2-3
2. The burden of proof in a criminal case is:
a. Beyond a reasonable doubt.
Correct. For civil cases the burden of proof is the preponderance of the evidence.
b. The preponderance of the evidence.
c. More than 50 percent of the evidence.
d. 100 percent assurance.
e. Probable cause.
f. All of the above.
3. Which of the following is/are a source of law in the United States?
a. Case law.
b. Constitutional law.
c. Administrative law.
d. Statutory law.
e. a, b, and d only.
f. All of the above.
Correct.
4. The first 10 amendments to the U.S. Constitution are commonly referred to as:
a. The Privileges and Immunities clauses.
b. The Bill of Rights.
Correct. The Bill of Rights provides many of the rights applicable to criminal
proceedings.
c. The enabling clauses.
d. The Declaration of Independence.
5. Direct appeals of U.S. district court cases are heard by the:
a. U.S. Supreme Court.
The Supreme Court hears very few cases relative to the total number of cases.
b. State Supreme Court.
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6. Which of the following has the discretion to bring charges against a suspect?
a. Judge.
b. Prosecutor.
c. Defense attorney.
d. Grand jury.
e. Either b or d.
Correct. Grand juries also have broad investigative powers and can keep their
proceedings secret. In federal courts, grand jury indictments are required for felonies. In
state courts, prosecutors can typically bring indictments for felonies without the use of
grand juries.
f. None of the above.
7. Which of the following elements must be present in a criminal matter?
a. Intent.
In some cases, a willful disregard for the consequences of one’s actions may yield a
crime. For example, injuries stemming from reckless driving generally lead to criminal
liability.
b. Premeditation.
Second-degree murder is murder without premeditation.
c. Guilty act.
d. Damages.
Correct. Although damages tend to exist, at least theoretically, in many crimes, it is the
act itself along with one’s state of mind that generally defines a crime. For example, it is
generally illegal to conspire to commit a crime, and the mere act of conspiring creates a
criminal offense even if the actual crime is never committed.
e. All of the above.
f. a and c.
Correct.
8. Which of the following does not occur at an arraignment?
a. Bail is set.
b. Defendant enters a plea.
c. Prosecutor presents the defendant a written list of the charges being brought.
d. Pretrial motions are heard.
Correct. Arraignments typically take only a few minutes, even with arguments over bail.
2-4
6. Which of the following has the discretion to bring charges against a suspect?
a. Judge.
b. Prosecutor.
c. Defense attorney.
d. Grand jury.
e. Either b or d.
Correct. Grand juries also have broad investigative powers and can keep their
proceedings secret. In federal courts, grand jury indictments are required for felonies. In
state courts, prosecutors can typically bring indictments for felonies without the use of
grand juries.
f. None of the above.
7. Which of the following elements must be present in a criminal matter?
a. Intent.
In some cases, a willful disregard for the consequences of one’s actions may yield a
crime. For example, injuries stemming from reckless driving generally lead to criminal
liability.
b. Premeditation.
Second-degree murder is murder without premeditation.
c. Guilty act.
d. Damages.
Correct. Although damages tend to exist, at least theoretically, in many crimes, it is the
act itself along with one’s state of mind that generally defines a crime. For example, it is
generally illegal to conspire to commit a crime, and the mere act of conspiring creates a
criminal offense even if the actual crime is never committed.
e. All of the above.
f. a and c.
Correct.
8. Which of the following does not occur at an arraignment?
a. Bail is set.
b. Defendant enters a plea.
c. Prosecutor presents the defendant a written list of the charges being brought.
d. Pretrial motions are heard.
Correct. Arraignments typically take only a few minutes, even with arguments over bail.
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10. Which of the following is/are an exception to the hearsay rule?
a. Dying declaration.
b. State of mind.
c. Business and governmental records.
d. Excited utterance.
e. Prior inconsistent statements.
f. All of the above.
Correct.
11. Identify the communication(s) not privileged.
a. Doctor patient.
b. Spouse spouse.
c. Teacher student.
d. Clergy congregant.
e. Attorney client.
f. All of the above.
Correct. In some cases, laws may permit the privilege to be abandoned in favor of the
public good or in cases where important evidence can not be obtained in any other way.
12. The crime of intentionally and permanently converting another’s property to one’s
own use is:
a. Burglary.
b. Embezzlement.
With embezzlement it is typically illegal to temporarily convert another’s property to
one’s own use. Also, with embezzlement, the property must first be entrusted to the
person committing the crime.
c. Larceny.
Correct. When there is intent to only convert the property temporarily, a different crime
may arise. For example, borrowing a car without permission generally leads to the crime
of joy riding and not larceny.
d. Robbery.
e. Fraud.
2-5
10. Which of the following is/are an exception to the hearsay rule?
a. Dying declaration.
b. State of mind.
c. Business and governmental records.
d. Excited utterance.
e. Prior inconsistent statements.
f. All of the above.
Correct.
11. Identify the communication(s) not privileged.
a. Doctor patient.
b. Spouse spouse.
c. Teacher student.
d. Clergy congregant.
e. Attorney client.
f. All of the above.
Correct. In some cases, laws may permit the privilege to be abandoned in favor of the
public good or in cases where important evidence can not be obtained in any other way.
12. The crime of intentionally and permanently converting another’s property to one’s
own use is:
a. Burglary.
b. Embezzlement.
With embezzlement it is typically illegal to temporarily convert another’s property to
one’s own use. Also, with embezzlement, the property must first be entrusted to the
person committing the crime.
c. Larceny.
Correct. When there is intent to only convert the property temporarily, a different crime
may arise. For example, borrowing a car without permission generally leads to the crime
of joy riding and not larceny.
d. Robbery.
e. Fraud.
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Chapter 02 - The Forensic Accounting Legal Environment
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True/ False
Please revise any false statement to make it true.
14. In a criminal investigation, the prosecutor represents the interest of the defrauded
party.
False. In a criminal investigation, the prosecutor represents “the people”
15. In a criminal case, there is no constitutional right to a jury trial.
False. The sixth amendment provides the right to a jury in a criminal matter.
16. A state constitution may not override the U.S. Constitution.
True. The US Constitution is the supreme law. State constitutions may provide additional
protections, but may not restrict the US Constitution.
17. A U.S. district court is considered a trial court.
True.
18. The judge is responsible for deciding which charges are brought against a defendant
in a criminal matter.
False. The prosecutor or District Attorney is responsible for determining which charges
are brought against a defendant.
19. A search warrant or arrest warrant is always required before arresting a suspect.
False. Sometimes, an office only requires probable cause to search or make an arrest.
20. More than one charge may be brought against a suspect in a certain situation.
True.
21. Suspects are entitled to an attorney before being booked for a crime.
False. There is no right to an attorney until the suspect has been booked.
22. Discovery in a criminal trial usually favors the defense.
True.
2-6
True/ False
Please revise any false statement to make it true.
14. In a criminal investigation, the prosecutor represents the interest of the defrauded
party.
False. In a criminal investigation, the prosecutor represents “the people”
15. In a criminal case, there is no constitutional right to a jury trial.
False. The sixth amendment provides the right to a jury in a criminal matter.
16. A state constitution may not override the U.S. Constitution.
True. The US Constitution is the supreme law. State constitutions may provide additional
protections, but may not restrict the US Constitution.
17. A U.S. district court is considered a trial court.
True.
18. The judge is responsible for deciding which charges are brought against a defendant
in a criminal matter.
False. The prosecutor or District Attorney is responsible for determining which charges
are brought against a defendant.
19. A search warrant or arrest warrant is always required before arresting a suspect.
False. Sometimes, an office only requires probable cause to search or make an arrest.
20. More than one charge may be brought against a suspect in a certain situation.
True.
21. Suspects are entitled to an attorney before being booked for a crime.
False. There is no right to an attorney until the suspect has been booked.
22. Discovery in a criminal trial usually favors the defense.
True.
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23. Hearsay evidence is not allowed at a preliminary hearing.
False. The purpose of a preliminary hearing is to weed out the cases not strong enough
for trial, accordingly, the judge will hear all evidence, including hearsay in determining
whether amateur should be set for trial.
24 The defense is not required to call any witnesses on the defendant’s behalf.
True.
25 A jury verdict of not guilty in a criminal case may be appealed by the prosecution.
False. This would subject the defendant to double jeopardy.
26. Generally, an attorney is allowed to ask leading questions of a witness.
False. Generally, leading questions are only allowed on cross-examination.
27. Attorney-client privilege extends to the forensic accountant hired by the attorney.
True.
28. All communication between an attorney and a client are privileged.
False. Information about future crimes is not privileged.
29. Recruiting or hiring someone to commit a crime is called aiding and abetting.
False. This is the crime of solicitation.
30. To be convicted of 18 USC 96 (RICO), at least two federal or state crimes must be
committed.
True.
Discussion Questions
31. What does the term full faith and credit mean, as indicated in the Article 4 of the U.S.
Constitution?
The full faith and credit concept requires that states “recognize” the public acts, records,
and judicial proceedings of other states
2-7
23. Hearsay evidence is not allowed at a preliminary hearing.
False. The purpose of a preliminary hearing is to weed out the cases not strong enough
for trial, accordingly, the judge will hear all evidence, including hearsay in determining
whether amateur should be set for trial.
24 The defense is not required to call any witnesses on the defendant’s behalf.
True.
25 A jury verdict of not guilty in a criminal case may be appealed by the prosecution.
False. This would subject the defendant to double jeopardy.
26. Generally, an attorney is allowed to ask leading questions of a witness.
False. Generally, leading questions are only allowed on cross-examination.
27. Attorney-client privilege extends to the forensic accountant hired by the attorney.
True.
28. All communication between an attorney and a client are privileged.
False. Information about future crimes is not privileged.
29. Recruiting or hiring someone to commit a crime is called aiding and abetting.
False. This is the crime of solicitation.
30. To be convicted of 18 USC 96 (RICO), at least two federal or state crimes must be
committed.
True.
Discussion Questions
31. What does the term full faith and credit mean, as indicated in the Article 4 of the U.S.
Constitution?
The full faith and credit concept requires that states “recognize” the public acts, records,
and judicial proceedings of other states
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Chapter 02 - The Forensic Accounting Legal Environment
2-8
32. Explain the concept of double jeopardy.
Double jeopardy is the process of being tried for the same crime twice, which is
not permitted under the Fifth Amendment of the U.S. Constitution, although
individuals may be tried separately in state and federal courts for the same crime.
Once the jury is seated in a jury trial or when the first witness takes the stand in a
bench trial, the criminal defendant is said to be in jeopardy and after that point,
the defendant cannot be retried for the same crime if there is a verdict of not
guilty or the judge
33. Explain how the concept of preemption applies when there is a conflict between local
laws, state laws, and federal laws.
The general principle of preemption applies to statutory laws: When there is a
conflict between federal, state, or local statutes, the statutes of the higher authority
preempt those of the lower authority. This prevents states making laws that
conflict with U.S. laws. For example, New York could not pass a law that
exempts its citizens from paying U.S. income taxes.
34. Discuss how case law evolves. In other words, once a case has been decided, what
would be the process for changing the result?
Case law evolves from appellate decisions. When the appellate decisions disagree
from one court (or jurisdiction) to the next, the Supreme Court may render a
decision that resolves the differences between the lower courts.
35. Who is responsible for enforcing administrative laws?
Enforcement of laws generally falls under the executive branch of government.
36. Explain the jurisdictional limitations of the federal courts.
Federal courts all have limited jurisdiction. The U.S. district courts try only cases
that involve criminal or civil federal law. The only exception is “diversity
jurisdiction,” which means that these courts have jurisdiction over civil disputes
between citizens of different states for amounts more than $75,000.
2-8
32. Explain the concept of double jeopardy.
Double jeopardy is the process of being tried for the same crime twice, which is
not permitted under the Fifth Amendment of the U.S. Constitution, although
individuals may be tried separately in state and federal courts for the same crime.
Once the jury is seated in a jury trial or when the first witness takes the stand in a
bench trial, the criminal defendant is said to be in jeopardy and after that point,
the defendant cannot be retried for the same crime if there is a verdict of not
guilty or the judge
33. Explain how the concept of preemption applies when there is a conflict between local
laws, state laws, and federal laws.
The general principle of preemption applies to statutory laws: When there is a
conflict between federal, state, or local statutes, the statutes of the higher authority
preempt those of the lower authority. This prevents states making laws that
conflict with U.S. laws. For example, New York could not pass a law that
exempts its citizens from paying U.S. income taxes.
34. Discuss how case law evolves. In other words, once a case has been decided, what
would be the process for changing the result?
Case law evolves from appellate decisions. When the appellate decisions disagree
from one court (or jurisdiction) to the next, the Supreme Court may render a
decision that resolves the differences between the lower courts.
35. Who is responsible for enforcing administrative laws?
Enforcement of laws generally falls under the executive branch of government.
36. Explain the jurisdictional limitations of the federal courts.
Federal courts all have limited jurisdiction. The U.S. district courts try only cases
that involve criminal or civil federal law. The only exception is “diversity
jurisdiction,” which means that these courts have jurisdiction over civil disputes
between citizens of different states for amounts more than $75,000.
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Chapter 02 - The Forensic Accounting Legal Environment
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37. Discuss the rights, duties, and obligations of a forensic accountant hired to assist in a
civil or criminal investigation.
This is a thinking question, since the answer is not explicitly spelled out in the
text. Various rights may be applicable in the court systems, such as the general
rights of those who participate in trials. Duties and obligations include compliance
with applicable laws and regulations, and ethical conduct.
38. What are the elements of the fraud triangle?
Pressure, opportunity, and rationalization.
39. Is a search warrant always required to obtain evidence?
No. Evidence in plain sight may sometimes be seized, evidence can be supplied
voluntarily, and subpoenas instead of search warrants are often used.
40. What is the fruit of the poisonous tree doctrine?
Under the fruits of the poisonous tree doctrine, evidence subsequently obtained
because of a defective search warrant or improper procedure can be excluded
from evidence in court. An exception may exist when the evidence could have or
would have been obtain anyway by other means.
41. What is the purpose of discovery?
The general exchange of information and evidence between prosecutors and
defendants is called discovery. In the interests of promoting justice, avoiding
surprises during trials, and in facilitating the more rapid settlement of cases,
prosecutors are typically required to provide the defense copies of the arrest
records, search warrants, witness statements, and, in general, access to all
evidence in the case. However, local discovery rules vary from one jurisdiction to
the next, and in federal courts, prosecutors are not required to supply the defense
pretrial statements from government witnesses. In some jurisdictions and
circumstances defendants may also have discovery obligations. In civil cases,
both the plaintiff and defendant are required to submit to discovery from the
opposing side.
42. Why is hearsay allowed in a preliminary hearing?
Preliminary hearings seek to weed out weak cases, and since there is no
determination of guilt or innocence, their rules of evidence are much more lax.
2-9
37. Discuss the rights, duties, and obligations of a forensic accountant hired to assist in a
civil or criminal investigation.
This is a thinking question, since the answer is not explicitly spelled out in the
text. Various rights may be applicable in the court systems, such as the general
rights of those who participate in trials. Duties and obligations include compliance
with applicable laws and regulations, and ethical conduct.
38. What are the elements of the fraud triangle?
Pressure, opportunity, and rationalization.
39. Is a search warrant always required to obtain evidence?
No. Evidence in plain sight may sometimes be seized, evidence can be supplied
voluntarily, and subpoenas instead of search warrants are often used.
40. What is the fruit of the poisonous tree doctrine?
Under the fruits of the poisonous tree doctrine, evidence subsequently obtained
because of a defective search warrant or improper procedure can be excluded
from evidence in court. An exception may exist when the evidence could have or
would have been obtain anyway by other means.
41. What is the purpose of discovery?
The general exchange of information and evidence between prosecutors and
defendants is called discovery. In the interests of promoting justice, avoiding
surprises during trials, and in facilitating the more rapid settlement of cases,
prosecutors are typically required to provide the defense copies of the arrest
records, search warrants, witness statements, and, in general, access to all
evidence in the case. However, local discovery rules vary from one jurisdiction to
the next, and in federal courts, prosecutors are not required to supply the defense
pretrial statements from government witnesses. In some jurisdictions and
circumstances defendants may also have discovery obligations. In civil cases,
both the plaintiff and defendant are required to submit to discovery from the
opposing side.
42. Why is hearsay allowed in a preliminary hearing?
Preliminary hearings seek to weed out weak cases, and since there is no
determination of guilt or innocence, their rules of evidence are much more lax.
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43. What is the voir dire process?
In the voir dire process, the attorneys or the judge asks potential jurors questions
about their attitudes and backgrounds and may automatically exclude some jurors
using “peremptory challenges.” Additional jurors may also be excluded if an
attorney can show just cause for, say, extreme bias, but judges routinely accept
the word of prospective jurors who promise to set aide admitted biases.
44. What options does a defense attorney have to counter the testimony of a witness?
The defense attorney can cross examine the witness and/or call defense witnesses
to counter the witness’s testimony.
45. Discuss the importance of jury instructions.
The final part of the jury trial before the case goes to the jury is that the judge
gives jury instructions on the legal principles that the jury must apply to the case.
The jury instructions are critical because they typically define the elements of the
crimes (or civil wrongs) under consideration, reasonable doubt, permissible
considerations in evaluating the credibility of the witnesses, and the mechanics of
the deliberations.
46. Discuss the rules of evidence.
In criminal trials, the rules of evidence control both the content of the evidence
and the manner in which it is presented. In federal and most state courts, the rules
of evidence are set forth in statutory codes.
The number one rule relating to evidence is that it can be introduced only if it is
shown to be relevant, meaning that the attorney must logically connect it to the
questions at hand. However, not all relevant evidence is admitted. For example,
judges may exclude relevant evidence that is deemed to be overly prejudicial or
inflammatory to the emotions.
A second major rule of evidence, the personal knowledge rule, is that witnesses
can testify only to things that they personally know through one or more of their
own senses.
The major exception to the personal knowledge rule applies to expert witnesses,
who are permitted to draw expert conclusions based on facts admitted into
evidence. For example, a handwriting expert could testify that in her opinion, a
defendant forged a given document, even though the expert did not personally
witness the act of forgery.
2-10
43. What is the voir dire process?
In the voir dire process, the attorneys or the judge asks potential jurors questions
about their attitudes and backgrounds and may automatically exclude some jurors
using “peremptory challenges.” Additional jurors may also be excluded if an
attorney can show just cause for, say, extreme bias, but judges routinely accept
the word of prospective jurors who promise to set aide admitted biases.
44. What options does a defense attorney have to counter the testimony of a witness?
The defense attorney can cross examine the witness and/or call defense witnesses
to counter the witness’s testimony.
45. Discuss the importance of jury instructions.
The final part of the jury trial before the case goes to the jury is that the judge
gives jury instructions on the legal principles that the jury must apply to the case.
The jury instructions are critical because they typically define the elements of the
crimes (or civil wrongs) under consideration, reasonable doubt, permissible
considerations in evaluating the credibility of the witnesses, and the mechanics of
the deliberations.
46. Discuss the rules of evidence.
In criminal trials, the rules of evidence control both the content of the evidence
and the manner in which it is presented. In federal and most state courts, the rules
of evidence are set forth in statutory codes.
The number one rule relating to evidence is that it can be introduced only if it is
shown to be relevant, meaning that the attorney must logically connect it to the
questions at hand. However, not all relevant evidence is admitted. For example,
judges may exclude relevant evidence that is deemed to be overly prejudicial or
inflammatory to the emotions.
A second major rule of evidence, the personal knowledge rule, is that witnesses
can testify only to things that they personally know through one or more of their
own senses.
The major exception to the personal knowledge rule applies to expert witnesses,
who are permitted to draw expert conclusions based on facts admitted into
evidence. For example, a handwriting expert could testify that in her opinion, a
defendant forged a given document, even though the expert did not personally
witness the act of forgery.
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49. Compare and contrast the role of the forensic accountant in the investigation of a civil
matter as compared to a criminal matter. Are there any similarities in the nature of the
investigations? Are the goals of the investigation the same? Is there any specific training
a forensic accountant would need to conduct the different investigations?
The criminal and civil processes are very similar. Criminal cases may need to
involve law enforcement, and in criminal cases the discovery rules favor the
defendant much more than they do in civil cases.
50. Suppose the laws of a certain state require the use of either a Subchapter S
corporation or a limited partnership in operating an accounting practice. What happens if
the U.S. Constitution is amended prohibiting accounting firms from operating as limited
partnerships? What options would an existing accounting firm have once the constitution
is amended? Would the firm be required to change its method of operation?
The U.S. Constitution is the supreme law of the land, and so state laws mandating
accounting firms to operate as limited partnerships would become invalid. Also,
accounting firms could no longer operate as limited partnerships even if they
wanted to. States would likely introduce new laws to cover the situation.
51. Why are the legal standards different for criminal and civil matters? Separately
identify the differences between these two types of matters from the perspectives of the
defendant and the plaintiff/prosecutor.
The main difference in legal standards involves the burden of proof required by
the prosecutor versus the plaintiff. In criminal cases, the prosecutor must prove
guilt beyond a reasonable doubt. On the other hand, plaintiffs in civil cases must
prove their cases by a preponderance of the evidence.
52. In the investigation of a criminal or civil matter, how does the forensic accountant
obtain the necessary information? Discuss the use of all investigative tools, including the
subpoena, the grand jury, and the search warrant.
In criminal cases law enforcement may subpoena information when there is
probably cause that a crime has been committed. Subpoenas can sometimes take
weeks to obtain the desired information and may or may not require a judge’s
signature, depending on the jurisdiction. Warrants, on the other hand, are
normally signed by a judge and permit authorities to immediately seize evidence.
Warrants are normally needed to seize evidence contained in a suspect’s home.
2-12
49. Compare and contrast the role of the forensic accountant in the investigation of a civil
matter as compared to a criminal matter. Are there any similarities in the nature of the
investigations? Are the goals of the investigation the same? Is there any specific training
a forensic accountant would need to conduct the different investigations?
The criminal and civil processes are very similar. Criminal cases may need to
involve law enforcement, and in criminal cases the discovery rules favor the
defendant much more than they do in civil cases.
50. Suppose the laws of a certain state require the use of either a Subchapter S
corporation or a limited partnership in operating an accounting practice. What happens if
the U.S. Constitution is amended prohibiting accounting firms from operating as limited
partnerships? What options would an existing accounting firm have once the constitution
is amended? Would the firm be required to change its method of operation?
The U.S. Constitution is the supreme law of the land, and so state laws mandating
accounting firms to operate as limited partnerships would become invalid. Also,
accounting firms could no longer operate as limited partnerships even if they
wanted to. States would likely introduce new laws to cover the situation.
51. Why are the legal standards different for criminal and civil matters? Separately
identify the differences between these two types of matters from the perspectives of the
defendant and the plaintiff/prosecutor.
The main difference in legal standards involves the burden of proof required by
the prosecutor versus the plaintiff. In criminal cases, the prosecutor must prove
guilt beyond a reasonable doubt. On the other hand, plaintiffs in civil cases must
prove their cases by a preponderance of the evidence.
52. In the investigation of a criminal or civil matter, how does the forensic accountant
obtain the necessary information? Discuss the use of all investigative tools, including the
subpoena, the grand jury, and the search warrant.
In criminal cases law enforcement may subpoena information when there is
probably cause that a crime has been committed. Subpoenas can sometimes take
weeks to obtain the desired information and may or may not require a judge’s
signature, depending on the jurisdiction. Warrants, on the other hand, are
normally signed by a judge and permit authorities to immediately seize evidence.
Warrants are normally needed to seize evidence contained in a suspect’s home.
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Chapter 02 - The Forensic Accounting Legal Environment
2-13
Grand juries normally have subpoena power, and the power to summon witnesses
and compel them to give testimony under oath.
In civil cases, attorneys typically act as officers of the court and issue subpoenas
as part of the discovery process.
53. Why is bail required? Are there any mitigating factors that could decrease the amount
of bail? Are there any charges for which there is no bail? What protection does a bail
bond seller have?
Bail is a “security deposit” aimed at insuring the defendant will appear for trial.
Bail bond sellers typically require collateral (such as a home mortgage) to ensure
they can collect the full amount of the bail in the event that the defendant does not
appear for trial.
Judges consider many factors in setting bail, including the nature of the crime, the
strength of the prosecution’s evidence, and the background of the accused.
Judges can waive bail for any charges; the amount of bail is typically at the
discretion of the judge.
54. Discuss the constitutional right of a defendant to have a jury trial. Are there instances
when a defendant would prefer to have a trial by judge? Would the prosecutor have a
preference? Discuss the benefits and detriments of both jury and judge trials from each
perspective.
Federal judges are appointed for life and relatively immune to political pressure.
Therefore in federal cases a defendant might prefer a trial by judge in a case in
which it appears likely the jury will be negatively affected by political pressures.
In some cases, judges might be more capable of handling complex technical
issues and thus be preferable for this reason.
Jury trials often favor the defendant, especially in criminal cases in which a
unanimous verdict is required, because the defense is able to participate in the
jury selection process, and it takes only one dissenting vote to prevent a
conviction.
55. Which side has the burden of proof in a trial? Are there instances when the burden
lies with the opposite party? Are there instances when the burden lies with both parties?
In general the burden of proof lies with the plaintiff or prosecutor. But as a
practical matter, the burden can shift to the defense after a prosecutor or plaintiff
puts on a case with very strong evidence. When such happens the defendant will
likely lose the case unless he presents a case to the jury or judge.
2-13
Grand juries normally have subpoena power, and the power to summon witnesses
and compel them to give testimony under oath.
In civil cases, attorneys typically act as officers of the court and issue subpoenas
as part of the discovery process.
53. Why is bail required? Are there any mitigating factors that could decrease the amount
of bail? Are there any charges for which there is no bail? What protection does a bail
bond seller have?
Bail is a “security deposit” aimed at insuring the defendant will appear for trial.
Bail bond sellers typically require collateral (such as a home mortgage) to ensure
they can collect the full amount of the bail in the event that the defendant does not
appear for trial.
Judges consider many factors in setting bail, including the nature of the crime, the
strength of the prosecution’s evidence, and the background of the accused.
Judges can waive bail for any charges; the amount of bail is typically at the
discretion of the judge.
54. Discuss the constitutional right of a defendant to have a jury trial. Are there instances
when a defendant would prefer to have a trial by judge? Would the prosecutor have a
preference? Discuss the benefits and detriments of both jury and judge trials from each
perspective.
Federal judges are appointed for life and relatively immune to political pressure.
Therefore in federal cases a defendant might prefer a trial by judge in a case in
which it appears likely the jury will be negatively affected by political pressures.
In some cases, judges might be more capable of handling complex technical
issues and thus be preferable for this reason.
Jury trials often favor the defendant, especially in criminal cases in which a
unanimous verdict is required, because the defense is able to participate in the
jury selection process, and it takes only one dissenting vote to prevent a
conviction.
55. Which side has the burden of proof in a trial? Are there instances when the burden
lies with the opposite party? Are there instances when the burden lies with both parties?
In general the burden of proof lies with the plaintiff or prosecutor. But as a
practical matter, the burden can shift to the defense after a prosecutor or plaintiff
puts on a case with very strong evidence. When such happens the defendant will
likely lose the case unless he presents a case to the jury or judge.
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Chapter 02 - The Forensic Accounting Legal Environment
2-14
56. Why does the hearsay rule exist? When are exceptions to the hearsay rule
allowed? Is there any consistency between the rule and exceptions; in other
words, can you devise an explanation as to why allowing exceptions to the
hearsay rule does not violate the rationale for it?
The hearsay rule exists because the defendant has a right to question those who
testify against her. It’s impossible to cross examine someone who does not appear
in court. There are many exceptions to the hearsay rule: dying declarations,
excited utterances, defendant admissions, statements that show someone’s state of
mind, written government and business records, and prior inconsistent statements.
In general, hearsay exceptions do not prevent a defendant from cross examining
hearsay witnesses.
57. Discuss different crimes that have arisen because of the use of computers. Is the
common theme of these crimes the use of a computer or the underlying act that is
involved? Would any of these crimes still exist if accomplished without the use of a
computer?
Technology makes certain crimes easier, especially crimes that involved theft of
information. Computer networks, including the Internet, make it possible for
hackers and unauthorized users to access centralized database and quickly steal
large amounts of information. This in turn can lead to crimes such as identity
theft.
Computers also tend to make it more difficult to identify the perpetrators of
crimes. Computer hackers leave not fingerprints or blown-off safe doors.
Most computer-related crimes would in fact exist without computers, though
many of them would be less prevalent.
2-14
56. Why does the hearsay rule exist? When are exceptions to the hearsay rule
allowed? Is there any consistency between the rule and exceptions; in other
words, can you devise an explanation as to why allowing exceptions to the
hearsay rule does not violate the rationale for it?
The hearsay rule exists because the defendant has a right to question those who
testify against her. It’s impossible to cross examine someone who does not appear
in court. There are many exceptions to the hearsay rule: dying declarations,
excited utterances, defendant admissions, statements that show someone’s state of
mind, written government and business records, and prior inconsistent statements.
In general, hearsay exceptions do not prevent a defendant from cross examining
hearsay witnesses.
57. Discuss different crimes that have arisen because of the use of computers. Is the
common theme of these crimes the use of a computer or the underlying act that is
involved? Would any of these crimes still exist if accomplished without the use of a
computer?
Technology makes certain crimes easier, especially crimes that involved theft of
information. Computer networks, including the Internet, make it possible for
hackers and unauthorized users to access centralized database and quickly steal
large amounts of information. This in turn can lead to crimes such as identity
theft.
Computers also tend to make it more difficult to identify the perpetrators of
crimes. Computer hackers leave not fingerprints or blown-off safe doors.
Most computer-related crimes would in fact exist without computers, though
many of them would be less prevalent.
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Chapter 02 - The Forensic Accounting Legal Environment
2-15
58. Review each of the following amendments (the Bill of Rights) to the U.S.
Constitution. Evaluate each amendment and explain how its provisions would affect both
a prosecutor and a defense attorney.
The Bill of Rights, have an especially important impact on civil and criminal
procedures. The Fourth Amendment prevents unreasonable searches, the Fifth
Amendment sets the right against double jeopardy (being tried twice for the same
crime), the right against-self incrimination (testifying against oneself), and the
foundation for due process (the right to be given notices of charges or claims and the
opportunity to defend against them). The Sixth Amendment grants the right to a
speedy trial, a jury, an attorney in criminal cases, to confront accusers, and to compel
witnesses to testify. The Seventh Amendment grants the right to a jury trial in certain
civil cases; the Eighth Amendment forbids excessive bail and cruel and unusual
punishment; the Ninth Amendment states that the set of citizens’ rights can be
broader that those elaborated in the Constitution. The Tenth Amendment states that
whatever authority is not vested in the federal government rests in the states.
59. Research the fraud triangle. Specifically look for its application to accountants (the
AICPA Web site is http://www.aicpa.org). Discuss specific steps the forensic accountant
could take in each area of the triangle to combat fraud.
Pressure: Run credit checks on prospective employees. Employees with credit
problems may be under pressure to steal.
Opportunity: This is the one are in which the business has a good deal of control.
2-15
58. Review each of the following amendments (the Bill of Rights) to the U.S.
Constitution. Evaluate each amendment and explain how its provisions would affect both
a prosecutor and a defense attorney.
The Bill of Rights, have an especially important impact on civil and criminal
procedures. The Fourth Amendment prevents unreasonable searches, the Fifth
Amendment sets the right against double jeopardy (being tried twice for the same
crime), the right against-self incrimination (testifying against oneself), and the
foundation for due process (the right to be given notices of charges or claims and the
opportunity to defend against them). The Sixth Amendment grants the right to a
speedy trial, a jury, an attorney in criminal cases, to confront accusers, and to compel
witnesses to testify. The Seventh Amendment grants the right to a jury trial in certain
civil cases; the Eighth Amendment forbids excessive bail and cruel and unusual
punishment; the Ninth Amendment states that the set of citizens’ rights can be
broader that those elaborated in the Constitution. The Tenth Amendment states that
whatever authority is not vested in the federal government rests in the states.
59. Research the fraud triangle. Specifically look for its application to accountants (the
AICPA Web site is http://www.aicpa.org). Discuss specific steps the forensic accountant
could take in each area of the triangle to combat fraud.
Pressure: Run credit checks on prospective employees. Employees with credit
problems may be under pressure to steal.
Opportunity: This is the one are in which the business has a good deal of control.
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Chapter 02 - The Forensic Accounting Legal Environment
2-17
Amendment I
Congress shall make no law respecting an establishment of religion, or prohibiting the
free exercise thereof; or abridging the freedom of speech, or of the press; or the right
of the people peaceably to assemble, and to petition the government for a redress of
grievances.
Amendment II
A well regulated militia, being necessary to the security of a free state, the right of the
people to keep and bear arms, shall not be infringed.
Amendment III
No soldier shall, in time of peace be quartered in any house, without the consent of
the owner, nor in time of war, but in a manner to be prescribed by law.
Amendment IV
The right of the people to be secure in their persons, houses, papers, and effects,
against unreasonable searches and seizures, shall not be violated, and no warrants
shall issue, but upon probable cause, supported by oath or affirmation, and
particularly describing the place to be searched, and the persons or things to be
seized.
Amendment V
No person shall be held to answer for a capital, or otherwise infamous crime, unless
on a presentment or indictment of a grand jury, except in cases arising in the land or
naval forces, or in the militia, when in actual service in time of war or public danger;
nor shall any person be subject for the same offense to be twice put in jeopardy of life
or limb; nor shall be compelled in any criminal case to be a witness against himself,
nor be deprived of life, liberty, or property, without due process of law; nor shall
private property be taken for public use, without just compensation.
Amendment VI
In all criminal prosecutions, the accused shall enjoy the right to a speedy and public
2-17
Amendment I
Congress shall make no law respecting an establishment of religion, or prohibiting the
free exercise thereof; or abridging the freedom of speech, or of the press; or the right
of the people peaceably to assemble, and to petition the government for a redress of
grievances.
Amendment II
A well regulated militia, being necessary to the security of a free state, the right of the
people to keep and bear arms, shall not be infringed.
Amendment III
No soldier shall, in time of peace be quartered in any house, without the consent of
the owner, nor in time of war, but in a manner to be prescribed by law.
Amendment IV
The right of the people to be secure in their persons, houses, papers, and effects,
against unreasonable searches and seizures, shall not be violated, and no warrants
shall issue, but upon probable cause, supported by oath or affirmation, and
particularly describing the place to be searched, and the persons or things to be
seized.
Amendment V
No person shall be held to answer for a capital, or otherwise infamous crime, unless
on a presentment or indictment of a grand jury, except in cases arising in the land or
naval forces, or in the militia, when in actual service in time of war or public danger;
nor shall any person be subject for the same offense to be twice put in jeopardy of life
or limb; nor shall be compelled in any criminal case to be a witness against himself,
nor be deprived of life, liberty, or property, without due process of law; nor shall
private property be taken for public use, without just compensation.
Amendment VI
In all criminal prosecutions, the accused shall enjoy the right to a speedy and public
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Chapter 02 - The Forensic Accounting Legal Environment
2-18
Amendment VIII
Excessive bail shall not be required, nor excessive fines imposed, nor cruel and
unusual punishments inflicted.
Amendment IX
The enumeration in the Constitution, of certain rights, shall not be construed to deny
or disparage others retained by the people.
Amendment X
The powers not delegated to the United States by the Constitution, nor prohibited by
it to the states, are reserved to the states respectively, or to the people.
2-18
Amendment VIII
Excessive bail shall not be required, nor excessive fines imposed, nor cruel and
unusual punishments inflicted.
Amendment IX
The enumeration in the Constitution, of certain rights, shall not be construed to deny
or disparage others retained by the people.
Amendment X
The powers not delegated to the United States by the Constitution, nor prohibited by
it to the states, are reserved to the states respectively, or to the people.
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Chapter 03 - Fundamentals I: Accounting Information Systems
3-1
Chapter 3
Fundamentals I: Accounting Information Systems
Teaching Notes
This chapter provides students with a basic understanding of business processes and
internal control processes. Even students who have already had a course in AIS may
benefit from the coverage, even if only for review purposes. Suggested points to stress:
• General
• The materials in this chapter are essential for students to properly understanding
auditing, and auditing is essential for students to understand fraud examination,
and fraud examination is a primary area of forensic accounting.
• Students with no accounting (or AIS) background need to master the materials in
this chapter along with auditing, before covering the fraud examination chapter.
• Learning Objectives
• LO1: Explain the meaning of business processes.
o Students without a systems background are accustomed to an
organization-chart view of the business enterprise. In this chapter, they
learn about how business processes span multiple departments and don’t
follow the organization chart.
o
3-1
Chapter 3
Fundamentals I: Accounting Information Systems
Teaching Notes
This chapter provides students with a basic understanding of business processes and
internal control processes. Even students who have already had a course in AIS may
benefit from the coverage, even if only for review purposes. Suggested points to stress:
• General
• The materials in this chapter are essential for students to properly understanding
auditing, and auditing is essential for students to understand fraud examination,
and fraud examination is a primary area of forensic accounting.
• Students with no accounting (or AIS) background need to master the materials in
this chapter along with auditing, before covering the fraud examination chapter.
• Learning Objectives
• LO1: Explain the meaning of business processes.
o Students without a systems background are accustomed to an
organization-chart view of the business enterprise. In this chapter, they
learn about how business processes span multiple departments and don’t
follow the organization chart.
o
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