Forensics Journal - Stevenson University 2015 | Page 64

STEVENSON UNIVERSITY

As the article implies, direct evidence is stronger than circumstantial
evidence and data analysis is circumstantial at best; assuming the
court would consider it evidence at all. Data analysis alone cannot
conclusively prove who did it, what was done, when it was done,
why it was done and whether alleged fraudster’s actions were
accidental or intentional.

WORD OF CAUTION
Fraud is hidden and red flags are usually not obvious to the casual
observer. Even professionals whose job it is to sift through financial
data every day sometimes overlook critical anomalies. One of the
most infamous examples of this is the SEC’s mishandling of the
tips provided by Harry Markopolos in the Madoff Ponzi Scheme.
Unfortunately, mistakes like this allow small frauds to grow into
massive frauds until eventually uncovered years later. By this time
the financial loss sustained is more difficult to recover. Although the
Madoff scenario is an extreme case of failure, the reality is that many
cases are not obvious examples of fraudulent activities. The reason
is that some businesses and industries are more complicated than
others and many accounting rules provide room for judgment and
estimates. Using Data Analysis cannot replace individual judgment
and expertise.

TRAINING
Organizations strive for success in fighting fraud must be proactive:
anticipate financial results, and then measure actual results against
those anticipated results. The right combination of training,
education and skills will improve the odds that red flags are detected
in a timely manner so as to identify fraud during its early stages.
However, caution must be exercised when leveling accusations of
fraud, because the determination that fraud is present is a legal and
factual distinction involving specific elements that must be proven in
a court of law. Conclusions reached should be supported by extensive
analysis and investigative work. Making premature conclusions or
direct accusations of fraud against persons or organizations, whether
verbal or written, should be strictly avoided by forensic analyst.

A Washington Post article that discusses recent legal defeats suffered
by the SEC shows that, despite using its Robocop tool to bring
actions against companies for fraud, more persuasive evidence
was required by the SEC to support allegations of actual financial
reporting fraud. The article illustrates why data analysis must be
used in conjunction with professional judgment and expertise;
especially when developing cases for trial. According to the article,
in December 2014:

CONCLUSION
The temptation to engage in financial reporting fraud is unlikely to go
away any time soon. Strong internal controls, pervasive ethics training
and increased regulatory scrutiny are all important considerations that
help manage the risk of financial reporting fraud. However, in order
to stay two steps ahead of the fraudsters, old methods of fighting
fraud must be constantly refined and replaced with new innovative
techniques. Without question, data analysis is reliable, but fraud is
so complicated that no full proof method exists capable of predicting
it on a consistent basis. Any fraud detection method requires the
application of judgment, experience and specialized knowledge in
order to truly be effective.

“ he SEC suffered a jury trial defeat in SEC v. Kovzan,
t
a civil fraud action alleging that the CFO of NIC Inc.
failed to disclose more than $1 million in perquisites
to the company’s former CEO. The SEC alleged that
the CFO knew or was reckless in not knowing that the
perquisites were not disclosed accurately. Not only did
the Kansas jury acquit the CFO on all 12 charges, they
found in his favor on every question on the jury verdict
form” (Morgan, Nicolas, & Jennifer Feldman, 2014).
The article continues by explaining that this SEC defeat:

REFERENCES

“ as followed by another adverse ruling in December, in SEC
w
v. Jensen. In that case, the SEC charged two former executives
of Basin Water Inc. with accounting fraud for improperly
recognizing revenue for six transactions, purportedly to
disguise the company’s financial performance. The judge
found that the SEC failed to demonstrate fraud, as there
were no documents or witnesses to support the allegation
that these transactions were shams. Further, the judge found
there was no direct evidence of scienter or recklessness. While
the SEC’s case was premised on allegations of improper
accounting, the only evidence of such improprieties was
unconvincing witness testimony, according to the court”
(Morgan, Nicolas, & Jennifer Feldman, 2014).

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trouble ahead? Retrieved November 19, 2014, from http://www.
whitecollarfraud.blogspot.com/2014/07/do-nu-skin-inventory-redflags-spell.html
Antar, S. E. (2014, August 4). Why Nu Skin must come clean on
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http://www.whitecollarfraud.blogspot.com/2014/08/ why-nu-skinmust-come-clean-on.html

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