They Follow the Money

Business

“Follow the money” is the explanation for all kinds of mischief post-Enron, but really, who can follow the money?

ONCE RELEGATED to the back office turning out audits, accountants have been thrust into the forefront of corporate governance by Enron and its ilk. Their testimony is sought in legal cases on questions ranging from motive in a murder to who gets what in a divorce settlement. Forensic accountancy——investigations into financial affairs by accountants qualified to give legal testimony——is transforming the profession with lucrative new opportunities at more than $300 an hour.

“I think Enron has done a lot for us,” says Dana Basney, shareholder at the San Diego office of Mayer Hoffman McCann. “Before Enron, the typical accountant was envisioned as someone with a green eyeshade who was afraid of his own shadow, which certainly isn’t true.”

Armed with computer technology, today’s forensic accountants sift through databases, looking to string together bits of financial information. Transactions like property sales are generally discoverable on the Internet, but information like bank records must be subpoenaed.

“It’s a chase,” Basney says. “Transactions are usually traceable, and sometimes the ability to trace can be aided tremendously by the fact that everything is on a computer. We’ll take their computer data and feed it into a database, and we realize that certain people are related parties, or maybe people are getting monies but haven’t done any work. Then we run sorts on the data, and highlight people we want to pursue. If checks are going to someone, we’ll try and figure out why. If there’s not an appropriate reason, we’ll look at the bank accounts the checks were deposited in.”

With everyone’s personal data floating around on the Internet, how difficult is it for individuals and corporations to keep their business private?

“Not as difficult as I’d like it to be,” Basney says. “People are always trying to hide the apple, and normally you’re not going to be able to find all of it, because it’s very expensive and time consuming. You’ve got to be computer literate to catch these guys.”

He charges $385 per hour, and extra for whatever lower-priced staff may be needed to build a database, for example.

Sometimes the cases get ugly. Basney was working for a trustee in a Las Vegas bankruptcy case when the body of an alleged “front man” for a fraudulent business related to the case was found in the desert. “He was discovered in a car three days after he was shot in the head,” Basney says.

A former stock options administrator for Wireless Facilities and his wife were charged in civil suits filed here in May by the Securities & Exchange Commission for fraudulently issuing the high-tech company’s stock options and selling them at a profit of at least $7.7 million. Vencent Donlan allegedly issued more than 700,000 shares of Wireless Facilities’ stock and options to his wife, Robin, between 2002 and 2003.

Basney says the case is a twist on a classic theme, in which someone writes a corporate check to themselves. “Most stock frauds are done by inflating the value of the stock; what this guy is said to have done was issue stocks he wasn’t entitled to,” he says.

A more commonplace type of corporate misappropriation is billing fraud——paying a phony company, for example, or an unrecorded transaction, in which the product goes out the door and cash goes in the pocket of the perpetrator. The giveaway to some types of corporate fraud cases, Basney says, is when the suspect suddenly experiences an upgraded lifestyle with expensive houses and flashy cars.

SOME FORENSIC ACCOUNTANTS’ assignments are far removed from strictly financial misdeeds. Heather Xitco, a director in the San Diego office of expert services firm LECG, recently testified for the defense in the trial of Cynthia Sommer, convicted in January of poisoning her Marine husband for his $250,000 life insurance policy.

“Typically, I wouldn’t testify in a criminal case unless it’s a case of embezzlement or elder abuse, which is rampant,” Xitco says. She recalls a recent case in which a daughter stole her elderly mother’s assets. “The daughter had her mother’s bank statements forwarded to her, and stole her life savings,” Xitco says. “The mother had a heart attack and couldn’t pay her medical bills because her daughter had taken her money. The daughter had taken more than $300,000 from her mother, one check at a time. The mother ended up suing the daughter because that’s the only way to get the money back, but the daughter had spent it all. Those are the kinds of things you hear, and they just about break your heart.”

Broken hearts are part of the landscape in Cinda Jones’ financial consulting practice. She is a certified divorce financial analyst who specializes in finding out about a partner’s assets in a divorce. Though Jones says spouses aren’t typically hiding assets from each other, she adds, “Divorce has a lot of fear connected with it.” Sometimes a divorcing couple will hire her to go through their finances to remove suspicion that either is hiding something, such as pension plans, annuities, investments or life insurance.

To what lengths will the divorcing couple go to hide assets? “Taking money offshore, moving it to a family member, a straw man buying something so they can get it later, a boyfriend or girlfriend holding the money, or putting it in a safe deposit box,” Jones says.

Forensic accountants such as Basney and Xitco agree their profession has been transformed in the wake of recent corporate financial scandals.

“Historically, until 10 to 15 years ago, most accountants were either tax or audit accountants,” says Xitco. “The consulting or forensic work has expanded exponentially over the years.”

“Hollywood has not been kind to accountants,” Basney adds. “In the movie The Vigilante, Charles Bronson is an architect. But if you read the book, he’s a CPA.”

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Preventing Fraud in Small Business

THOUGH SCANDALS the magnitude of Enron might get the attention, accountants say small businesses are most vulnerable to fraud because they are less likely to recover than a large firm and often employ friends and family members, relying on personal trust rather than internal controls to protect them from fraud.

Accounting firm Mayer Hoffman McCann says common traits found in fraudulent situations include employees who go to extremes in their considerateness of their coworkers; employees who work excessively and refuse assistance; employees who work excessively and still produce poor accounting records; and managers with dominant personalities who refuse to delegate or take time off.

They’ve compiled these fraud-prevention tips for small business owners:

•  Perform background checks on employees.
  
•  Create an environment where honesty is practiced and employees are encouraged to be on the alert for fraud.
•  Company owners should always receive bank statements directly from the bank. The statements should be reviewed by the owner before giving them to the person responsible for the bank reconciliation.
•  Maintain current and accurate accounting records. Lapses in staff ability to perform this could indicate that the accounting department is understaffed.
•  Have the company’s CPA perform reviews of internal controls and perform interim reviews of the financial statements. This tells employees that others are watching and may deter theft.
•  Set up a fraud hotline, and encourage employees to use it if they suspect fraud.
•  Insist that employees take time off, and cross-train employees so that they can review each other’s work. This minimizes management’s reliance on a single individual.

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