Forget the felt visors, bow ties and slide rulers.
Forensic accountants are a different breed of bean counter. They’re part “CSI” cop, part computer expert, part number cruncher.
They’re the piece of the accounting industry that helps find the financial records that others may want hidden,and their work helps ensure a case can past legal muster.
Forensic accountants have helped uncover fraud and make sure companies aren’t hiding losses. And demand is growing for their services, largely as an outgrowth of Sarbanes-Oxley accounting reform that has spurred companies to take a closer look at their financials.
“What I do is take the accounting and sort the fraud-related aspects, and take this into a court of law,” said Ron Durkin, lead partner in forensic accounting at KPMG LLP in Southern California.
Durkin said the number of people working in his forensic department in Los Angeles, which also covers clients in Orange County, has grown by about 50% during the past five years.
Sometimes the cases are high-profile, as with Enron Corp. or options backdating, the latest questionable tactic to hit public companies in which executives get stock options timed to when the price would make them most lucrative.
Forensic accountants may look at a Ponzi scheme or a lower-level employee pilfering from a struggling private company. Or, it might just be a divorce case that demands a detailed look at bank statements and pay stubs.
The accountants also work to help value companies prior to mergers and acquisitions.
Whatever the case, forensic accountants from big and small accounting firms piece together clues from various sources,sometimes tedious work that takes a lot of time. In the end, good sleuthing helps convict or expose inappropriate behavior.
Taking On the Big Cases
Although forensic accounting has been around for decades, if not longer, the recent Sarbanes-Oxley legislation has helped make the job easier for these accountants.
Sarbanes-Oxley, passed in 2002, was born out of the scandals at Enron and WorldCom Corp.
The legislation required more extensive internal controls, which can raise red flags if someone is using or shifting money improperly. From there, forensic accountants might get involved.
But WorldCom was undone by whistleblowers who noticed the company was counting revenue that wasn’t there.
Whistleblowers still are key today, because internal controls are only as good as the company using them, accountants said.
The authors of Sarbanes-Oxley included a provision that encourages more whistleblowers. The legislation requires audit committees to have some kind of hotline for employees who are concerned there could be some kind of financial impropriety with their employers.
These tips lead to calls to lawyers. From there, forensic accountants often get involved, if there is a substantive allegation.
“Generally, they retain independent counsel, who then retain forensic accountants,” Jerry Zuk, an accountant with Deloitte & Touche LLP in Los Angeles.
That’s when the investigative work begins.
One of the most important pieces to gathering evidence: Get the computer hard drive and any backup tapes that suspected employees might have used, Zuk said.
Today’s executives and employees may be smart enough not to keep a non-computer based “hard” file, but they often will use their computers to discuss or help commit fraud.
“It’s really about the computer these days,” Zuk said.
Forensic accountants will ask the company’s information technology department to tell the suspected executive that his or her computer is on the fritz. The techies will then take the computer, copy all the files and return it in a few hours. Or, the techies may swoop in overnight.
That leaves the executive in the dark, while forensic accountants can look over every file, including those that have been deleted. They might look for keywords such as “illegal” or “improper.”
“You’re kind of looking for the smoking gun,” Zuk said.
Accountants might look at when improper financial transactions were made in the general accounting ledger software, Durkin said.
That might mean checking out all transactions from one person. Or, another good trick: examining all the transactions made after hours or on the weekends, the time when fraudsters sometimes make their moves.
The types of fraud can cover many areas, such as options backdating, hiding losses in off-balance sheet entities or boosting revenue illegally.
Zuk said about 70% of forensics work stems from accusations of improper revenue recognition. That might mean a manager sets up a return policy outside company controls. Or, it might mean a company will try to meet its revenue goals for the quarter by asking a customer to buy products for the next year,and then let the customer return it later.
Sometimes, as in the case of WorldCom, a company might just make an expense an asset, which makes the balance sheet look better than it really is.
More companies are launching investigations once Sarbanes-Oxley work turns up something curious, said Ken Jones, who does forensic accounting work for The Lyndon Group in Newport Beach.
Those calls can come from private companies. He said managers like to use the threat of Sarbanes-Oxley to motivate employees to cooperate with Jones’ team.
“It works very, very well,” Jones said. “People don’t understand. They may not know it doesn’t apply to them.”
Fraud isn’t always science, but instinct, said KPMG’s Durkin.
Durkin knows this from his days at the FBI in the 1980s and 1990s. He worked in its fraud and crime division.
“You combine the skills of an accountant with the mindset of an FBI agent,” he said.
Forensic accountants must learn the schemes. They also try to think like criminals trying to cover their tracks.
“The mindset is the key,” he said.
Sometimes it’s not the fraud, but the attempt to cover up the fraud that can make the biggest impact during a trial, he said.
“You get up in front of a jury, and try to explain these accounting transactions, and their eyes kind of glaze over,” he said. “But say, ‘This person destroyed this document.’ (Jurors) get that.”
Finding What’s Hidden
Fraud isn’t limited to big public companies. A crook can use the power of persuasion to bilk money from investors.
Steve Milner of Squar, Milner, Miranda & Williamson LLP in Newport Beach said these accounting jobs can be tough because there are so few clues, as with a Ponzi scheme.
“You have a whole bunch of investors saying, ‘Can you help?'” Milner said. “The lawyers are saying, ‘We don’t know who to sue. We don’t know who has the money.'”
The forensic accountant has little to go on in the early days.
“When you look for the money, it’s gone,” he said.
Milner said he starts by taking any piece of financial information he can, such as a check register or a pay stub.
Then, like a private investigator, he’ll begin to try to paint a financial picture by trying to stitch together what appear to be random facts. He said he’ll use a huge spreadsheet to store the data.
Then there’s just old-fashioned chatting, culling facts from simple conversations.
It’s not like people are always in the mood to chat.
“You have to be pushy,you have to be real pushy,” Milner said.
Someone, for instance, may tell Milner that they’ll send some key files to him. But that won’t cut it.
“We say, ‘I’ll tell you what. We’ll be there tomorrow. We’ll go through the files for you,'” he said. “Sometimes, you’re looking at someone and saying to yourself, ‘They’re lying though their teeth.'”
In divorce cases, the desire to hide assets can be huge. One party usually has more wealth than the other, a fact that he or she wants to hide.
Bradley Lake Hogan, a forensic accountant in Anaheim, has handled many divorce cases in OC.
He’ll talk to anyone connected to his client’s former partner to get the facts. He’ll also use computer and database tools to find out what people’s estimated net worth is.
He said demand for forensic accounting in divorce cases is booming.
“It’s a litigious community we live in,” Hogan said.
Hogan, who is looking to add two accountants to help him with his forensic accounting work, said his help doesn’t always lead to more acrimony in a divorce.
In some cases, he’s discovered that the husband or wife isn’t worth as much as the other thought, and there’s no reason to try to bleed them dry.
