Getting a Handle on Financial Fraud

During periods of economic stress, both civil and criminal incidents of fraud tend to rise as businesses face increased financial pressures.

Fraud covers a wide range of activities from intentional misrepresentation to more active deception performed with intent to obtain an illicit gain or advantage.

While an exhaustive list of fraudulent conduct would be very broad, questionable practices may involve:

• Taxes.
• Valuation.
• Embezzlement.
• Bribery and corruption.
• Purchasing and kickbacks.
• Wills and trusts.
• Financial reporting irregularities.
• Insurance claims.
• Bankruptcy and preferential transfers.
• Asset-based lending.
• Securities and investments.
• Electronic payments.
• Telemarketing.
• Health care.

Another type of litigation deals with claims against CPAs for failure to detect fraudulent behavior. Even if not explicitly agreed, both clients and jurors tend to believe that CPAs should be vigilant against mischief. Third-party CPAs can take a fresh look into these situations.

Role of the CPA

The CPA work list in fraud cases incorporates a range of tasks such as:

• Evaluating cases by collecting and analyzing bank and credit card statements, journals, ledgers and databases.
• Reviewing documents and transactions for any details of theft or embezzlement.
• Estimating losses.
• Interviewing witnesses.
• Preparing a written report, including graphs, charts and spreadsheets.

After the relevant records have been produced or subpoenaed, a CPA may work independently to ascertain and document exactly what happened and to identify who is responsible. In addition, a CPA will quantify all loss exposures and determine the applicable time periods involved.

All CPAs are not equally qualified to undertake fraud assignments. Those who hold advanced certifications such as the CFE (certified fraud examiner) are particularly trained in protocol and evidentiary requirements. Lawyers should also inquire about a prospective CPA's fraud background in terms of previous cases and the outcomes in those matters.

Ponzi schemes

Uncovering and investigating a Ponzi scheme illustrates a high-profile scenario in which CPAs and attorneys work closely to represent defrauded investors. These types of classic scams, which were brought to public attention by the massive Madoff scandal in 2008, essentially rely on funds paid in by later participants to pay off artificially high returns to initial investors.

Cash flow analysis is the central element for investigating all Ponzi and pyramid schemes, and the basic rules can be summed up in three words — follow the money! CPAs seek a Ponzi pattern, using computer forensics and electronic discovery.

They will follow these steps to set up an inventory and document management system:

• Investigate bank statements, wire confirmations, debit and credit memos, deposit slips and canceled checks.
• Extract accounting system data to a database.
• Create a cash database.
• Compare accounting systems extractions to bank and brokerage statements.
• Identify related entities and accounts.

A typical Ponzi case will be a minute fraction of the Madoff millions, but a CPA can be an invaluable adjunct to the legal team.

Check with us to learn where to obtain the best professional advice to identify and recover investor assets.