(taken from the Jan/Feb 2006 issue of On Balance magazine)

CPA sleuths:
Bringing the truth to light
By Colleen Smith
 

Like a Perry Mason movie brought to life is the way some forensic accountants describe their jobs. Investigations and courtrooms are part of their everyday lives, but the glamour is an illusion.

“I spend lots of time digging through boxes, getting dirty, making copies and doing other less-than-desirable tasks,” said Tracy L. Coenen, CPA, MBA, CFE of Sequence Inc. in Milwaukee.

“When I talk to students they often see forensic accounting as an exciting, sexy, sleuth sort of thing,” said Howard L. Marklein, CPA, partner at Virchow Krause & Co. in Elkhorn. “The reality is, it is very, very detail-oriented. You have to be a strong auditor to do a good job.”

Forensic accountants also have to be comfortable on the witness stand. It’s one thing to do research and issue a report. Telling your story in open court is a different, but related, job requirement.

Intuition plays a role, too, said Coenen: “One of my most important assets is my intuitive ability to investigate.”

Gregory A. Anderson, CPA, president of Ihlenfeld, Skatrud, Anderson, Inc. in Manitowoc, says forensic accounting requires a unique perspective. “You largely disregard the books, what’s on paper,” he said. “The things you’re looking for often never make it to paper. You have to review the business system itself.”

Marklein said forensic work is not based on a statistic sample. It involves identifying schemes, calculating losses, viewing documents and making copies.

Forensic CPAs are in demand as fraud investigations in small and large organizations make headlines. In fact, 6 percent of gross revenue is lost to internal fraud in the United States every year, according to the Association of Certified Fraud Examiners (ACFE). “It’s a line item that never shows up on the financial statement,” Anderson said.

While CPAs say awareness about fraud has grown and demand for their expertise has increased because of Enron and WorldCom, they don’t believe fraud is on the rise. Recent cases have changed the way they go about their business, however.

Trends
Improved technology and increased litigation are among the most significant changes in forensic accounting. Timothy P. Muehler’s forensic group is 50-strong at Clifton Gunderson’s offices nationwide. A CPA and attorney, Muehler said technology enables financial statements, documents and checks to be scanned, saved and searched according to number and word protocols. “We can do our investigations much more quickly and avoid human errors,” he said.

“If we think an employee voided checks or wrote checks using fictitious names or vendors, we can use our search protocol to sort through millions of pieces of data with highly specific search parameters,” Muehler said. “It’s remarkably quick.”

CPAs said businesses are more likely to press charges when they find fraud. District attorneys also seem more inclined to take on white-collar fraud cases than in the past.

“Unfortunately, though, many cases continue to be settled out of court and deals are cut,” Anderson said. A recent case of his involved an employee theft of $250,000. The company decided to settle and not press charges to keep bad publicity out of newspapers.

“Problem is, nothing prevents that person from getting picked up as an employee elsewhere and doing the whole thing again,” Anderson said.

Marklein added that decisions not to press charges also send a wrong message to other employees: “The message to everyone becomes, ‘The worst thing that happens if you steal here is you have to pay some of it back or get fired.’ ”

Signals
Many CEOs believe that fraud won’t happen to them. However, Coenen said her cases involve people in positions of significant trust within a company: a CFO, controller, CEO or operations manager.

Frequent telltale signs include employees who suddenly seem to be living a more expensive lifestyle, pay for everything in cash and don’t take vacations for possible fear their schemes will be realized.

Recent fraud statistics from the ACFE show that 93 percent of offenders are first-time offenders. Males and females commit an almost equal number of frauds, but the amount lost by males is significantly higher.

An embezzler can be someone with whom an executive has grown close. “Some of the most classic fraud examples involve the longtime trusted employee, someone who may look like your grandma or grandpa,” Anderson said. “You’re close to them. You may go out to dinner with them and know their children. Your judgment becomes clouded.”

“You almost have to throw trust for your own employees out the window,” he said. “Not because you think they’re Charles Manson, but once you get into an automatic sense of trust you can be positioned for trouble.”

Prevention
CPAs strive to help organizations prevent fraud through systems, reviews and diligence.

“We have to be proactive,” Anderson said. “It’s hard enough to make a buck in today’s world with increasing wages, health care costs and heating expenses.”

John Klugiewicz, CPA, a special agent in the White Collar Crime Squad of the FBI’s Milwaukee office, said that as companies increase their internal control efforts, it is likely they will detect hidden fraud schemes.
 “I encourage auditors to involve a forensic accountant in the audit planning process and SAS 99 brainstorming sessions,” Marklein said. “We can provide an independent critical view. We bring a criminal mindset. We’re much more skeptical. We know from experience where a particular business or industry may be most vulnerable.”

Muehler said organizations with policies and checks and balances could have a false sense of security: “The problem is those policies and procedures aren’t always being followed.”

Experience necessary
Forensic accounting isn’t a part-time endeavor, Muehler said. Experience is required when investigating or setting up controls. Organizations that try to pre-investigate can spoil the evidence.

“If you don’t spoil the evidence you may taint it,” Muehler explained. For example, turning on a computer can destroy evidence. “Certain things happen automatically when you turn a computer on,” Muehler said. “If you suspect you have an activity that should be investigated, you want to retain the hard drive in its original form.”

Klugiewicz, whose FBI unit is focused on preventing terrorism, said fraud cases must meet the reasonable-doubt standard. “The admissibility of evidence collected by forensic accountants is subject to criminal case admissibility standards. It’s important that such information is collected and maintained properly by the forensic accountant or person collecting them.”

CPAs said involving experts is a must for system control development, reviews and investigations. “Firms or organizations should consider a team or network approach,” Anderson said.

Muehler said his team is often called on by attorneys and other CPA firms. “We’ve done a number of valuations for sole proprietors and small CPA firms,” he said. “There’s a level of trust there because they’ve given me access to their client. I provide the service for them and move on.”

CPAs who want to pursue forensic accounting should assist an experienced forensic accountant before leading a case, Coenen said. They can also obtain additional education and certification such as the certified fraud examiner (CFE), accredited business valuation (ABV) and certified valuation analyst (CVA.)

“It is very important to be aware of the background, credentials and experience of a forensic accountant,” Coenen said.

Colleen Smith is principal of Emerald Isle Marketing Public Relations, a New Berlin-based, full-service communications firm.

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