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Forensic Accounting
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Accountants
turned certified fraud examiners.
By William Poe
E-mails tripped up Linda Tripp. Microsoft Corporation’s own computer
files fueled the federal anti-trust prosecution of Bill Gates’ famous
company. And a long, old-fashioned paper trail of financial wheeling
and dealing prompted the Whitewater investigation during the Clinton
administration.
As disparate as each of these cases appear, they all illustrate
the power of forensic accounting, a growing specialty in which button-downed
CPAs have been transformed into trench coat detectives.
Forensics, once the exclusive bailiwick of savvy medical examiners
and police evidence technicians trying to make a murder case in
court, are now an increasing part of the once-staid accounting profession.
“Forensic accounting is a big part of our practice, and it’s a very
high-growth area,” says Mike Prost, a founding shareholder with
the accounting firm of Mueller, Prost, Purk & Willbrand, P.C. “We
do more than $1 million each year in fees from this general area.”
BKD, LLP, formerly the accounting firm known as Baird, Kurtz and
Dobson, now maintains three forensic computer labs and does forensic
accounting work throughout America’s heartland, says Tom Frogge,
BKD’s partner in charge of litigation support in St. Louis.
Recent growth in forensic accounting has sired a new accounting
credential—certified fraud examiner—that goes beyond the traditional
certified public accountant badge, Frogge says.
“Every accounting firm is trying to bring a certified fraud examiner
on staff,” he adds.
Forensic accounting is, in essence, accounting knowledge applied
to investigations and court proceedings. Call it accounting jurisprudence.
And an accountant sniffing a paper or electronic trail in a fraud
case is not all that different from the medical examiner determining
the path of a bullet through a victim’s body. Both professionals
make their expertise available to investigators, collect relevant
information and may testify in court.
Accountants are trained in financial information and make their
knowledge available to clients, sometimes companies but usually
attorneys, who are engaged in fact-finding or embroiled in criminal
or civil litigation.
“We have different professionals who specialize in different areas,”
Prost says. “Some people are good at digging up the dirt; others
at analyzing the information, and others are good at testifying
on the results of the probe.”
Prost and Frogge both often serve as expert witnesses during trials.
Forensic accounting, Prost says, most often is applied in relatively
straightforward business valuation actions, marriage divorce suits
in which business assets and revenues are disputed, and in allegations
of employee theft or other corporate irregularities.
“You always want to make sure that, in business sales and acquisitions,
no one has been cooking the books to obfuscate true value,” Prost
explains. “In divorce cases, there are often claims that assets
have been hidden or shifted. And we have found some unbelievable
stuff such as houses in luxurious places where girlfriends live
and that sort of thing.”
Above:
Mike Prost of Mueller, Prost, Purk & Willbrand, P.C.
In the area of employee theft, Prost says, “Nothing concerns us
more than a client coming in and saying he thinks theft is going
on. Part of the problem is business people think CPAs will catch
a theft during annual audits or reviews, but that’s not what CPAs
are there for. Even a forensic investigation may not catch everything.”
Frogge, who oversees a separate forensic accounting and dispute
services division within the 125-person BKD St. Louis office, says
forensic accounting involves four steps: collecting data, preserving
the data, analyzing the information, and presenting court-related
evidence.
While accountants have long been called upon to verify the validity
or value of written financial information that exists, for instance
in annual company audits or quarterly U.S. Securities and Exchange
Commission filings, a lot of financial and other information can
now be found only on computers.
“Computer forensics is the hottest part of forensic accounting,”
Frogge says. “The paper trail has really become an electronic trail,
and you have to know how to access computer files.”
To that end, MPP&W and BKD both use specialized software that allows
accountants to extract financial and other information from computer
files. To an accountant, the process is known as breaking computer
secrets.
“We attach our forensic computer to someone’s computer or file server
and obtain information from hard drives, including e-mails and the
addresses of web sites visited, even if they were never saved,”
Frogge says. “We can essentially mirror someone’s hard drive.”
Above:
Tom Frogge of BKD, LLP
Software tools, made available by companies such as Guidance Software
Inc. and New Technologies Inc., allow investigators to do more than
just mirror hard drives or track Internet uses. Software even allows
investigators to apply an intelligent fuzzy logic filter to search
for suspicious strings of text, detect storage pattern anomalies,
and catalog computer usage times.
“We use data tools that are widely accepted by law enforcement and
the courts,” Frogge adds.
Those tools, by the way, were first developed in the early 1990s
for the U.S. military and government agencies for scrutiny of DOS
and Windows operating systems. While the software is generally not
sold to the general public, private companies such as accounting
firms can buy it. Only a limited number of tools were developed
for the Macintosh operating system, which is not used extensively
in the corporate environment. That means that Macintosh files are
generally less susceptible to snooping than PC files.
Computers, Frogge says, “create a lot of fear among owners of privately-held
companies and middle-market companies. The owners are typically
entrepreneurs who hire a comptroller to handle financial matters,
and they are worried that they don’t understand the magic that goes
on inside these computer boxes.”
Both BKD and MPP&W have expanded services to help business clients
prevent fraud and theft. MPP&W, for instance, promotes an operational
review in which “we look for the areas where opportunities exist
for employee misfeasance and theft and establish the requisite controls,”
Prost says.
Despite safeguards, theft and embezzlement occurs, most often during
recessions, Prost says. And detection can be difficult.
“We had a case of a manager stealing $10,000 a month, and it went
undetected for years,” Prost recalls. “It was a large distribution
company, and the amount being stolen made a difference of one-half
of one percent in their margin. The missing money was not easily
noticed.”
A trusted company employee can be the perpetrator of theft, Prost
adds. “And 75 percent of these cases involve alcoholism, women,
drugs and gambling. That’s when desperate people do desperate things.”
Prost adds: “It’s often like betrayal by a son or a daughter. The
owner often says he would have given them the money if they had
only asked.”
At any given time, BKD may be engaged in one or more “data probes”
in the St. Louis area, Frogge says. A typical $50,000 engagement,
he adds, might consist of $10,000 to $15,000 in data probe work
and the remainder in expert witness costs. Sometimes, BKD is hired
only to recover data.
In most cases, Frogge and Prost say, forensic accountants work under
the power of a subpoena or otherwise as an officer of the court.
“We don’t do anything without attorneys directing us,” Frogge says.
“We can’t extract anything without legal jurisdiction to do so.”
And, whether the engagement is about business valuation, fraud,
theft of money or trade secrets, shareholder disputes, damage calculations,
franchise infringement, or marital disputes, forensic accounting
is all about one thing, Frogge says.
“It’s all about money.”
William V. Poe is principal of Poe Communications, a St. Louis
advertising and marketing communications firm.
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