White collar government investigations almost always have one thing in common: They rely heavily on an analysis of financial information. This often includes going through banking documents with a fine tooth comb, and can also involve scrutinizing accounting records.
While the task of accumulating this data and examining it seems basic, there is much work involved, and expertise in financial and accounting crimes is necessary to fully understand the issues and the potential criminal or civil charges that the government brings against the company or individual. To properly defend such a case, it is necessary to have a financial investigator involved to help filter the data and the issues the government will raise.
Without a forensic accountant or fraud investigator, the defendant is left at the mercy of the government’s investigators, and they can hardly be trusted to do a fair and accurate analysis of the numbers. Simply put, the government has a vested interest in making the numbers related to the crime or civil infraction as large as possible so as to encourage guilty pleas or settlements.
I’m not saying that government investigators are dishonest. Rather, I am saying that they are not looking out for the best interest of the accused. Their interest is the government and whatever civil or criminal penalties the government is seeking. For that reason alone, their work must be viewed skeptically with the assistance of someone as knowledgeable as the government’s employees.
Consider allegations of tax fraud. When the Internal Revenue Service suspects a taxpayer, either a business or individual, is substantially underreporting income for tax purposes, bank documentation is one of the key pieces of their investigation. The investigator will subpoena bank statements, check copies, and deposit detail, and scrutinize these documents to ultimately calculate unreported income.
The criminal investigator or revenue agent is looking at the bank documents to identify a number of things:
- Is more money being deposited into bank accounts than is being reported as gross income?
- Does spending appear to be in excess of the income reported?
- Is there evidence of other bank or brokerage accounts that could provide valuable clues about the taxpayer’s income?
- Are there any transactions involving overseas accounts that may be used to hide income?
- Do the bank records suggest that crimes such as money laundering, organized crime, or terrorist financing are occurring?
Documents evidencing expenditures, asset ownership, and movement of money will be scrutinized as well. Questions about whether or not funds represent taxable income are often easily resolved in the government’s favor. If the taxpayer cannot prove that an item is not taxable, then the government will usually assume that it is taxable.
In lieu of direct evidence of income and deductions, the taxing authorities will turn to alternative methods of proving income. Indirect methods of proof include the Net Worth Method and the Expenditures Method, both of which can also be referred to as a lifestyle analysis. Essentially, the government is examining known assets and expenditures to back into the amount of pretax income needed to pay for those items.
In one criminal tax fraud case, the IRS alleged that a small business had several hundreds of thousands of dollars of unreported income. Their analysis has several major flaws, but it took a forensic accountant to pick apart the numbers and find the fallacies in the government’s assumptions. A lifestyle analysis performed by the forensic accountant further showed that the government’s numbers could not be true based on the assets and expenditures of the owners. The actual unreported income was a small fraction of that alleged by the government, and the results of the detailed financial analysis were presented to the government and aided in a substantially smaller settlement paid by the taxpayers.
Properly defending a tax fraud case of this nature requires a forensic accountant who has the ability to capture and analyze the data, complete a proper independent analysis of the “lifestyle” of the business or individual, and poke holes in the government’s analysis, calculations, and conclusions. The documentation is often voluminous, which is why it is imperative to engage an investigator who has a track record of successfully completing such cases. Innovations in technology can help manage and analyze reams of data, but it is equally important to have an expert who is well-versed in this type of complex analysis.
Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, securities fraud, investment fraud, tax fraud, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at [email protected] or 312.498.3661.