When there are suspicions of hidden income or secret investments or bank accounts, an analysis of known bank accounts can reveal helpful details. Tracy Coenen explains how bank statements and credit card statements can be used by a forensic accountant in a divorce case.
When companies have big problems, they usually bring out the big guns. The benefits of using large law firms, audit firms, and other professional service firms are undeniable. These firms offer a depth of experience that is invaluable, and they have seemingly unlimited resources in terms of manpower. A large firm often has the ability to mobilize an engagement team quickly, and can bring in experts from around the world.
Does bigger mean better? Certainly the perception exists that larger firms provide better services. No one can fault an executive who chooses a big firm when trouble is brewing. There is an undeniable comfort level that comes with the big firms because they have established reputations and many resources. Even if the project goes poorly, no one can fault the executive who chose the large firm.
There is no shortage of allegations of investment fraud since the stock market tanked in 2008. Are there more investment scams occurring, or have market conditions just led to the discovery of more of these schemes? I’ll guess the latter, although no one really knows for sure.
The beauty of fraud is that so much of it goes undetected. Those involved in financial fraud actively conceal their schemes and their involvement, so it’s impossible for fraud investigators to know exactly how much fraud is happening. For example, perpetrators go so far as to pay others to participate in the scheme and cover up phony financials and non-existent promissory notes. This kind of concealment leads to more investors putting money in a scheme, and ultimately creates ever larger financial losses.
In the end, however, it doesn’t necessarily matter if we can put our finger on exactly how many of these investment schemes are out there. What really matters is being able to identify the hallmarks of such schemes so that investors can avoid them like the plague.
I would like to think that most companies are committed to doing business honestly. They try to do the right thing, and when a problem is found, they try to correct it quickly.
Even when a scandal is looming, I hope most companies would want to find the truth as fast as possible and take appropriate action.
Even when a company is committed to fixing problems, however, management does not always do it the right way. This is particularly true when it comes to investigating suspicions of wrongdoing. There are many times when such an investigation must be done by an independent party in order for the company to be in the best possible position following the conclusion of the investigation.
The financial part of a case can become overwhelming very quickly. Particularly in cases involving white collar crime, securities fraud, Ponzi schemes, or other fraud recoveries, the trail of financial documentation is often very long. A forensic accountant needs to examine the financial documents and piece together the evidence in a way that attorneys, judges, and juries can understand.
When there are mountains of data, the investigator needs a way to quickly examine the data, assemble it in a format that is usable, find connections between transactions, and quantify results. Traditional forensic accounting techniques are no longer effective in these types of investigations. The volume of data can quickly overwhelm the investigator, and this affects the quality of the results.
Below is a clip of a portion of a video I did on accounting services in divorce and family law cases. I discuss the work that a CPA can do in divorce cases.
Written by Tracy L. Coenen, CPA, CFF
ABA Section of Family Law eNewsletter
When a divorce or a child support issue is looming, it’s amazing how a quickly a closely held business starts “losing money.” I use quotes because such a situation is so predictable. One party wants to protect her or his assets, and when there is a business involved, the motivation to hide money can be stronger than usual.
The types of businesses that can be prone to manipulation of the books include restaurants, retail stores, doctor or dentist offices, construction companies, auto dealerships, and law practices. This list isn’t exhaustive by any means, but it provides good examples of businesses at risk of financial maneuvering.
Any business that is closely held and has finances that are easily manipulated by the owner is at risk. A lawyer filing for divorce from his wife may suddenly stop taking a paycheck and then claim he has no earnings from the practice. A restaurant owner could stop reporting cash receipts from customers, thereby claiming much lower revenue for the business while secretly pocketing the cash. A carpenter may offer customers a discount if they pay with cash and don’t request a receipt, never reporting that money as income.
It is sometimes difficult to determine the income of individuals who will be paying child support or spousal support. This can often be the case when dealing with self-employed individuals. If the reports of income made by the spouse or parent don’t seem to make sense, it may be necessary to look at his or her lifestyle to determine income. In this situation, we look at the expenditures made by the person and calculate the level of income necessary to fund those expenditures. Tracy Coenen explains the process in this video.
Written by Tracy L. Coenen, CPA, CFF
Wisconsin Law Journal
If a fraud is worth committing, it’s worth committing right. A little extra effort in the commission of a fraud can go a long way toward profiting from it as long as possible. Follow these recommended steps to increase your chances of successfully pulling off a fraud at work.
Don’t Act Suspicious
Don’t be a complainer. Don’t blatantly fight the rules. Appear to go along with policies and procedures, and don’t cause trouble for your co-workers or supervisors. You don’t want to appear to be disgruntled or seem like a problem employee. Those types of employees cause suspicion.
Cases of financial fraud often focus on the core issue of where the money went. Successfully carrying out a fraud scheme involves not only taking the money, but covering up the fraud and hiding the money trail. Recent headlines have consumers wondering how someone like John Corzine of MF Global could have no idea where hundreds of millions of dollars went. But skilled financial investigators know there is always a trail, and while the money may or may not be recovered, it can be located.
Cases involving allegations of security fraud, money laundering, misappropriation of assets, income tax fraud, and Foreign Corrupt Practices Act (FCPA) violations require investigators to follow a money trail. However, sometimes it is difficult to know where to start, or where to continue when you’ve come to an apparent dead end.
Third Party Records
Regardless of the type of case for which there is a need to trace the flow of funds, the most reliable source of information is third party records. The records of an alleged fraudster are always suspect. How are we to know if the accounting records have been manipulated?
In contrast, records from a disinterested third party are much more likely to be authentic and to tell the truth about the money. The most common and reliable sources of third party records are banks, brokerage houses, and credit card companies. Except in rare cases in which a secret relationship facilitates the manipulation of these records, they will tell us exactly where money came from and where it went.
Do you know where to start getting these records? It may be simple in the case of a bona fide business with one or two sets of books. Even if the accounting records are manipulated or altered in some way, the records will likely point to financial institutions that hold at least some of the company’s money. The first place to start is the accounts disclosed by the target of the investigation or the accounts documented in the target’s records.
If we’re tracking down a fraudster with no disclosed or confirmed accounts, we will have to be creative. It’s not practical to subpoena every bank in existence, so some precision is required in our investigation. We must look to parties other than the target for information on accounts and activities of the scammer.
For example, an investor in a Ponzi scheme may have canceled checks relating to his investment, and the information on the back of the checks can go a long way in telling us what banks the target was using. Gather together the documentation of multiple victims of the Ponzi scheme, and suddenly several financial institutions used by the fraudster may be revealed. We can then get those records and dig through them to find evidence of other accounts used.
A skilled fraudster is going to tangle a very intricate web of accounts, transactions, people, and entities. Money is intentionally bounced from bank to bank, account to account, and entity to entity in varying amounts with seemingly random timing. These things make it difficult to trace the flow of money and to tie funds to any particular act or scheme.
A capable investigator is going to be able to unravel the mess and make sense of the money movements. This isn’t easy, especially when the number of involved bank or brokerage accounts climbs. Cataloging individual transactions is simple. The more institutions, accounts, and entities involved, the greater the complexity of the analysis.
The difficulty is in ensuring that all accounts and all time periods have been analyzed, and all transactions between these accounts are properly documented. It is easy to get so caught up in the details of individual transactions, that the investigator could lose sight of the big picture. This could result in a failure to analyze all transactions, a missed link between accounts, an overlooked payment to an outside party that be a smoking gun, or a failure to have a complete and accurate tracing of money through the web of accounts.
Don’t think of this as simply a data entry exercise. It is much more than that, and it is a critical part of prosecuting or defending a fraud case. It’s easy for just about anyone to look at one bank statement or check copy and tell me where the money went. It is another thing entirely to look at 100 bank accounts over a period of three or five years and get a complete picture of the flow of funds over time.
What happens when you seem to have come to a dead end in the money trail? There is usually no such thing as a dead end unless you’ve come to a piece of real estate, a boat, an airplane, or a sizable bank account that can be seized (or at least tied up in the legal system for the foreseeable future). Whether a case is civil or criminal, part of the endgame will be recovering the proceeds of the fraud. In many cases, it is the most critical thing, especially for the victims.
If frequent small transactions are all you are seeing, and there is no apparent pot of gold, you just haven’t found the right information yet. Somewhere within all this evidence is a clue to a piece of real estate that was purchased with illicit funds. A payment to a municipality, a utility company, a real estate attorney, or a construction company may hint to the existence of real estate. A payment for a registration fee, to a fuel company, or to an insurance company might lead us to the existence of a luxury yacht.
Again, the key will be to dig deep into the details of the financial transactions without losing sight of the big picture. As questions are raised regarding certain transactions, the investigation still must continue through the remaining transactions. Although one lead may look promising, it should not be the reason to stop going down other roads that may lead to the discovery of other valuable information.
Pulling It All Together
Equally as important as wading through a financial labyrinth skillfully is presenting the findings in a way in which non-accountants can understand it. Attorneys, judges, and juries may need to understand the flow of money in the scheme, so telling a story about the money is critical.
The best way to communicate results to people with varying levels of accounting and financial sophistication is with three approaches: words, numbers, and pictures. The financial investigator should start with an explanation of the work completed and the findings and conclusions. Then set forth summary tables of the most important numbers that are discussed, followed by charts and graphs that further demonstrate the findings. This gives the user an opportunity to see a picture of what has been explained about the disposition of funds or relationships between entities.
When these three approaches are combined, it is much easier for a reader to understand the conclusions that have been drawn after an exhaustive financial analysis. After all, a complex analysis and conclusion that is helpful to your case is not worth anything if the important people can’t understand the opinions and how they were reached.
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.