Winning Auditor Malpractice Cases


Winning a case against an auditing firm when there is a sizeable fraud (such as the Koss Corp. embezzlement) or the collapse of a Ponzi scheme (such as the Bernie Madoff case) is not easy. Simply because there is a fraud, a business failure, or a pyramid scheme collapse, the auditors are not necessarily at fault.  The auditors may have carried out their professional responsibilities exactly as they should have, but they still did not uncover the fraud.

How does a fraud go undetected by auditors? The first thing to remember is that audits are not designed to find fraud, so they rarely do. Equally important, is the fact that frauds are deliberately (and often effectively) covered up by those perpetrating them. Particularly in the case of executives embezzling or perpetrating financial statement fraud, they are keenly aware of exactly how the auditors do their work, and take careful steps to avoid detection.

Technically speaking, auditors are not engaged to find fraud. They are engaged to give an opinion on the financial statements, and whether they are fairly stated. The auditors are required to perform certain procedures related to fraud, essentially assessing the risk of fraud and increasing the testing of the financial statements as there is a greater perceived risk of fraud. The auditors are not specifically engaged to (or expected to) find fraud, under the current auditing standards. Continue reading

Preventing Fraud in a Law Firm


There are two inexpensive and simple steps that can be taken to provide more oversight for the disbursement function at a law office. First, a partner needs to be actively involved in the process of issuing checks and payments. It’s not enough to simply glance at checks to vendors and immediately sign them.

Before any check is signed or sent out, it should be compared to an invoice, credit card statement, or other documentation that will help verify the legitimacy of the payment. This reduces the risk that an employee pays a personal credit card with company funds or otherwise improperly issues a payment from the firm’s checking account.

The second step to increase oversight at a law firm is involving at least one other person in some of the functions. If the office manager is disbursing funds, another employee should do the bank reconciliation. This provides a natural checks-and-balances situation, in which the second employee is verifying the work of the office manager. Continue reading

Hollywood Ponzi Scheme Guilty Plea


The big news in Hollywod is a D-List actor named Zach Avery (legal name Zachary Horowitz) who is set to plead guilty to a Ponzi scheme in which he collected $650 million from about 250 investors. That’s a lot of money! And that’s an impressive scam.

Over the years, I’ve written a bunch here about Ponzi schemes:

The fraud went like this: Horowitz started a company called 1inMM Capital, LLC. In his plea agreement, he admits to a seven year scheme in which he told investors that this film company was purchasing foreign distribution rights to movies. The movies were then licensed to Netflix, HBO, and other streaming platforms so they could be streamed online outside the U.S.

Zachary had no distribution or streaming deals, and the contracts he showed potential investors were all fake. Here’s where the fraud should have been obvious to any of the investors: Zach promised them 25% to 45% returns on their money within a year. Continue reading

MLM Income Disclosure Statements Updated Again


For years I’ve been collecting income disclosure statements issued by multi-level marketing (MLM) companies. These are the proof that you have almost no chance of making money in MLM, no matter what the company or product.

Across the board, you see that the vast majority of the distributors make almost nothing in commissions. The “average earnings” for a company as a whole sometimes looks decent (who wouldn’t want to make an extra $2,000 per year!), but the averages are skewed by the handful of people at the top of the pyramid who make big money (at the expense of the many at the bottom).

I have updated our library of disclosure statements to include new disclosure statements for 2020. The newest ones include Amway, Beachbody, Inteletravel (PlanNet Marketing), Herbalife, LuLaRoe, Mary Kay, Melaleuca, Monat, Optavia, Paparazzi, Rodan + Fields, and Xyngular.

Milwaukee Alderwoman Chantia Lewis Charged With Fraud


On Tuesday, Milwaukee Alderwoman Chantia Lewis was charged with 4 felonies and 1 misdemeanor related to misconduct in public office, embezzlement, fraud, and campaign finance violations. Her attorneys say this situation is just about “accounting errors.” The detailed criminal complaint includes compelling evidence, however.

The total Ms. Lewis is accused of stealing or misappropriating totals at least $21,666.70. Thomas Meverden, an investigator with the Milwaukee County District Attorney’s Office examined bank records and other documents that were subpoenaed from vendors such as Agape Love Bible College, New York New York Hotel and Casino, Southwest Airlines, and the City of Milwaukee.

The alleged fraud breaks down like this: Continue reading

Investigating Ponzi Schemes


You’ve heard news stories involving Ponzi schemes. Investment scams and Ponzi schemes are all too common, even thought consumers are warned about them regularly. Investors are lured in with promises of high returns. People in or nearing retirement find these investments enticing, especially as their retirement funds in the stock market have taken many hits in the last few years.

As I wrote in my book Expert Fraud Investigation: A Step-by-Step Guide, investors are becoming victims of these scams despite the proliferation of information available about phony investment schemes and the dire warnings given regularly by news reporters.  Perpetrators of investment schemes dream up stories explaining their unusually high rates of return on money, and get high net worth people to invest with them. Often these people are investing their entire savings with scammers.

These high investment returns typically amount to guarantees in excess of 10% per year. Often they are to the point of ridiculous, offering a 30% or 40% annual return. As a fraud investigator, it is clear to me that these offerings are bogus, because any investment that legitimately generated such returns would not be much of a secret to the rest of the world. But consumers, who are often eager to protect and grow their nest eggs, are all-too-willing to believe that this investment is the answer to their money problems. Continue reading

Tracing Digital Assets in Divorce (Cryptocurrency)


Everyone is asking about cryptocurrency and NFTs (Non-Fungible Tokens) in divorce. More and more people are investing in and using cryptocurrency, and it could be an important asset that needs to be accounted for during the divorce. In some cases, one spouse has made or lost a lot of money trading crypto, and that has implications too.

So what do you do if you haven’t a clue about this crypto stuff?

First, you make sure you’re working with a forensic accountant or other financial expert who knows what they are talking about. Cryptocurrency can be hard to track down and an added problem is the volatility (crypto can gain or lose a ton of value throughout a day).

Second, you can learn the basics of crypto and NFTs so that you at least know what you’re talking about. Cryptocurrency is quite simply a digital currency in which transactions are verified and records are maintained by a decentralized system. In other words, no one person or entity (like a government) controls cryptocurrency. There are all sorts of different flavors of cryptocurrency, but some of the most recognizable names include bitcoin, ethereum, litecoin, and dogecoin. Continue reading

Think Like a Thief


Fraud is committed by real people. They have real families and real jobs. They often are just like you and me. But what makes thieves different from a lot of us is their ability to lie and steal. Most of us would never seriously consider taking something that does not belong to us, especially not significant sums of money.

But thieves are different. Those who commit fraud have taken that which is not theirs. They have cheated others. They have covered up their lies. What makes it okay in their minds to commit fraud? What is it about their moral code that allows them to steal? How do they justify their actions?

The answer is found in the fraud triangle, an old concept in criminology that still has wide acceptance in the fraud examination field. In order for fraud to occur, three things must be present, and each represents one side of the triangle. The three pieces of every fraud puzzle are opportunity, motivation, and rationalization. These are key to explaining why a fraud occurs. Continue reading

Two Great Internet Resources for Background Investigations


My investigations are rooted in financial documents, as I am most often trying to trace money and figure out where it went. (Thus, my unofficial tagline of: “I find money!”)

But incorporated into the financial investigations is often background investigative work. To be clear: I don’t do deep-dive background investigations. For something like that you’d go someone like Marcy Phelps or Philip Segal. If the point is just getting a better understanding of the people and entities involved, however, I do some of the legwork to find that.

I’m often looking for names of family members, friends, roommates, business associates. I want to find addresses of homes lived in and other properties owned. I might be looking for addresses that were used by business entities. Sometimes I’m looking for pictures of people or places they lived.

Here’s how I would use obituaries and Facebook in my financial investigations:

Obituaries can tell you about…. Continue reading