Forensic accountants: Following the money trail

Companies once thought to be blue-chip stalwarts of the American economy continue to fail. Before the latest scandal surrounding WorldCom’s woes, bankruptcy filings at cable firm Adelphia and telecom upstart Global Crossing and the implosion of energy trader Enron shook the confidence of a stock market already reeling from terrorist attacks on Sept. 11.

What caused the failure of these behemoths is still largely unknown. One group of highly specialized investigators, forensic accountants, are almost certainly looking into what happened at these companies. Sifting through records and reports to piece together what brought about their demise.

According to the American Institute of Certified Public Accountants, forensic accounting is ?application of accounting principles, theories and discipline to facts or hypotheses at issue in a legal dispute.?

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Hal Johnson, national executive director of the Forensic Accountants Society of North America, adds, ?There’s an old saying that if you want to find the source, follow the money trail. That’s what a forensic accountant does — they’re trained to follow the money trail.?

Johnson says while most forensic accountants have earned the Certified Public Accountant designation, there is no official title for forensic accountants, nor specialized training. Most working in the field, though, have years of experience, often in auditing, under their belts.

?What I do is like putting together a 10,000-piece jigsaw puzzle,? said Denver-based forensic accountant Gordon Yale, who has practiced for 12 years. Yale has worked on several high-profile cases, and conducted investigations for the Colorado Board of Accountancy into the savings and loan industry, including the notorious, now defunct Silverado Savings & Loan.

Yale does most of his work for law firms, investigating cases of securities fraud and audit negligence. He says a good forensic accountant is ?highly professionally skeptical — you have to be willing to really examine to some detail many, many representations that people less well-trained would take for granted.?

And while many high-profile cases making use of forensic accountants focus on stock manipulation and large corporations, the field is as wide as accounting profession itself, according to Marie Sonnen, a CPA who’s practicing as a forensic accountant in Arvada.

Sonnen recently opened the Colorado office of New York-based Roback, Ferraro, and Pehl. The firm specializes in providing forensic accounting services to the insurance industry. Forensic accounting can come into play in all types of cases — divorce, bankruptcy, business valuation and some cases of insurance fraud, Sonnen says.

She added her work often requires ?a lot of creativity and investigative work. A lot of times ? records have been destroyed, so we have to go beyond the basics and say, ?How else might we able to prove this?’ ? Sonnen says that much of forensic accounting is subjective, a departure from regular accounting work.

Forensic accounting ?is not historical,? she adds. ?Normal accounting is what happened in the past; this is usually what didn’t happen. Say a small business has a fire, and they’re shut down. They have some type of business interruption insurance coverage, and what we have to do is go in and calculate, ?Well, what would they have earned during that timeframe?’ It’s subjective because two different accountants would have two different answers for that, because it’s something that didn’t happen.?

Sometimes, though, forensic accountants are charged with finding out what happened, or more precisely, why something happened. Kevin Call is a partner in the Denver law firm of Hein & Associates, and is national director of Litigation and Valuation Advisory Services. Call’s team is often called by a company’s board of directors to investigate when earnings have to be restated.

Call says that in one Chicago company, his team of forensic accountants discovered some ?very, very aggressive revenue recognition issues. We found falsified sales , we found sales that there was no basis at all for the sale.?

But forensic accounting isn’t limited to the private sector. Government agencies, including the Securities and Exchange Commission, use forensic accountants in their investigations. So does the state of Colorado.

Ron Kammerzell is a senior investigator with the state’s Division of Gaming. He and his team investigate the backgrounds of those who apply to the Colorado Limited Gaming Control Commission for licenses. They also conduct criminal investigations at casinos in Black Hawk, Central City and Cripple Creek.

?If we have a criminal case in the casino, where an employee is embezzling from the company ? we’ll reconstruct and try to prove through meters that someone stole from that machine.? Kammerzell says his investigations are made easier because casinos make wide use of surveillance equipment, including cameras and devices that count money going into slot machines.

In the private sector, fees for forensic accountants can range from $50 an hour to $400 per hour for the most complex cases. Work that commands the highest fees involves ?high-level, several entities,? says Johnson, ? ? offshore money, requiring real, heavy, hands-on work and a lot of experience.?

Forensic accounting, Sonnen says, ?is a growing field, a developing field. No two cases are identical.? Call agrees, saying he’s seen ?fairly steady? growth, and adding, ?Any time you have a restatement or a company gets itself into trouble from a public perspective, attorneys hired by the board always bring in forensic accountants.?