The Telephone Rings: The Anatomy of a Forensic Accounting Investigation

September 2, 2009

by Larry Goldsmith, C.P.A., J.D., C.F.F.A

It was a dark and stormy afternoon when suddenly I heard the familiar sound of the telephone ringing. No doubt another person seeking forensic assistance where a ‘perceived’ violation of trust has occurred. Notice the emphasis on ‘perceived’; after years of answering these calls I’ve learned that just because there is suspicion does not mean there is cause for action.

This time, the caller was a woman with a cool but quiet voice. From her quivering tone I knew there was trouble, but when you’re a Forensic Accountant, you get used to trouble. You even get to like it. The caller said she suspects a family member of stealing from mom and dad’s estate. Mistrust and suspicion among family members is unfortunately common in my business. Sometimes it’s about a family member stealing monies held in trust, or taking financial advantage of an elderly relative. The caller usually has no proof. No evidence of a crime being committed. Just an unshakeable belief that something bad is taking place.

Typically, the caller is unaware of their options and is seeking guidance. They are usually upset and often angry, seeking restitution. In their emotional state, these callers are also generally unmindful of the consequences of pursuing an unfounded suspicion. If the caller’s assumption is wrong, they stand to lose more than money – they may lose a lifelong relationship with a family member of a family friend. Or worse, they may be sued for defamation of character.

Contacting a Forensic Accountant at this stage was definitely the right thing for the caller to do. Lawyers and police will not get involved without evidence of wrongdoing. But Forensic Accountants are trained to investigate financial matters and provide documentation that shows that something untoward may actually have happened, or be happening. Remember – a CPA is not necessarily a Forensic Accountant. Just as you wouldn’t trust a pediatrician to perform brain surgery, you shouldn’t assume that your family accountant knows the specialized methods and tests used by Forensic Accountants to resolve often complex issues involving potential financial malfeasance.

The Forensic Accountant’s first job is to listen to the caller with an objective ear. Determine if the caller has legal standing to pursue a claim, if the matter is financially worth pursuing, and if the caller’s assertions can be proved: for example, an estranged son may be jealous that his brother, who lives with and takes care of mom, is receiving greater financial benefits now and in the mother’s will. Or, a daughter visiting from out of town notices that the live-in nurse is now driving a Mercedes and seems to be wearing her mom’s jewelry. Two situations, maybe only one of which may have a cause of action.

After determining whether the matter can or should be pursued and establishing that there are no conflicts of interest, the Forensic Accountants then develop a plan and a budget:

· The plan establishes the goals and step-by-step procedures of a forensic search, including a study of the relationships of the parties involved and an investigation of how the money flows.

· The budget gives the prospective client a realistic idea of the costs involved in pursuing an investigation.

Once the plan and budget are approved and the investigation begins, the Forensic Accounting team develops theories on how a financial defalcation may occur. The goal is to determine if a “smoking gun” can be found that provides an attorney with sufficient reason to file a lawsuit, or, in more extreme or urgent cases, allows the client to file a police report and pursue criminal remedies.

Even when a report has been filed, the police are powerless unless the State’s Attorney is willing to pursue the matter. The police and the State’s Attorney generally do not have the manpower nor the financial resources to pursue what they often consider to be no more than “family squabbles”. Only if television or newspaper media get involved and publicize a wrongdoing — as in the Brooke Astor case in New York — will the authorities initiate a criminal investigation.

A lawsuit, as opposed to a criminal charge brought by the state, is a civil court matter. In the event of a successfully concluded civil suit, the courts have the power to protect the remaining assets, appoint receivers to watch over the assets, and recover stolen assets. Court and attorneys may produce the best results in the long run, but they come with a price. And a civil case can drag out for years.

Whether the action is civil or criminal, the subpoena power of the Court can open up doors and provide a flood of documents that can greatly increase the probability of proving malfeasance or theft, if either has in fact occurred. But to get into court one needs evidence and a cause of action. The Forensic Accountant is often the only one who can find the evidence needed so that the attorney can file a strong and compelling cause of action.

I explained all of this to the woman on the phone. I gave her options. And finally, I warned her that confronting the suspected wrong doer can be very dangerous. Wrong doers have been known to commit violence to keep their acts undiscovered.

Just as I was about to ask her name and suggest she come to the office to talk further, I heard a man’s voice and what sounded like a struggle through the receiver. Then the line went dead. I hung up the phone and listened to the rain beat against the window. There are some things a Forensic Accountant can fix and some he can’t.

CJBS, LLC is a Chicago based firm that handles Forensic Accounting issues on a national basis. E-mail me at , if I may be of assistance.