A Joint Effort to Fight Corporate Fraud

CPAs stand as a solid line of defense in thwarting basic accounting fraud.
BY RICK TELBERG

EXECUTIVE SUMMARY
IN THE BATTLE AGAINST CORPORATE FRAUD, the FBI’s top financial crime investigators have taken their case to the CPA profession, seeking expanded cooperation between accountants and law enforcement officers.

THE AICPA AND THE FBI RESPONDED with a joint effort that was kicked off with a webcast featuring three FBI white-collar crime-fighter chiefs. Some 20,000 accountants watched nationwide.

THE PROJECT IS EXPECTED to blossom into a deep and wide-ranging partnership in which FBI agents and AICPA members will share and learn from each other the latest fraud-detection and deterrence techniques, auditing “tricks and traps” and the roles and responsibilities of CPAs and law enforcement officials.

AS PART OF THE FBI’s STRATEGIC OVERVIEW of white-collar crime, the agency said CPAs are an essential part of winning the fight.

THE FBI WILL BE CALLING UPON CPAs in several ways—as objective, third-party expert witnesses, as eyewitnesses and as candidates to join the agency. The FBI is actively recruiting CPAs as special agents and as analysts. Accountants already are a key part of the FBI team, with 1,300 accountants working as special agents. And the bureau will hire CPAs to fill 15% of new positions.

THE FBI SAYS CPAs STAND AS A SOLID LINE of defense in thwarting basic accounting fraud: The independence of CPAs, as well as their objectivity and professional skepticism, remains a crucial element in conducting effective audits.

RICK TELBERG is editor at large and director of online content for the AICPA. His views, as expressed in this article, do not necessarily reflect the views of the Institute. Official positions are determined through certain specific committee procedures, due process and deliberation. His e-mail address is rtelberg@aicpa.org.

aced with a crisis of corporate fraud in American business, the Federal Bureau of Investigation’s top financial crime investigators have reached out to the CPA profession, seeking expanded cooperation between accountants and law enforcement officers. The AICPA and FBI responded with a joint effort, which was kicked off with a webcast featuring three FBI white-collar crime-fighter chiefs. It was watched nationwide by some 20,000 accountant members. The project is expected to blossom into a deep and wide-ranging partnership in which FBI agents and AICPA members will share and learn from each other the latest fraud-detection and deterrence techniques, auditing “tricks and traps” and the roles and responsibilities of CPAs and law enforcement officials.

“The CPA’s rich tradition of independence and integrity led us to see if we could broaden and deepen this relationship with the AICPA,” said Grant Ashley, CPA, assistant director in charge of the FBI Criminal Investigative Division.

Specifically, the FBI and the AICPA together will deal with the scope of the problem, identify common accounting schemes, work effectively with each other and under the impact of the Sarbanes-Oxley Act and related rules and regulations. The FBI and the AICPA have a long tradition of cooperation, but the new initiatives are designed to broaden and deepen the relationship and to expedite communications between the organizations. For instance, at a recent FBI training conference attended by more than 300 white-collar crime investigators from various agencies, the AICPA provided a number of instructors. “We believe we can reach the greatest number of CPAs through a joint effort,” said Ashley, referring to the relationship with the AICPA. “The CPA’s role in uncovering and preventing fraud cannot be underestimated.”

Corporate Fraud Is a Nationwide Issue

Here are some locations of
FBI fraud investigations:

Anchorage, Alaska
Birmingham, Alabama
Boston
Charleston, South Carolina
Chicago
Columbus, Ohio
Detroit
Erie, Pennsylvania
Honolulu
Houston
Johnson City, Tennessee
Los Angeles
Oklahoma City
Omaha, Nebraska
New York
San Diego
San Francisco

CPAs ARE CRUCIAL PARTNERS
Following the corporate scandals of 2002, the Department of Justice issued a three-part formal definition of corporate fraud: accounting fraud, self-dealing by corporate insiders and obstructive conduct. The FBI is handling more than 2,000 securities and corporate fraud cases, the majority representing millions or even billions of dollars in losses and thousands of victims. As part of the FBI’s strategic overview of white-collar crime, Ashley said, his agency realized CPAs are an essential part of winning the fight. “It was clear to me the CPA profession is uniquely situated to join in the partnership—in education, in focusing and sharing information on what we’re seeing and what the profession is seeing,” he added.

In addition Ashley noted the FBI will be calling upon CPAs in several ways—including as objective, third-party expert witnesses, as eyewitnesses and as candidates to join the agency. Indeed, the FBI is actively recruiting CPAs as special agents and as analysts. Accountants already are a key part of the FBI team, with 1,300 accountants working as special agents. In fact 15% of the FBI’s new hires for the special-agent position are slated to be CPAs this year. Interested CPAs can find employment applications at www.fbijobs.com.

With the AICPA’s help, Ashley said, “we could probably short-circuit this fraud problem in a couple of years.” It’s hoped, he added, in “three or four years” American business and investors will be looking back on this period as a historical anomaly. Ashley said the nation already may be turning the corner on the scourge of billion-dollar fraud schemes, citing the upsurge in prosecutions. He attributed the potential turnaround to the effects of the Sarbanes-Oxley Act, which, he suggested, has helped the FBI as much as it has helped auditors. “These new regulations are going to put the teeth back into what the profession can do, through basically transparent financial statements. And it’s going to help in the long run to put an end to this problem. I don’t see this being a significant long-term crime problem.”

WHITE-COLLAR CRIMINALS GET CREATIVE
To be sure, white-collar crime has been around as long as, well, white collars. And the FBI has been pursuing business crime almost since the agency’s inception. But in recent years, FBI officials say, white-collar crime has exploded both in the size and scope of the money involved and the number of victims affected. White-collar crime has morphed into monster-sized problems the size of Enron, WorldCom, Tyco and Global Crossing. Today, corporate fraud reaches from Wall Street to Main Street and back again. To add a historical perspective, Keith Slotter, CPA, chief of the FBI financial crimes section, noted that the 1980s were marked by the savings-and-loan scandals, and in the 1990s, the FBI found itself fighting a crisis in health care insurance fraud, which continues to this day.

Today, one of the red flags alerting the FBI to a major problem may be a simple financial restatement. But with a record 919 restatements in the five years through June 2002—many concerning huge and ostensibly tightly run companies—the FBI has its work cut out for itself in tracking down every one. “Now,” Slotter added, “just because a restatement was made doesn’t mean a fraud was committed. But it’s a signal you need to look at.”

The key reason for a restatement, by far, is a revenue-recognition question—involved in at least half of all SEC cases. Restatements for improper revenue recognition also result in larger drops in market capitalization than any other type of restatement. For instance, 8 out of the top 10 market value losses in 2000 related to revenue problems, according to FBI data. And, of the 10 companies, the top three lost $20 billion in market value in just three days due to revenue-recognition problems.

No Industry Is Immune to Scandal
The FBI is involved in fraud investigations in these industries:

Banking. Cable TV. Charities. Energy. Insurance. Internet. Medical. Retail. Software. Telecommunications.

“In white-collar crime,” said Slotter, “we keep turning up new types of schemes; it’s really endless. And as the criminal becomes more sophisticated and with increased and improved technology, we’re going to continue to see new and different types of schemes. We see crimes today that, frankly, didn’t exist 10 or 15 years ago. I’m talking about things like identity theft, which, back in the ’80s, was practically unheard of, but now it’s a very personal and pervasive crime. We see all types of advance-fee and investment schemes (see “ Foreign Advance-Fee Scams”) that are incredibly creative and convincing between the perpetrator and the victim. Unfortunately many people lose millions, even billions of dollars.”

CRIME KNOWS NO BORDERS
“These criminals,” added Gary Dagan, CPA and chief, FBI economic crimes unit, “are very bright and intelligent. And when they see us putting a dent in a major crime area—as we did with the savings-and-loan crisis in the ’90s—they’ll move to something else. A lot of times, they’re not just working in their own little group or by themselves—they’re working internationally with other partners. So as the global world appears to become smaller, they’re working on that much grander a scale.”

But even in the United States, investigations are not confined to the usual centers of corporate activity, such as Wall Street or Silicon Valley. Quiet towns such as Omaha, Nebraska, and Erie, Pennsylvania, have seen their share of business scandal.

In addition, according to Dagan, “one of the most disturbing things that we’re seeing is no industry is immune from this.” Even some charities are among those being investigated by the FBI for fraud. (See “ No Industry Is Immune to Scandal.”)

As far as the FBI is concerned, CPAs stand as a first line of defense in thwarting basic accounting fraud. “The independence of the CPA remains a crucial element in conducting effective audits,” Dagan said. “You have to continue to be objective, and professional skepticism can’t be emphasized enough.”

The FBI Is Not Alone
Although the FBI handles more than 9 out of 10 corporate fraud cases, many other national agencies or regulatory bodies are involved in the fight. Here’s a sampling:

Commodity Futures Trading Commission.*
Defense Criminal Investigative Service.
Department of Labor.
Federal Energy Regulatory Commission.*
Internal Revenue Service.
National Association of Securities Dealers.*
Postal Inspection Service.
Securities and Exchange Commission.*

*These agencies have only civil authority and cannot prosecute criminal cases.

But the FBI doesn’t have all the answers. So with CPAs, auditors and management accountants sharing knowledge and experience, the agency is learning the significance of some recurring themes, particularly in revenue-recognition schemes. “As basic as I think it is,” Slotter said, “you really, really need to look at the yearend transactions closely. The journal entries right before the books are closed on any companies at the end of their fiscal year are incredibly important because so many transactions relative to revenue and expense often occur within those last few days, maybe the last day even.”

FBI Corporate Fraud Hot Line
Since it was launched in February 2003, the hot line has received more than 2,000 calls. Tipsters can remain anonymous. And the FBI says callers have helped considerably in flagging new cases and enhancing ongoing ones. The number is 888-622-0117.

Slotter also urged accountants to probe deeper into internal company and subsidiary transactions. But mostly, he said, auditors and accountants need to employ a healthy skepticism. “We all need to ask the right questions,” he said. “And that sometimes means asking the tough questions as to why things were transacted the way they were, why certain items were booked the way they were and assuring ourselves that the answers to those questions are satisfactory and that they make sense.”


RESOURCES

Books
CPA’s Handbook of Fraud and Commercial Crime Prevention (# 056504JA).

Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879JA).

CPE
Introduction to Fraud Examination and Criminal Behavior (# 730275JA).

Identifying Fraudulent Financial Transactions (# 730244JA).

Finding the Truth: Effective Techniques for Interview and Communication (# 730164JA).

Web site
Antifraud and Corporate Responsibility Resource Center, http://antifraud.aicpa.org/.

SAS no. 99 information.

Management Antifraud Programs and Controls (SAS no. 99 exhibit).

Fraud Specialist Competency Model.

Conference
AICPA Conference on Advanced Litigation Services and Fraud
September 26–29
JW Marriott Desert Ridge, Phoenix

For more information, to place an order or to register go to www.cpa2biz.com or call the Institute at 888-777-7077.

©2008 AICPA

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