The Fraud Examiners

Tom Golden, who heads PricewaterhouseCooper’s Midwest investigations practice in Chicago, assesses the field: “Companies know fraud is epidemic—the phone is ringing off the hook. We have doubled the number of examiners in the past year, and we’re still growing. There is no end in sight.” Robert J. Lindquist, senior managing director for Citigate Global Intelligence & Security in Washington, D.C., agrees and adds, “For those professionals who wish to excel, this field has much opportunity.” And according to Debbie Cutler, a partner with Kramer, Love and Cutler in New York City: “Clearly, the CPA’s role in combating fraud has increased due to recent corporate scandals and media attention. There is growth in this area as companies implement internal control systems and look for ways to reduce fraud.”

Lindquist says interested CPAs should learn about the legal aspects of fraud. “It is important to understand exactly what constitutes fraud,” he says, “which includes practical knowledge of the legal system and concepts such as the elements of the offense, what constitutes proof, mens rea (intent) and completeness of evidence.”

Both Lindquist and Cutler say antifraud education and training will include interviewing skills. According to Cutler: “Conducting proper interviews is a large part of being an effective fraud examiner. It is hard to overemphasize the importance of this skill.”

Golden had discovered the file when he examined the company’s lease contracts receivable (LCRs). “There was letter after letter from customers proclaiming the company’s product was inferior and demanding their contracts be terminated,” Golden said.

The problem was that none of the contracts had been canceled or removed from the LCRs, and none of the same complaints had shown up in the hundreds of positive confirmations that had been sent out earlier. “I knew something was terribly wrong,” he said. He was right. After comparing the complaint letters to the confirmation list, he discovered that the client’s personnel had surreptitiously gained access to the auditors’ computerized confirmation list and altered it, making sure that none of the complaining customers were selected for confirmation.

As a result of Golden’s initial discovery, the auditors were able to determine that $11 million in leases probably were not collectable. “For a company with $7 million in reported pretax income, it was a material amount,” said Golden. The auditors required the company to restate its financials, doubtlessly averting a multimillion-dollar lawsuit from investors and creditors. Believing they could not rely on the client’s integrity, the audit firm resigned. Ultimately, the company failed.

“This case taught me a valuable lesson that has stayed with me throughout my career,” Golden said. “My mother raised me to trust everyone, but she wasn’t an auditor.” After experiencing his first fraud, Golden was hooked. He began asking his superiors to assign him suspected fraud cases and gradually acquired experience.

Golden, now a seasoned veteran who has investigated hundreds of frauds, says auditors must adopt a simple and powerful philosophy: Trust but verify. “Most clients are honest, but not all. The only way auditors can effectively do their jobs is by being professionally skeptical.”

MS. PERRY MASON
Perhaps Debbie Cutler was born to be a fraud examiner. “When I was young, my family referred to me as Perry Mason,” she said. “I was a very inquisitive child who wouldn’t give up until I got the answers.” It was happenstance that led her to combine her natural talents with her accounting degree.

“I’d spent 10 years in public accounting performing traditional audit work,” Cutler said. “One day a partner invited me to help investigate an accounting malpractice case that included fraud allegations against a U.S. senator. I jumped at the chance, and as it turned out, I loved the work.”

That was 15 years ago. As Golden did, Cutler started making it known within her firm that she was interested in fraud assignments. She took fraud-related continuing professional education and eventually obtained her CFE designation. Debbie now spends nearly half of her time working on fraud cases. “For me, investigating fraud is a very challenging and rewarding occupation. I like the fact that you are dealing with people in difficult situations, and no two cases are exactly the same.”

“There are two valuable lessons to be learned from this case,” she observed. “First, employers can’t always assume the people they hire are honest. When someone is responsible for handling company assets, his or her background should be carefully checked. Second, not all fraud can be uncovered by examining the books and records. You also have to be trained to ask the right questions.”

MR. FORENSIC ACCOUNTING
Robert Lindquist of Citigate Global Intelligence & Security is a veteran of at least 2,000 cases in a career spanning three decades. His investigations have taken him to far-flung locations such as China, the Caribbean, Europe, South America and Africa.

Lindquist became an expert the same way many of the field’s pioneers did—by learning on the job. As both Cutler and Golden did, he received a fraud assignment early in his career, discovered he had a flair for the work and pursued it as a career path. In a case that marked a high point in his career as a fraud examiner, the government of Trinidad hired Lindquist to investigate the business dealings of John H. O’Halloran, a former cabinet minister. But there was one major problem to recovering any ill-gotten gains: O’Halloran—widely known as “Mr. Ten Percent” for the kickbacks he allegedly demanded in exchange for government contracts—was long dead.

Yet, even though they have different experiences, the advice of these CPA/CFEs is remarkably consistent. They agree that when gathering evidence, fraud examiners and auditors need to trust their instincts and check out their suspicions. Professional skepticism is really an enhancement of the “sixth sense.” It will help CPAs identify the classic warning signs or red flags of fraud, including how devious people act. In short, these pros think auditors need to be more skeptical. Considering the multibillion-dollar financial frauds that have recently plagued corporate America, their opinions constitute sound advice.

All agree that growing demand for antifraud experts justifies the time and effort required to join the field. Says Golden: “I feel I am doing something really worthwhile that goes beyond the financial successes I have gained for my family and me. I’m catching the bad guys—and I love it!”

Joseph T. Wells, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners and professor of fraud examination at the University of Texas at Austin. Mr. Wells won the Lawler Award for the best JofA article in 2000 and 2002 and has been inducted into the Journal of Accountancy Hall of Fame. His e-mail address is joe@cfenet.com .