When audits get tough, firms call the cops
Amid a spate of accounting scandals, auditors look to ex-sleuths for extra help.
NEW YORK — "This is your auditor! Open the books! Now, up against the wall! No one move, or I'll call the Securities and Exchange Commission."
Yes, given the news of corporate wrongs, it had to happen: Former cops are being hired by auditors to try to spot fraud. The new green eyeshades called forensic accountants are looking for inflated profits, hidden assets, questionable payments, and other corporate shenanigans. They are hunting for what Fed Chairman Alan Greenspan termed "infectious greed." They're almost certainly walking around the hallways at WorldCom, Adelphia, Tyco, Enron, and other companies in the news.
But forget calculators: These investigators are poring over bank statements and scrounging through computers looking for e-mails that may show something bad has happened. Their archaeological research often prompts SEC actions or even criminal probes by district attorneys.
When they call the DA, it's often on a first-name basis, because many of this new breed are former FBI officers, criminal prosecutors, and even retired Canadian Mounties, who have traded in their Smith & Wessons for Palm Pilots.
This extra muscle has received greater exposure as auditors rethink how to better police problems and avoid conflicts of interest. "It's part of the increased emphasis on auditors to be watchdogs," says Erik Skramstad, a partner at PricewaterhouseCoopers in Boston.
From their years in law enforcement, these watchdogs have some unusual qualifications. They are skilled at interview techniques, honed from dealing with "perps" and "sources." Many have had advanced training courses on how to spot information in seemingly innocuous remarks.
"We know how to develop a rapport and develop information," says ex-FBI agent Tom Hughes of Deloitte & Touche in Los Angeles. "We know how to listen to what is being told, when to change the subject, how to develop what the person wants to tell you. It's not that much different from questioning someone about a bank robbery."
Take one of the cases that now involves Stephen Max, former special agent for the IRS's Criminal Investigation Division: An individual who invests in classic cars thinks his business partner is not being straightforward. Mr. Max, now with the West Orange, N.J., firm of Bederson & Co., is checking the books.
The use of retired crime-busters in the accounting profession has been going on for some time. The collapse of the savings-and-loan industry in the mid-'80s resulted in all kinds of investigative litigation. Then, in the 1990s, a healthcare fraud scandal created a demand for Health & Human Services investigators.
Those doing this kind of work say they end up with complicated cases that normal accountants can't tackle. For example, Decision Strategies, an investigative group that hires many former government cops, was hired by the Chilean government to look into kickback charges at Codelco, a government-owned business.
"It involved years of multimillion kickbacks from trading companies around the world, which made it very complicated. But in the end, we found it cost Chileans $175 million in losses," says Michael Hershman, a top officer at the Washington-based firm.
Mr. Hershman hires former government white-collar specialists, because of their training in investigative techniques. He says normal accountants assume that a company is giving them accurate information. "Often when you get an accountant and have him working on fraud or economic crime, you find him very uncomfortable," says Hershman.
Of course, there are plenty of differences for G-men-turned- civilians. For one thing, they can earn a lot more money. According to the US Office of Personnel Management, a senior agent (GS 12 or 13) with 10 or more years of experience can make between $75,000 and $90,000 per year. In the private sector, says Hershman, a good forensic investigator can make a base salary of between $125,000 and $150,000.
Moreover, ex-cops no longer need to carry firearms, since they won't be arresting anyone themselves. That also means they no longer have a badge and the ability to get information through subpoenas or wiretaps.
Some make the adjustment, and some don't, says PricewaterhouseCoopers's Mr. Skramstad. "The key is a high degree of intellectual capacity and a consultative spirit," he says. "If they have too much of a prosecutor or law-enforcement mentality, I find them too set in their ways."
Another big difference is that law-enforcement officials have a relatively narrow focus, says ex-FBI agent Mr. Hughes. They look for the easiest case to make, with the biggest perpetrator, and they investigate that and put people in manacles. Then, they move on to the next case.
The white-collar crime units at the accounting firms have a broader as well as a more constructive approach to investigating companies, Hughes says.
"All employees may have had a knowledge of the act, and you want to find out why they didn't bring it to management," he explains. "Do they have an ethical atmosphere that encourages people to come forward? We do more for the company by correcting for the future."
Most of the time, forensic accountants are brought in when CEOs or boards of directors suspect there is something wrong. But sometimes the work is preemptive. For example, Michael Zeldin, now at Deloitte & Touche in Washington, used to head the Justice Department's money-laundering section.
"Many of the people I hired are still there, and I know what they look at," he says. "I can apply that to clients to be sure they are not doing anything that will aggravate the government."