Crime Watch Accounting

Inside the offices at Forensic Strategic Solutions Inc., in Birmingham, Ralph Summerford and his team of accountants gather in front of the large whiteboard in his office several times a week to discuss the details of their latest investigation into financial fraud, missing assets, cyber attacks or accounting malpractice.

The team members are all experts in what is called forensic accounting, a specialized field of accounting in which financial data is gathered, analyzed, prepared and presented as evidence in a court of law. Summerford and his team are often called as expert witnesses before grand juries and trials.

This day, he is pointing at a sentence written near the top of the board that says, “We hate fraud.” Summerford says he wrote it during a recent meeting to make a point about the firm’s purpose.

“We love resolving the cases, ” says Summerford. “But what we hate is when people use their power, influence and position over other folks. That’s what we hate. We have no political motivation. We just hate fraud.”

Forensic Strategic Solutions is an investigative financial consulting firm that conducts fraud examinations and financial inquiries for companies and organizations around the country. Summerford founded the firm in 1992, after having worked several years in public accounting.

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“What attracted me to forensic accounting was the suspense of it, the investigative part of it, and the putting together of the puzzle to figure out the numbers, where they were, who put them there and why, ” Summerford says.

In recent years, government prosecutors have had to figure out where the numbers were in several financial scandals, including the collapse of the energy company Enron, Wall Street investment manager Bernard Madoff’s multibillion-dollar Ponzi scheme, and most recently, the theft of credit card information from retail giants like Target and Neiman Marcus by computer hackers. In these and other cases like them, customers, business owners and investors have lost big-time, even entire fortunes.

In the 2012 Association of Certified Fraud Examiners’ Report to the Nations, the study found that the typical organization loses 5 percent of its revenues to fraud annually. The median loss due to fraud was $140, 000, and more than one-fifth involved losses of at least $1 million. Nearly half of the victim organizations never recovered their losses. The study was based on information from 1, 388 cases of occupational fraud worldwide between January 2010 and December 2011.

Companies and organizations that suspect they have been the victim of fraud turn to their attorneys or certified public accountants, who call on firms like Forensic Strategic Solutions for assistance, says Alton Sizemore Jr., the firm’s director of investigations and a shareholder in the company. Sizemore, a former assistant special agent in charge for the FBI’s Birmingham division, oversees investigations in fraud assessments for both criminal and civil cases.

Since joining the firm in 2005, Sizemore says he has worked cases involving bank fraud, falsified loan applications and financial statements, and incidents where trusted employees used their positions within companies to embezzle funds, take kickbacks or set up bogus suppliers so they could sell goods to their employer.

“We get referrals from people who think there has been a fraud, ” Sizemore says, “so we work with them to determine if there really are any red flags that indicate fraud. If there are not, then we suggest an assessment. Let us take a look at your business and determine if there are red flags and if there are areas in which you’re vulnerable. If we find red flags, we suggest an actual investigation.”

For Sizemore and the other investigators, the work can include checking everything from invoices and financial statements to interviewing managers, vendors and others who are familiar with a business’ operations, he says.

He recalls a recent case in which officers at an Alabama bank, following the housing market collapse, allegedly cooked up a scheme to recruit straw borrowers who bought properties at amounts higher than the original mortgage loans to keep regulators unaware that the collateral was overstated.

The firm’s investigators have worked as consultants on high-profile legal cases, such as the lawsuit against HealthSouth Corp. They also were expert witnesses in a case involving an Alfa insurance agent in northeast Alabama who pleaded guilty in 2007 to falsifying loan applications and stealing more than $5 million in loans.

Most recently, Gov. Robert Bentley hired Forensic Strategic Solutions to look into allegations of wrongdoing regarding contracts at Alabama State University. In the firm’s preliminary report to Bentley’s office last September, it found “sufficient predication” to believe that a jury or judge could conclude that multiple acts of fraud, waste and/or abuse were occurring or had occurred at ASU.

For Ralph Summerford it’s simple: “We hate fraud.”

As with any investigation, says Summerford, the firm starts each case by investigating the initial allegations.

“We will, in effect, develop a theory of what might have happened, what could have happened, who might be involved and how they were involved, ” Summerford says.

Sizemore and Summerford say companies and organizations must be vigilant in watching for fraud. Any anomalies in financial records should be questioned, says Summerford. The employee who never takes a vacation may be attempting to keep others from discovering a crime, Sizemore says. Other warning signs to watch for are employees who exhibit drastic changes in behavior or those who seem to live above their means.

“Walk around the parking lot, ” Sizemore says. “If your accounts receivable clerk is driving a brand new Jaguar, it might be a clue. Could there be a reasonable explanation? Yes, but you have to be able to ask those questions.”

These days, however, incidents of hacking and the spread of malware are major threats against businesses. So, in January 2014, Forensic Strategic Solutions formally launched its forensic technology practice. Working with partner companies like SecureIT360 and Packet Ninjas, the firm offers services such as cyber security, data breach and incident response, in addition to computer forensics for the collection, retrieval and preservation of digital evidence for litigation.

Accountant and shareholder Kelly Todd is the practice co-leader with Lindsay Gill, the firm’s director of forensic technology. If a case of suspected fraud is technology related, Todd says, Forensic Strategic Solutions, with assistance from its partners, could collect data as evidence, determine how the breach occurred and the extent of the compromise.

But while hackers outside of a company do pose a real threat, Todd says, “I think the one thing that I preach a lot is that employers cannot forget that employees are an equal threat, and they oftentimes are overlooked. The threat can be [employees] stealing data, leaving with customer lists or just maliciously harming the data within the organization.”

If a company suspects that an insider is using his computer to steal, says Todd, the firm, through its partners, has the technology to take a digital image of the employee’s computer hard drive. Once the employee is confronted, investigators will know if the employee deleted information from the computer.

Sizemore says, however, that companies and organizations should begin looking at their fraud vulnerability the day they are established.

“They need to have internal controls in place to diminish the possibility of fraud, ” says Sizemore, including separation of responsibilities so that a single individual isn’t the only employee who can write and cash checks. Cross training personnel and implementing mandatory vacations also are important, preventative measures, he says.

Companies also should analyze their cash flows, percentages of expense to revenues, cost of goods sold percentages to see if anything is “out of kilter, ” he says.  And when questions arise, the analysis should be given to an independent auditor to review. He says that he’s seen cases where the analysis is given to the person who is perpetrating the fraud because they are the manager of the operations.

But too often, says Todd, employers fail to put the proper controls in place to prevent fraud.

“The fact is, no one wants to pay for prevention, ” says Todd. “Many employers believe it will never happen to them.”

Companies that have lost money because of fraud can turn to Forensic Strategic Solutions’ accounting malpractice team for help. The firm’s forensic accountants examine clients’ financial records to determine whether auditors performed their due diligence during regular audit procedures. Forensic Strategic Solutions investigators will then render their expert opinion to the company’s attorneys, who can then decide whether to hire the firm to present expert testimony in court, Summerford says.

Forensic Strategic Solutions also assists attorneys in cases where monetary damages, lost profits or the true economic value of an owner’s interest in a business are contested in litigation.

CPA William Dameworth manages the firm’s business valuation practice at its Winston-Salem, N.C. office. Conducting a proper valuation can involve an examination of records such as general ledgers, financial statements, tax returns, list of sales, as well as economic, industry and competitive outlook reports, he says.

The work is challenging because, unlike real estate, for which appraisers can establish a house value based on comparable sales, no two businesses are alike, Dameworth says.

“Businesses can have different product lines or different customer lines, ” he says. “Sometimes you hear people describe business valuation of private companies as reflecting both art and science, and that’s often the case.”

Moreover, he says, since both economic and industry conditions vary, the valuation given to a business at a particular time could be materially different a year down the road, depending upon what has happened in the external environment, he says.

Although fraud is not always the focus of his work, Dameworth says, fraud may be uncovered while conducting a business valuation.

“If it ends up that there was an intentional effort to deceive, and people relied upon it, then Ralph or Kelly or the other folks who focus on the fraud arena can take the data and put it through the sieve of what the requirements are to have it be a fraud claim, ” Dameworth says.

Whether clients need business valuations, cyber security assistance, forensic accounting or financial investigation services, Summerford says he believes Forensic Strategic Solutions is making a difference for people who are often in emotional pain, having been victimized either by strangers or a once-trusted employee or colleague.

“We’re in many ways a psychologist, ” says Summerford. “What I’m most proud of is that we’re effective for our clients, and we can help them through a difficult time and quickly get to the bottom line.”

Gail Allyn Short is a freelance writer for Business Alabama. She lives in Birmingham.

text by Gail Allyn Short • photos by Cary Norton

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