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July 2019

Inside the Life of a Private Detective in the Digital Age

Computers speed up records searches, but they don’t replace the value of face-to-face views of people and places, says Max Hansen. Photos by Brad McPherson

A Daphne, Alabama conference room houses a display like no other. The trophy case contains surveillance tools, data recovery systems and spy gadgetry of all descriptions. With tracking devices, bugging equipment and pinhole cameras, it is like stepping into James Bond’s attic, except 007 is fiction. Baldwin Legal Investigations is real.

How real? “Give me your name and birthdate,” says the firm’s owner and CEO, Max Hansen. I did. Fifteen minutes later, he presented a 52 page “Story of Emmett.”

The half-inch thick volume in single-spaced text includes every house I have lived in and current owners, automobiles I have owned, 20 neighbors and contact information. Listed also are 20 friends with phone numbers, my relatives, interests, hobbies, credit history, cell phone numbers, email address and previous arrests (none).

Thumbing through my report, Hansen speaks what you want to hear from a private investigator — “You’re a pretty boring guy.”

For others the verdict is different.

The “scatter” or “shotgun” report is an example of computers empowering detectives. Gathering the same information just 10 years ago required weeks of pounding the pavements. Today the process is digitally done in minutes.

State licensing was a catalyst. “It’s been a game changer,” says Barry Hodgens, of Hodgens Investigative Services in Cropwell, near Birmingham. He refers to the Alabama Private Investigation Regulatory Act, a relatively new law empowering state detectives with some pretty cool search engines and more. But Hodgens, an investigator primarily covering personal injury, wrongful death and industrial accidents, adds that, though the law is a good start, it’s not the end.

“We need to beef it up,” says Jonnie Munn, president of the Alabama Private Investigators Association and head of Corporate Special Services Inc. in Birmingham. Referring to the state regulations, he adds, “It is lacking.”

In addition to being APIA president, Munn’s private investigative work includes workers compensation, injuries, surveillance and background checks. He notes, “Under current requirements, one must take a test, pay the fee and prove U.S. citizenship to be a licensed private investigator in Alabama. But the legislation should include minimum standards, an apprenticeship license, at least two years’ experience in related fields and/or a combination of education in criminal justice, law enforcement or political science.”

He adds that the APIA hopes to submit a proposal covering all of the above to the Alabama Legislature by next year’s session. “We want to offer training and bring in new people, but we also want our people required to obtain the training to be professionals.”

“With the exception of Mississippi, Alabama is the only nearby state that does not have similar training and standard requirements,” Munn says. Hopefully, according to APIA, that will soon change.

But Alabama’s private investigators are benefiting from tools now available electronically, along with old fashion gumshoe work.

A tiny video camera just above the clasp on this pen can be a valuable tool for a private eye.

“Once I have your name and birthday, I’ll find you,” claims Hansen, whose agency work includes 17 to 23 capital murder cases annually. “We use a variety of search/database tools,” he adds, referring to services like Tracers, TLO and IRBsearch — many available only to licensed private detectives and law enforcement officers.

“We do the same work we have always done — track, gather information, report it to clients,” says Hansen, acknowledging electronic tools of the trade. “But with computers, we do it much faster.”

The private eye eyes a lot. Cases are an assortment: insurance fraud, domestic relations, industrial and automobile accidents, wrongful death, embezzlements, missing persons, child support, homicides and more. Some detectives cover a wide variety. Others specialize, such as in insurance fraud. Some are hired for expertise in specific skills like building and installing custom tracking devices not much bigger than a postage stamp that can track a car anywhere in North America.

With the computer came the digital detective. Many search engines are only available to licensed professionals. But others are free, and one is referred to by detectives as “the gift that keeps on giving” — social media.

“The beauty of Facebook is that we don’t have to look for the information,” Hansen notes. “You give it to us. It would amaze you the amount of information we glean from social media sites without having to dig for it.”

Barry Hodgens agrees. “To most people, services like Twitter and Facebook are social media outlets. To us it is a resource tool, continuously updated by the people using it.

“No matter how much warning they receive, people do not realize or care that social media posts never go away. They still will say anything online.”

And police and other investigators, with some training and skills, can find patterns in those social media posts, the PIs say. They look not just at the suspects but also whom they hang out with online. Detectives search what suspects are posting, where they go online and what they do while there.

However, all detectives interviewed adamantly stated that, regardless of the digital tools used, nothing replaces old fashioned boots on the ground. “At the end of the day, you still have to be a good interviewer and know how to read people,” says Hodgens, whose 30 years of job experience includes the FBI. “I need to physically see a car crash site and must see the witnesses to determine their truthfulness.”

And even though many tools in the detective’s arsenal are available to the public, knowing how to legally obtain information from bugging devices and tiny hidden microphones and cameras is something the public does not understand. Using such gadgets without a license can be illegal. New detectives learn that, but not overnight.

The training is demanding. Hansen notes, “I sometimes worry that younger, new detectives use computers as a crutch. It is a tool, not the end-all, in good private investigative work.

“We hire people in our firm with criminal justice degrees, law enforcement backgrounds or both,” adds the investigator with 28 years’ experience. “Our people spend a year in-house apprentice training.”

“The job is not for everybody. It’s a tough slot to fill,” he continues. “You must have self-confidence and you cannot be timid.”

Good interviewing, writing and data collecting skills are essential. “I cannot emphasize enough to my people — verify, verify, verify. The information you gather, decisions you make, reports you produce will change someone’s life — good or bad — forever,” Hansen warns.  “I never forget that.”

Munn adds, “In our business we talk to a wide variety of individuals — doctors, professionals, felons, drug addicts, you name it. A good investigator must know how to read people who don’t always want you reading them.”

Detectives interviewed agreed: Gone are the days of trenchcoat-wearing private eyes, except in movies. Hollywood reminisces the romance of days when Humphrey Bogart engaged in shootouts with people he was tailing.

“My insurance carrier would not go for that,” says Hansen. “But back in the day, this business was like the wild, wild West as far as qualifications were concerned. Basically all you had to do was say ‘I’m a private detective,’ and you were one.”

Even if the job is tamer now, there are still risks, Barry Hodgens notes. “You don’t always go in the best neighborhoods. I have experienced situations where I feared for my life. There are times I wear body cams.”

Detectives often work in the same environment police do. But as Hansen says, “When a private detective is in a bad situation, we can’t call for back up. There is no back up.”

But, at the end of the day, the rewards are great. To many, the world of detective work is in their blood, fascinating and a rewarding endeavor where no two days are the same. On Monday, the task is embezzlement charges. On Tuesday, a homicide. Who knows what the week may bring?

“But I love what I do,” Hansen says. “Every day is different, and every day you help people. We help see that justice is served.”

Emmett Burnett and Brad McPherson are freelance contributors to Business Alabama. Burnett is based in Satsuma and McPherson in Mobile.

Defense Contractor Attains Employee-Owned Propulsion

Co-founder Bill Roark, President and CEO John Watson and Chief Technology Officer Joe Hill, with the 3D imaging headsets used to view some Torch products. Photos by Dennis Keim

Torch Technologies has ranked among the nation’s fastest growing companies 12 years in a row. It’s recognized as a great place to work and it wins kudos among employee-owned companies.

The reason for the recognition? President and CEO John Watson says it’s in the nature of the business organization itself: They take employee-ownership seriously.

Watson and Torch co-founders Bill Roark and Don Holder had all previously worked for Nichols Research Corp., a large missile defense company in Huntsville that went public in the late 1990s and was later sold. Roark and Holder suddenly found themselves unable to honor commitments made to employees. Much affected by that experience, Roark and Holder began to discuss starting their own company — one that, to avoid a repeat of what had happened to their employees at Nichols, would eventually be entirely employee-owned. In 2002, they created Torch.

“Don was in his mid-sixties when he helped found the company,” Roark recalls, “so we knew he’d be exiting, and we needed a path that would allow us to buy a founder out without having to sell the company.”

In 2005, when they had reached 50 employees, they implemented an Employee Stock Ownership Plan (ESOP). From that point on, “everyone got a stock option, so they could exercise ownership in the company when that option matured,” says Roark. By 2010, employee ownership of the company had reached 40 percent, and Roark and Holder met their goal of 100 percent employee ownership at the end of 2011.

Torch Technologies President and CEO John Watson, at company headquarters in Huntsville.

Today, Torch is one of the nation’s top 100 defense services companies, and for the most part has seen consistent annual growth of 30-40 percent since its founding. The company expects to generate around $470 million this fiscal year. Based in Huntsville owing to its proximity to U.S. Army Aviation and Missile Command, Torch has expanded to 15 other locations, including Colorado, Florida, Hawaii, Maryland, Massachusetts, Pennsylvania, New Mexico, Texas, the Marshall Islands and Egypt.

“John came on board in 2009, and one of his first goals was to expand us outside of Huntsville,” says Roark. “I’d say he’s succeeded.”

The company also has evolved from being services-only to offering solutions. To accommodate that transition, Torch broke ground last year on a 45,000-square-foot facility, the Technology, Integration and Prototyping Center.

“We’re doing some novel things in that area,” says Watson, like developing next-generation instrumentation for capturing warhead tests. “We’re also doing a lot of work in obsolescence and re-engineering,” he continues, citing the company’s work on early-warning detection radar systems. Other projects include building repair stations and tech repair manuals for subsystems on the CH-47 Chinook helicopter and developing virtual training products.

“We’re also seeing some opportunities to take some of our defense development technologies outside into the commercial sector,” says Watson. “We’re proud of the platform we’ve built, and we take advantage of that to address more complicated problems that are out there. We’re in a military community, and we take very seriously our mission in terms of providing capabilities to our warfighters and bringing them home safely.”

That dedication extends beyond the company’s professional services; Torch also is deeply committed to community outreach. “We really feel that the cornerstones of our company are, of course, our employee owners and our customers, but the community is part of that, too. If we want to have a healthy workforce, we need to have a healthy community.”

“That’s something our employees take a lot of pride in,” adds Roark.

Inc. 5000 Fastest Growing Companies — 12 years in a row
Washington Technology — Top 100 government contractors
Bloomberg Government — Top 200
Entrepreneur 360 — Ranked #11
Great Places to Work & Fortune — 4 years in a row
Best Workplaces for Millennials — 3 years in a row
ESOP Company of the Year, New South — 2018
Best Places to Work in Huntsville — Listed 5 times

In 2005, the company’s employee owners formed a 501(c)(3) organization, Torch Helps, to support non-profit organizations that assist underserved communities. One requirement: the charity selected to receive the $10,000 grant must operate in the area of a Torch employee’s residence. The program solicits applications quarterly, a Torch Helps committee reviews each application to ensure requirements are met and then provides a list of recommendations to the board of directors. Finally, employees vote on the board’s selections. Torch Technologies covers all of the administrative costs of Torch Helps, ensuring that all donations go directly to the organizations selected by the employees.

“The impact we’ve had on improving things for the warfighter and the soldier, you know, we’re very proud of that,” says Roark. But he points out that Torch doesn’t often get to see those impacts firsthand. “When you see a kid get a scholarship for college because of a local program you’ve funded and [one day] you’re trading emails with him as he’s making the dean’s list — those are the kinds of things that really tug at your heartstrings. And it’s really the employees,” he’s quick to add. “They’ve built the foundation for the company to be able to do that successfully.”

On April 30, Torch Technologies attended the unveiling of the Wounded Warrior-Combat Medic Statue at the Huntsville-Madison County Veterans Memorial, a project it sponsored. Military veterans from the company stood behind the statue during the dedication ceremony.

“The military is very important to us and recognizing and honoring them is very important to us,” says Roark. The company’s name and logo are inspired by the Statue of Liberty, he points out. Their Huntsville facility is called the Freedom Center. “You can’t get lost in terms of trying to figure out what we’re about.”

Katherine MacGilvray and Dennis Keim are freelance contributors to Business Alabama. Both are based in Huntsville.

How to Get the Best Price for Your Business

Ashley Taylor, of Jackson Thornton (left), and Sue McGlynn, of Warren Averett, say accurate records, good projections and a host of other information can make the process of valuing your business as painless as possible.

You’ve started thinking about retirement and what you’re going to do with the business you’ve built. Do you want to give it to your children now, make it part of your estate, sell it to someone else entirely? What if you want to keep working for a while but let someone else deal with the biggest headaches?

Maybe you’re getting a divorce, and you need to know what the business is worth for the property settlement, whether or not you decide to sell. Or you want to buy out your business partner, or vice versa.

Maybe a bigger company is eyeing your business for acquisition. Or maybe you’ve realized that you’re going under and you want to get whatever you can first.

Or consider this. When the principal of a company dies, someone has to put a value on the estate.

The reason for selling is one of many factors that go into business valuation. Whatever the reason or the circumstances, accountants say, business owners should make sure their records and their operations are in order, and they should seek expert advice.

Also, begin working toward an exit strategy sooner rather than later.

All of the above situations require that a realistic, independent value be put on a company before a sale can be considered, says Ashley Taylor, senior manager with the Jackson Thornton Litigation and Valuation Group. Jackson Thornton CPAs & Advisors has offices in Alabama, Tennessee and Kansas.

“Get your financial information in order,” Taylor says. Advance preparation will save money in the long run when you turn everything over for a business valuation.

“If you can get your financial records in shape, it makes our jobs a lot easier. We usually like to look at tax returns and financial statements over the last five to seven years, depending on the industry. Being able to analyze those quickly and easily makes it a lot easier.

“If we’re given really sloppy data, it might take us a long time to get it to a point to where we can actually analyze it. We’ll just spend more time prepping the data than we would have, had we gotten good data to begin with.”

A potential buyer will demand all the records, including taxes, and will scrutinize everything, says Sue McGlynn, a CPA in the tax division of Warren Averett CPAs and Advisors. Warren Averett has offices in Alabama, Florida, Atlanta, Houston and the Cayman Islands. A buyer wants to determine cash flow after taxes and expenses. Nor is the sale the end of the owner’s involvement.

“I’m in there from almost beginning to end and even beyond, because I’m the one doing the tax return afterwards,” McGlynn says. “A business owner ought to know what the tax ramifications of the transaction are.”

Despite what one might see on the internet, there is no single formula to put a value on a business, the experts say. If the company’s regular accountant and attorney don’t already have expertise in valuation process and in the industry itself, the owner needs to find a consultant.

“Find people who know about your business, who know about your industry and understand taxation,” McGlynn says.

If your existing advisers can’t recommend one, ask potential consultants about their credentials. The American Institute of Certified Public Accountants and the National Association of Certified Valuators and Analysts are two of the major professional organizations that offer certifications in related specialties and maintain directories of members on their websites.

In preparing to sell, the owner also should consider the condition of the facilities and equipment necessary to the industry. Similar to a homeowner preparing to put a house on the market, the physical condition of a business and whether updates are needed will affect the price.

Any environmental or legal issues should be resolved if possible, as these also can lower the price.

How the business is managed also affects its value. There should be some sort of management structure even in small family operations.

“Say I’m the owner of the company,” Taylor says. “I know the ins and outs and hold all the client relationships. If I got hit by a bus tomorrow, what would happen to the company?”

Lyle Simons, corporate advisory consulting manager at Warren Averett, says basic issues such as who owns what should be clearly delineated. “Sometimes there can be some confusion as far as the legal structure of a company,” he says.

Whether a building is owned, rented, or owned by a related business needs to be considered. Part of a good management structure also includes not mixing personal business with company business.

Simons considers timing to be a crucial part of valuation process. “Quite often you find out that tomorrow isn’t the right day to sell,” he says.

Waiting to deal with issues such as updating equipment, resolving legal and accounting questions, and making other changes and improvements can pay off in the long run, according to Simons. General industry conditions also may dictate staying off the market until things are better.

The sales price is usually a multiple of revenue or income, taking all the variables into consideration.

“We get into the nitty gritty of who’s their competition, how much market share do they have? In what shape are your facilities and equipment? Do they need to be replaced soon?” says Taylor.

Comparable sales prices for similar businesses are important, and so are projections. Revenue forecasts should be based on what can be proven, not on how much money the owner wants to get out of the sale.

Says McGlynn, “Sometimes in those initial meetings, you’ll say, ‘Do you have a forecast? Do you have a budget?’ Sometimes they’ll say no. That is a factor in determining value, having some robust forecasts as to what you think your company is going to do.”

The price set by the owner should be “realistic and defensible,” according to Simons. Prior earnings and future contracts are some ways to support the asking price.

Once the price is set and the business owner has specified what deliverables will be included in the sale, the buyer signs a letter of intent. But that’s not the end of the deal, only the beginning of negotiations. The buyer will want to “look under the hood” and verify everything, says McGlynn.

Not everyone who goes through a valuation process actually wants to sell. They may be years away from retirement, or it may be that one principal in the company wants out but the others don’t. Whatever the reason, though, accountants say education, preparation and not being in a hurry are the keys to getting the right price.

Jane Nicholes is a Daphne-based freelancer for Business Alabama.

Red Square Grows with Tribal Casino Gaming Expertise

Red Square’s leadership team, left to right: Sarah Jones, president; Elena Freed, COO; Rich Sullivan, CEO, and Joa Pope, vice president of creative operations. Photo by Ty Shaw

Gambling in this country is wide open as a Vegas billboard, except for a few holdouts such as Alabama, where the only sure bet is the occasional failed plunge at a state lottery.

So it’s no small wonder that one of the most successful ad agencies working the national gaming circuit is headquartered in south Alabama, in Mobile.

“The gaming category has been a very good one for us, and we were early past the post on it,” says Rich Sullivan, CEO of Red Square advertising agency. “It allowed us to grow into a national agency and enabled us to do work outside of the category. And for us to be in the state of Alabama is especially unusual.”

Lodged in the Port City’s historic downtown, the colorful co-working spaces of this 75-employee ad agency contrast sharply with the staid, brick storefronts of St. Emanuel Street.

Red Square represents a constellation of Native American tribal casinos across the country, including the country’s largest tribe — The Cherokee Nation, in Oklahoma — and largest tribal casino — Foxwood, in Connecticut.

“We have been working in gaming close to 20 years, but we really began building steam 15 years ago,” says Sullivan. “We worked with the Poarch Creek Tribe before it became Wind Creek Hospitality. They were very instrumental in our growth.”

Headquartered in Atmore, in Escambia County, the Poarch Creek Tribe started gaming in 1985 in a 1,500-seat high-stakes bingo hall — the Creek Bingo Palace — on tribal land, one year after becoming the first federally recognized tribe in Alabama. Now doing business as Wind Creek Hospitality, the venture supports the welfare of the tribe with a spread of casinos that includes Atmore, Montgomery and Wetumpka in Alabama, Gardendale in Nevada, and the Caribbean islands of Aruba and Curaçao.

“When I was in college, tribal casino gambling was at the very beginning of that industry,” says Sullivan, who took charge of the agency in 2005, after the retirement of his father, Richard Sullivan, who helped found the agency in 1977.

“When I got to the agency, I thought that if we got some expertise we could differentiate ourselves and build the expertise in the category to grow,” says Sullivan. “Now gaming is an incredibly large industry that has grown across the country.”

Tribal gaming, the segment of the industry Red Square is most active in, grew in the same timeline as the agency to become a close contender to the older, commercial Las Vegas-type enterprise. According to the most recent (2018) State of the States report by the American Gaming Association, tribal gaming revenues hit a record $32.4 billion in 2017, compared to commercial gaming, which was $40 billion. And tribal casinos now operate in 28 states, compared with commercial casino gaming in 24 states.

Red Square’s concept team, left to right: Pat Reid, creative director; Casey Herman, designer; Tina Phanthapannha, activity-centered designer, and John Medzerian, ACD. Photo by Ty Shaw

Along with the gaming side of this industry comes a raft of other enterprises and the separate flood of marketing that goes with it.

“You can think of the gaming industry as a retail business, as well,” says Sullivan. “They have a lot of hotels and restaurants and music, the retail side, multi-amenity properties. You’re selling a lot of entertainment, an amenity-driven property within a property.

“Foxwoods, our client in Connecticut, they have 55 restaurants and bars. Think about all the marketing that goes on. You’ve got a lot of calendars to manage, shows to sell tickets to. They are really 24-hour-a-day retail advertising clients. That creates tremendous challenges in managing the logistics. In 2018 we completed more than 17,000 pieces of creative.”

Keeping track of that work is the responsibility of Joa Pope, Red Square vice president of creative operations, who recently came to the agency from the parks division of Disney in Orlando.

“A lot of the accounts are these large promotions for casino clients, across 30 different types of media channels, on the properties or their website,” says Pope.

“Casino work, by the nature of the market, is very quick turnaround and a fast-paced type partnership with clients. If the competition is going to run a cash promotion within a range of dollars and attract the same type clientele, you have to come to their defense.”

“In 2007 we had about 24 employees, and now 75, so it has more than doubled,” says Sarah Jones, Red Square president and head of account services. “On one specific occasion, with The Cherokee Nation, we took on a much larger piece of business, and we suddenly had to hire 22 people.

“That piece of business is still a client, and for us to become trusted partners helps us keep those longer relationships. Any client can hire a vendor. We want to be hired to partner, to share information about their business. Our best client relationships come out of our viewing ourselves as a partner and not just a vendor.”

“Because of our work in the gaming category, we are able to be incredibly selective about the work we do outside of the gaming category,” says COO Elena Freed, who, besides overseeing administration and human resources is also involved in business development. “The majority of the work we are going after outside of casino and hospitality tends to be highly strategic and often digital in nature. This work is getting noticed by bigger brands, which is making it easier to get meetings with large corporations across a variety of spaces.”

Red Square conference room. Photo by Patrick Chin

One of the most recent new clients is Cedars-Sinai, in Los Angeles, where Red Square has a project helping with social media.

Red Square also is currently doing projects for Hilton Worldwide, Nescafe Canada, New York Pride, Cartelligent in San Francisco, and Swell Creative Group in Los Angeles. Current project work also includes some leading Alabama names —Austal USA, CPSI, Hibbett Sports and the University of Alabama.

Sullivan says gaming clients currently represent about 60 percent of agency business but have been a foundation for nongaming growth and new geographic territory.

“When I got here, my goal was to build a national agency, and we’re well on our way. Gaming allowed us to grow.”

Gaming clients now include Rivers Casinos, headquartered in the Chicago area, with casinos near Chicago and in Pittsburgh and Philadelphia. Red Square recently opened an office in Chicago.

From L.A. to Chicago to Connecticut, by way of Mobile, Alabama: It may not be an obvious course for building a national advertising agency, but for Rich Sullivan and Red Square, it is proving to be a strategically sound one.

Chris McFadyen is editorial director of Business Alabama.

When Do You Call in the Fraud Team?

Every company needs a fraud response plan, says Kelly Todd, managing member and the member in charge of forensic investigations at Forensic Strategic Solutions LLC, of Birmingham.

“Occupation fraud” — committed against a company by its own officers, directors or employees — “is likely the largest and most prevalent threat,” according to a 2018 report compiled by the Association of Certified Fraud Examiners.

The ACFE also reports these statistics for U.S. fraud cases:

• Average loss — $100,000
• Median duration before detection — 16 months
• Corruption — 30 percent of total cases
• Means of detection — a tip, 37 percent of the time

Nonetheless, the percentage of cases referred for prosecution has dropped 16 percent in 10 years, most commonly because the victim organization feared bad publicity.

Accounting shenanigans that prop up securities was the biggest fraud category, reaching historic highs in 2018.

Kelly Todd (right), who leads the investigation team at Forensic Strategic Solutions, reviews files with forensic analyst and investigative accountant Erica Hale. Photo by Art Meripol

According to corpgov.law.harvard.edu, in 2018, “Securities class action filings involving accounting allegations remained at uncharacteristically high levels as the trend of core filings against larger defendant firms continued.

“There were 143 securities class actions involving accounting allegations (accounting case filings) during 2018, nearly 86 percent more than the historical average.”

The report also stated, “The number of accounting cases containing an allegation and announcement of internal control weaknesses exceeded the historical average for the sixth consecutive year.”

Given all of this, the accounting industry, specifically the auditing sector, is looking for ways to reform the auditing process, where independence from the company being audited and ethical conduct is paramount.

Clive Viegas Bennett, CEO of MGI Worldwide, writes in Accountancy Age, “The huge independence edifice is built on quicksand because the auditors are paid directly by the companies they audit.”

A prime example of the issues facing the auditing world is the case involving accounting firm PricewaterhouseCoopers, the Federal Insurance Deposit Corp. and what used to be Alabama’s third largest bank, Colonial.

Earlier this year, PricewaterhouseCoopers announced that it has settled with the FDIC for $335 million over its audits of Colonial Bank, which failed during a financial crisis. The suit was related to professional negligence claims brought by the FDIC against PwC coming out of the firm’s audit of Colonial. The FDIC sought to hold PwC liable for not detecting fraud during audits of Colonial Bank, and a federal judge said the accounting giant had not designed its audits to detect fraud. An Alabama federal district court had earlier awarded damages of $625 million to the FDIC.

“I consider auditor independence to be a misnomer,” says Todd DeZoort, professor of accounting in the Culverhouse College of Commerce and the University of Alabama’s Durr-Fillauer Chair in Business Ethics. “While some auditors should be careful to manage their financial and relational dependencies on a client, I believe auditor independence is impossible in our current system. My research indicates that stakeholders are interested in auditor reliability, which flows from auditor integrity, expertise, independence and pursuit of objectivity.”

DeZoort says a quality audit “should help a client clean up financial reporting and internal control problems that, if unaddressed, can be catastrophic to a company. The audit function is there to serve the public interest and protect very vulnerable stakeholders in a very complicated and high risk reporting environment.”

DeZoort teaches a seven-step fraud risk management model that includes fraud risk governance, fraud risk assessment, prevention, investigation, reporting, mediation and, last but not least, detection, which is where Todd and her troops come in.

Todd DeZoort, accounting professor at the University of Alabama, says “The audit function is there to serve the public interest and protect very vulnerable stakeholders in a very complicated and high risk reporting environment.”

Forensic accounting, according to DeZoort, is more focused on risk assessment and investigation, while fraud prevention is the responsibility of management and internal auditing.

In her work as a forensic accountant and fraud examiner, Todd works closely with defense and plaintiff attorneys, audit committees, corporate boards and government inspector generals. Her experience in litigation consulting includes services in civil proceedings, including the calculation of economic damages in a broad range of personal and corporate disputes. Todd has testified as an expert witness in federal and state courts.

“I think one of the things that is important to keep in mind,” Todd says, “is while, yes, every company should have a fraud response plan, there really is a dividing line between companies based on their size and what they are capable of from a resource standpoint. You are going to tend to see response plans and protective detection and that sort of thing in a much larger company, because they have the resources to do it.”

Todd points out that fraud is not something that happens every day. “It is not a normal occurrence in a business.”

And while much of today’s corporate fraud may be linked to technology, technology is “having a huge and growing impact on auditing and fraud examination,” says DeZoort. “For example, we are seeing a surge in the use of artificial intelligence in both auditing and fraud examination, allowing advanced data analytics involving 100 percent of transactions rather than just traditional random samples.

“We see anti-fraud professionals conducting more advanced quantitative and qualitative data analytics with technology, including data mining, digital analysis and linguistic text analysis.”

“When we go in, or a business suspects that there is a problem, one of the first things we want to do generally is ask for mirror images of the computers,” Todd says. “So if the business doesn’t realize, or hasn’t thought through how they are going to respond to the event, how they handle the evidence, or potentially the event, they may not even recognize what could potentially be evidence, that if handled improperly, by the wrong people or just handled improperly in general, could render that potential evidence useless in a court of law.”

She says handling electronic information, handling employees and suspects can be tricky for a company if there is no plan. “And a lot of times when there is no one suspected, they may have no idea who may be involved. And so it is just thinking through those initial steps in how to deal with something that a business is not accustomed to dealing with on a daily basis,” Todd says.

Todd says her firm has been using data analytics or data mining for 20 years. “Now, artificial intelligence is really changing the landscape as far as the ability to proactively look for fraud, or just patterns of wrongdoing. I think it is going to change the accounting profession. What it is not going to do, though, is once the patterns are identified, it is not going to be able to go and investigate the fraud, and it is not going to be able to develop the evidence and interviews. While it may change the initial detection, it is not going to change the investigative part of it.”

Todd says it is important to separate prevention and detection from investigation. “Detection could happen internally in a company. But from our standpoint, because we are outside, we are typically called in when a company believes it has a problem, or they may have detected something, but they don’t have the resources to actually investigate and develop the evidence to take it to law enforcement.

“Fraud, for us, is really about looking for the footprint of the beast. Fraud leaves a pattern, leaves trends in the data, or in the financial statements or in any various financial reports. And so what we are doing, we are going in and, based on what the company may believe has happened, we work under what is known as the fraud theory approach. We form a hypothesis based on what we believe may have happened, and then we test that hypothesis through document review, collection of electronic evidence, accounting transactions, that sort of thing, and then interviewing. And we generally go from the general to the specific. As we are making our way through our investigation, we start with the big picture, and follow that trail to more specific information and eventually work our way into some kind of solution, depending on what the client is looking for. If it is looking for a confession from the suspect, then the specific is going into seeking a confession through an interview.”

Todd says there is often an “aha” moment in the investigation — when  investigators are following one path “and all of a sudden something unleashes, and we are ‘Oh my gosh, you are not going to believe this. It is this person as opposed to that person.’”

Todd says a high percentage of fraud cases settle out of court or in guilty pleas. Forensic accountants are sometimes called the “detectives of the accounting world,” and Todd says there are some key things to look for when questioning people involved in suspected company fraud.

“Forever, people thought it was about body language,” Todd says, “and while body language is important, it is only one of many ways to tell if someone is being deceptive with you. The more things that are happening across various channels if you will, speech, a tone of voice and the jittery body language, the more of those that are happening at one time, the more likely it is that the person is being deceptive. The key is to be able to identify their baseline, what is normal for that person.”

Todd says, “If you think fraud is not going to happen, you are wrong because it is, but when it does, do not take matters into your own hands, and be certain to put together a team of experts that know what they are doing.”

Bill Gerdes and Art Meripol are freelance contributors to Business Alabama. Gerdes is based in Hoover and Meripol in Birmingham.

How ServisFirst Keeps Scoring

Top management at ServisFirst, from left, CEO Tom Broughton, COO Clarence Pouncey and CFO Bud Foshee. Photo by Cary Norton

Since it opened 14 years ago, Birmingham-based ServisFirst Bancshares has remained focused on its initial game plan to keep things simple — and the numbers say that’s working.

For the fifth year in a row, ServisFirst has been honored as a Raymond James Cup winner, which recognizes the nation’s best community banks. ServisFirst ranked fourth overall of 258 banks considered for the award in 2018 and was the only bank in the Southeast chosen.

The Raymond James award was based on various profitability, operational efficiency and balance sheet metrics. Banks eligible for the award included all exchange-traded domestic banks, excluding mutual holding companies and potential acquisition targets, with assets between $500 million and $10 billion. ServisFirst’s assets stood at $8.3 billion at the end of March this year.

ServisFirst doesn’t concern itself with everything, but it’s obsessed with fostering strong customer relationships and a disciplined approach to controlling costs and pricing loans.

“We try to do just core banking,” says ServisFirst Chief Financial Officer Bud Foshee. “We make loans and take in deposits, and our board has been really good at keeping us on that path.”

ServisFirst has not taken on the risks associated with having a wealth management unit, a trust department or a capital markets group. And it has opted not to offer other services provided by some banks, such as insurance. Says Foshee: “We have insurance companies as customers; why would we want to compete with them?”

To reduce costs, ServisFirst outsources as much of its work as possible, including its core systems, all audits and asset liability management. Such services can be handled by outside vendors instead of higher-overhead employees. Since it was founded, ServisFirst has always stressed the use of technology — such as remote capture of deposits — to keep overhead low, according to Foshee.

“There are some things we do and some things we don’t,” says ServisFirst CEO Tom Broughton. “You just have to know what’s in your wheelhouse. You can’t be everything to everybody, and we don’t try to be. We try to concentrate on and be good at a few things.”

Measurements that Raymond James used to choose its Community Bank Cup winners were efficiency ratio, return on average assets, return on average tangible common equity, 5-year core deposit percentage, net interest margin and nonperforming assets to loans, and real estate owned.

All of those measurements are related to — and support — each other. In the Raymond James analysis, ServisFirst scored exceptionally high in efficiency ratio, return on average assets and return on average tangible common equity. But what, exactly, does that mean when it comes to the company’s operation?

The efficiency ratio is a valuable measurement because it shows how much money it takes for a bank to create a dollar of revenue. “It takes ServisFirst about 35 cents to create $1 in revenue, with a lot of banks above 50 cents, some are above 60 cents,” says Clarence Pouncey, chief operating officer at ServisFirst. “So, we’re about 35 percent on our efficiency ratio, which shows we’re very efficient with the capital we’ve been entrusted with.”

The bank’s return on average assets for 2018 was 1.88 percent, well above the 1.33 percent return other commercial banks reported last year, according to the Federal Deposit Insurance Corp. Return on assets is a key measurement because it shows how well a bank uses its assets to generate income.

The return on average tangible common equity at ServisFirst was 20.96 percent last year, almost double that of other commercial banks, according to the FDIC. Return on equity shows shareholders the return on their investments. Also, a higher return on equity is a sign that a bank is increasing its ability to generate profit without needing as much capital.

ServisFirst also graded extremely high on its 5-year average core deposits, which indicates a stable source of funds from a pool of loyal customers in the geographic areas it serves. The compounded annual growth rate on deposits for the five years ending last December was 18 percent, with total deposits standing at $6.9 billion at that time.

Of the measurements used in the Raymond James analysis, Foshee believes ServisFirst concentrates the most on achieving a healthy net interest margin. Having a good net interest margin requires a never-ending quest to make rates on deposits attractive enough to gain and keep customers while pricing loans high enough to create profitable margins.

Doing those things and staying competitive is easier said than done, but ServisFirst has managed to stay well ahead of the curve. The bank grew its gross loans from 2013 to 2018 at a compounded annual rate of 18 percent, and it ended last year with a net interest margin of 3.75 percent. That easily beats the 3.45 percent posted by other commercial banks last year, according to the FDIC.

ServisFirst has been able to increase its loans without sacrificing loan quality. That’s the main reason that the bank’s percentage of nonperforming assets to loans and real estate owned at the end of March was only 0.49 percent, well below that of most other banks.

“Since day one, we’ve always grown but when you do that, you’ve got to have controls in place, especially when it comes to loans,” Foshee says. “We have a very disciplined risk management platform.”

Solid loans are nice, but they must be complemented by controlling rates on deposits. “Right now, loan rates are not going up, so you’ve got to look at a way to control deposit costs,” Foshee says. “At our annual directors’ retreat in May, one of the things we discussed in our management meeting was how to control deposit costs going forward.

“If the Federal Reserve cuts rates, we’re going to have to tell our clients we’re cutting their (deposit) rates, and that’s not easy. Other banks will have to do that, too, but it’s still not a conversation you look forward to having with clients.”

Foshee and Broughton have been with ServisFirst since it started, and Pouncey joined the company a year later. Although recent interviews with them were to be based on numbers and ratios, each of them quickly segued to talking about ServisFirst customers.

“All of our bankers are customer focused,” says Broughton. “It’s just our kind of thing. Some people would call us a cult bank because we are a bit of a cult. Eighty percent of our customers come from referrals by satisfied customers. We don’t do any marketing to speak of and practically zero advertising. All we have to do is take care of our customers, and we’ll keep going. A lot of bankers spend time in meetings. We’re the exact opposite. We like spending time with clients.”

ServisFirst now has 10 regions stretching from Nashville to Charleston to Tampa. The company’s net income almost tripled between 2013 and 2018, from $52.3 million to $137 million last year. That, Broughton says, is largely because each of the bank’s regional CEOs has the same mindset regarding customers.

In considering leadership teams for regional locations, “If we talk with someone and they have a warm-chair concept, they’re not going to work with us,” Broughton says. “The main reason we won’t work with someone is if they don’t like getting out and meeting with customers.”

Charlie Ingram and Cary Norton are freelance contributors to Business Alabama. Both are based in Birmingham.

Superlative Burbs: Hampton Cove

Golf and gracious neighborhoods blend in the Hampton Cove community, part of the city of Huntsville.

The Hampton Cove planned community is part of the city of Huntsville but shares a zip code with the adjacent small town of Owens Cross Roads. The area began development in 1992 and now is home to an estimated 8,000 residents in 20 neighborhoods with about 2,000 dwellings that range in size from townhomes and patio homes to luxury estates, says Ronda Miskelley, director of the Hampton Cove Owners Association. “We attract residents in all stages of life from families to retirees,” she says. “Three of our communities have contracted lawn maintenance services.”

Miskelley’s family has lived in several of the community’s neighborhoods over the years. She and her husband moved up from their starter home as their family grew. “Once you move out here and see what a nice retreat it is, and yet is convenient to the city, you don’t want to leave,” she says. “And you don’t have to in order to scale your lifestyle up or down.”

Situated in a valley in the foothills of Monte Sano, the community is a short commute over the mountain for those who work in Huntsville but want to live in a more rural area. Hampton Cove has its own fire station, as well as an elementary and middle school. Shopping and other services are plentiful nearby. “We’re like a small town unto itself,” Miskelley says.

The community’s main entrance includes a visually striking waterfall and fieldstone springhouse. Amenities include the Hampton House, which serves as the area’s recreational facility, the Hays Nature Preserve, a multitude of lakes, a 54-hole Robert Trent Jones Golf Trail golf course and more than 20 miles of continuous sidewalks.

“We’re so fortunate to have such a well-designed community located within the city limits of Huntsville,” Miskelley says.

Kathy Hagood and Dennis Keim are freelance contributors to Business Alabama. She is based in Homewood and he in Huntsville.

Autocar Launches Severe-duty Trash Hauler

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Some might call it beautiful: Autocar’s new DC-64R, “R” for “Refuse,” offers a newly designed cab that fits any size of driver and a host of other features.

Alabama’s automotive industry puts out some sleek, stylish cars and SUVs at its various assembly plants. One automotive assembly plant that opened its million-square-foot, $120 million plant in Birmingham just over a year ago heads in a little different direction.

Autocar recently announced it would start building the DC-64R, a new severe-duty truck designed specifically for refuse applications, starting later this summer.

The company, founded in 1897, built the first U.S. truck in 1899. Its newest model was developed with insight, data and guidance from waste haulers around the country, according to Autocar President James Johnston.

“We could not have engineered a truck this good without all their feedback that resulted in innumerable improvements,” Johnston says. “We’re grateful for their help and proud to bring to this market a truck that is honestly customer-built.”

Among its features, the 64R offers a completely new cab that maximizes productivity by putting all its controls within easy reach of any size driver. The cab structure is built from a combination of steel, judiciously chosen aluminum components, and corner castings to withstand years of refuse abuse.

It has a completely upgraded electrical system meant to resist the worst conditions the refuse industry can throw at it. Autocar also says it’s also the first truck to feature ultra-high-strength 160,000 PSI steel frame rails, 24 percent stronger and lighter than the rails on other trucks on the market, eliminating the need for frame liners in nearly all refuse applications.

On the tech side, the new model has one-touch diagnostics, telling the operator or technician of any fault that has occurred and showing how to fix it.

The 64R also will be the first of Autocar’s lines to sport the recently announced company bowtie logo, reborn on its 100th birthday. Autocar builds its trucks in Birmingham and Hagerstown, Indiana.

Abandoned, Eyesore Mill in Lanett Under New Management

It took “untold hours of time and energy” by a dedicated corps of people, but the city of Lanett in June took possession of the abandoned Lanett Cotton Mills site with the help of a partnership that included the Chambers County Development Authority and the Alabama Municipal Electric Authority.

The city hopes to leverage economic development potential from the reuse of the historic industrial property. Lanett Cotton Mills opened in 1894 and was the area’s main employer until the late 20th century, according to the Encyclopedia of Alabama.

Lanett Mayor Kyle McCoy described the effort to acquire the property, which went completely idle in 2006, at a recent ceremony to mark the sale. McCoy hopes the mill site, long an eyesore and source of community displeasure, can be developed into something more fitting for its location on U.S. Highway 29, one of the most heavily traveled and publicly visible locations in the town.

As well as city and county cooperation, McCoy praised the Development Authority staff and Board President Bobby Williams and Electric Authority CEO Fred Clark for their efforts. The mill was purchased from Regeneration LLC with the help of the AMEA Capital Loan Program no-interest note of $400,000 over four years.

The site, which is now getting a thorough cleanup effort, is zoned and restricted for commercial and light industrial development.

What’s Your Credit Score? FICO Helps With Answers

Workshop participants in Birmingham gain skills to better their credit scores.

For the average consumer, there are many mysteries surrounding credit scores. What is a FICO score? Is it really necessary to monitor this metric on a daily basis, as some personal finance counselors suggest? Will a better FICO score make me a better person?

Good questions all. A FICO score is a type of credit score created by the Fair Isaac Corp. Lenders use it, and other scores like it, to assess whether it’s a good idea to lend you money. A good credit score entitles you to better interest rates, since you’re a lower risk, thus potentially saving you hundreds or thousands of dollars when buying a house or car.

A decade or so back your credit score was something you sometimes had to pay to access, usually from one of the three big companies that generated credit scores. The information is now much more available, and it pays to know your score, particularly if you’re in the market for a big purchase. They should also be checked periodically to make sure of their accuracy.

About 100 attendees picked up these tips and others in May when FICO brought its Score a Better Future event to the University of Alabama at Birmingham Collat School of Business. The credit education event featured a 45-minute interactive FICO Score education program followed by individual credit counseling sessions for any attendee who registered. More than 40 individuals opted for individual counseling.

U.S. Sen. Doug Jones, D-Alabama, delivered opening remarks at the event. Jones is a member of the Senate Banking Committee, which has jurisdiction over credit score/credit reporting issues.

For the traveling show, FICO uses participants in the FICO Score Open Access Credit and Financial Counseling program, such as Operation Hope, National Urban League and Gateway Family Solutions, as part of this financial inclusion initiative. Future events are being scheduled in Washington, DC, and Charleston, SC, along with several other cities.

While good credit doesn’t necessarily equate to a good soul, it does offer food for thought. As one attendee says, “It made me realize the factors that are contributing to my debt and my personal decisions that impact my credit score.”

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