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Select Roles of a Forensic Accountant
W. Stephen McConnell 1, JD, LLM (Taxation)

The Journal of Forensic Accounting, D. Larry Crumbley, Editor in Chief, defines “forensic accounting (as) accounting that is suitable for legal review, offering the highest level of assurance, and including the now generally accepted connotation of having been arrived at in a scientific fashion.” This is fine as far as it goes, but I would suggest some elaboration of the term “accounting.” Accounting is not just limited to the accumulation, classification and ordering of numbers in a prescribed format. The more expansive definition includes analysis for some particular purpose and, in the context of forensic accounting, the particular purpose has legal consequences.

This piece is intended to describe a few of the assignments the writer has undertaken during the past twenty years. I admit to selecting these scenarios that I believe will be interesting to the reader. The names, legal proceedings and citations are omitted for proprietary, privacy, or lack of memory purposes.

An insurance claim by a commodities broker for several millions of dollars was filed in the early 90’s for stolen gold. The insurer referred the claim to the adjuster to do an analysis of transactions in gold of this particular claimant over a several year period. We examined the relevant books and records of the claimant, comparing the purchase orders with delivery receipts, sales records, bank deposits and expenditures, customer orders and receipts for delivery to them. The practice of the broker was to purchase gold from refiners, jewelers, and similar sources, have it melted down to findings or bars, ship the commodity to the broker’s secure location for marketing and delivery to customers. The alleged theft took place from the “secure” location where someone supposedly broke in, cracked the safe and escaped with the goods. Our examination audit showed two things; this broker was the worst business man the commodities industry had ever seen; and there was a serious discrepancy between the gold coming in and the gold going out of the secure facility, long before the alleged theft. Based on our work, the claim was denied and the broker brought a law suit to recover under the policy.

We were all pumped up for the trial and ready to go. A few months before the trial had been scheduled, the Federal law enforcement officials approached us to find out about our findings which, of course, we shared with them. Big mistake! The government prevailed upon the court in our case to postpone the trial. Then the broker voluntarily dismissed the lawsuit. It turned out the broker was laundering money through the brokerage business for some bad folks, thus the poor business results. He had been skimming gold from his own operation for some time and his “backers” became suspicious, thus the fake theft to explain the discrepancy. The broker turned on his backers, became a government witness, was granted immunity, and told to drop the insurance case claim. Of course the insurer won the case but was never able to collect the several hundred thousand dollars in defense costs because of the governmental intervention.

I was engaged to examine a number of trustee transactions over several years. A lawyer had written a trust naming himself as trustee of a fund set up for a young woman. At the same time, he prepared a will for her naming himself as executor and a durable power of attorney granting him the authority to act on her behalf. Her complaint, other than the overt conflict of interest, was that he had done some self dealing with the trust where he had sold the trust some investment real property he owned. He had also charged some fairly substantial fees for managing the trust and making investment decisions.

We went through his accounting and compared them with the trust transactions from the statements provided by the brokerage house he chose. This analysis showed he had been churning the account, that is, buying and selling the same securities over and over again without any apparent reference to market trends or values. We also uncovered the fact that he had been a registered representative with the brokerage firm and had been receiving compensation based upon the volume of purchases and sales of his accounts, one of which was the trust. Further investigation uncovered some licensing problems he had with the Securities and Exchange Commission, including some complaints about his conduct as a registered representative. These findings were documented, assembled in a report and provided to the client. I wish I could say she used the information provided to obtain some good result. I cannot. She did not discuss how or to what extent she used the report. This was her prerogative since she paid for the effort but it sure would have been nice to hear how he got his just desert.

The last experience I want to share involves a divorce. The former husband is a lawyer with a moderately successful practice. During the divorce, both parties supplied their financial affidavits which are supposed to set out the assets, liabilities, income and expenses of both parties. Since the husband stated his income from the law practice and investments under oath and this information appeared superficially commensurate with his life style, I thought the former wife, my client, was probably over reacting to her suspicions of his misrepresentations. She had, however, subsequent to the divorce, come across some financial information which she thought might be relevant to the issue of his truthfulness in his affidavit.

By examining this financial information, including some representations on tax returns and financial statements given to prospective or existing lenders, including the period covered by his financial affidavit within a month, it showed a number of inconsistencies. He had understated his income from his law practice by as much as fifty percent. He simply failed to include a number of investment properties he had owned on the date of his affidavit. There was also a violation of the Marital Settlement Agreement where he had misapplied a portion of several years’ alimony payments. Based on this evaluation and analysis, the former wife has reopened the divorce to try and correct the omissions of the former husband.

There are other cases, one where funds were diverted from a corporation for the personal benefit of the controlling shareholders. There was another case where partners in an insurance agency were not getting their share of the agency’s commissions. My wish is to empress upon the reader that forensic accounting may, and often should, play a role in disputes where money is at issue. Knowledge of the law, especially evidentiary law can be very helpful to the forensic accountant and, ultimately the client. Often, a good solid report works wonders in persuading the offending party to settle, saving substantial sums in fees and expenses. That often means a win – win situation for both parties.

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1 McConnell is a Forensic Accountant practicing in the Tampa Bay Area. He has two degrees in Law, a Juris Doctor from American University, where he was Editor in Chief of the Law Review, and a Master of Law in Taxation from Georgetown University. Since the early 90’s, he has performed analyses of diverse transactions having legal implications, such as loss claims on gold transactions for members of the Lloyd’s of London insurance syndicate, alleged trustee fraud in handling trust funds, alimony, child support, and equitable distribution in family law matters, as well as testifying as an expert in tax and accounting matters in Florida Circuit Courts and Federal Bankruptcy Court matters.