Forensic accounting: CSI for the number-crunching crowd

Eric Stephens, managing director of Minneapolis-based Intellex Forensics, started his career as an accountant in a foreign office of an American company. When he discovered fraud by colleagues, he was shocked. "I was a 24-year-old kid who grew up in Wyoming. I wondered where were their values," he said. "It only expanded from there." He turned to forensic accounting, helping clients find and prevent wrongdoing. An expert in the Foreign Corrupt Practices Act, or FCPA, he still often works overseas.

Q: What is the difference between forensic accounting and regular accounting?

A: Conventional accounting is more a function of balancing the books and with a goal of producing accurate financial statements. Forensic accounting provides a more in-depth analysis of the underlying data with a goal of detecting or investigating fraudulent activity. For instance, in a traditional accounting setting, the cash account would tie to a bank statement and be reported on a balance sheet. In a forensic accounting arena, many areas would be investigated, the source of funds, the movement of cash, the veracity of the underlying data — is it really liquid or illiquid, and does it consist of U.S. currency or non-U.S. currency? The result of those questions, may lead to a set of questions surrounding, for instance, FCPA violations, money laundering, or any number of other potential risks.

Q: How often are you called before a company discovers fraud?

A: A small percentage overall is serving proactively. A client calls us for an initial discussion, "We have offices here, here and here," and they simply want to stay out of trouble. That's usually from a company that has expanded quickly or is perhaps in a new arena. For example, a local company contacted us that was expanding in Brazil. In this case, they said, "We're opening in Brazil. How do we stay clean there?" In this case, we saw the client was already being asked to do something that was in violation of U.S. FCPA standards. We helped initiate a compliance program for that new office.

Q: Is there much call for this more intensive type of accounting investigation?

A: Where there are opportunities for profit, there are opportunities for other kinds of business, including the risk mitigation and proactive consulting that we do. Certain parts of the world are certainly more attractive now. Asia, specifically China, where there's been widespread growth. We've seen an influx of American interests in Chinese operations. The American economy has become very risk focused, with the introduction of Sarbanes-Oxley, the Dodd-Frank legislation, FCPA, anti-money laundering rules, and the U.S. Patriot Act to name a few. On a global scale, U.S. firms still have to comply with U.S. standards and that presents somewhat of a challenge when doing business in countries where corruption is widespread. It works in the other direction as well. For example, during our market downturn in real estate, we saw an influx of foreign interest in U.S. real estate. This presented opportunities because banks and mortgage providers want to make sure that the source of those funds is legally obtained.

Q: It sounds like there's a lot of detective work beyond just looking at bank statements.

A: There is a substantial amount of investigation. Let's say we're serving a client and looking at financial statements and we're not satisfied with the data, we request source documents from the bank itself. In this age of easily manipulated documents and Photoshop, we prefer to look at original documents. Then, underlying the investigative work, there's a tremendous amount of analytical work.

Q: Is Minnesota any different from other places in corporate crime?

A: We don't see that Minnesota is impervious to any of the issues that we experience worldwide. Money amounts differ, however the subject matter is usually repetitive. Employee embezzlement, credit card fraud, money laundering. It really is across the board. One matter we experienced in recent years was a small town business, privately held, two partners involved. The partner responsible for accounting had stolen approximately $163,000 from the business, of which she owned 50 percent.

Q: How do your clients identify fraud or problems with employees in the first place?

A: The signs are sometimes very clear. Departmental expenses increase without explanation, new vendors may be introduced or an employee responsible for procurement appears to live a lifestyle well outside of his or her income level. We were recently called to investigate a situation where a corporate purchasing agent with an annual salary of $100,000 purchased an $80,000 car. This person joined the country club, took expensive vacations and advertised his activity on social media. Colleagues got suspicious and ultimately blew the whistle.

Evan Ramstad • 612-673-4241