Calgary Herald

November 22, 1999

ACCOUNTING SLEUTHS PROFIT FROM CORPORATE WRONGS

Michael Kessler was hired by Monsanto Co. to track down a sweetener counterfeiting ring. Fake packages of Equal, the St. Louis-based Monsanto's sugar substitute, were showing up in stores from Minnesota to South Carolina. The 49-year-old forensic accountant uncovered a clue to the source, not in the ledger books but in the trash. Staking out Haskel Trading Co. in Brooklyn, N.Y., he found bogus boxes of Equal buried amid crates and cardboard in a bin outside.

Such sleuthing is a booming business for Kessler and other forensic accountants, who charge about $300 US an hour for investigative work, a third more than for audits.

They're riding a wave of corporate crime from cooked books and hacked computers to infringed copyrights and old-fashioned theft. "This is without doubt one of the fastest-growing areas of our practice," says Frank Piantidosi, head of the investigative group at Deloitte & Touche.

Fraud of all types cost U.S. companies more than $400 billion last year, reports the Association of Certified Fraud Examiners. Investors sued 235 corporations for securities fraud in 1998 -- a record number -- according to the Stanford Securities Class Action Clearing House at Stanford Law School in California.

The Bank of New York Co. says it has hired investigators from the accounting firm KPMG LLP to determine whether a Russian crime syndicate laundered as much as $10 billion through the bank, as U.S. law enforcement officials allege.

And for months, scores of accountants have combed documents at six insurance companies for clues to hundreds of millions of dollars that vanished with Martin Frankel, according to state regulators. German police captured the money manager in Hamburg in September after a global manhunt, but investigators still don't know how much money is missing, let alone where it is.

Big Five accounting firms like Arthur Andersen LLC, Deloitte & Touche and KPMG are expanding their forensic businesses, units that are often part of what executives call "litigation support services" or "dispute resolution".

Deloitte has added at least 75 people to its investigative unit, including more than two dozen former agents of the U.S. Federal Bureau of Investigation, the U.S. Central Intelligence Agency, federal prosecutors and the Royal Canadian Mounted Police. At KPMG, the New York forensic practice has grown to 90 people from four in the past five years.

In the past, forensic accountants were little more than glorified insurance examiners. An insurer might, for example, hire an outside investigator to value a factory flooded by Hurricane Floyd. Now the sleuths are landing work because more companies are suing each other, or being sued by their shareholders.

Cendant Corp., formed in 1997 by the merger of CUC International Inc. and HFS Inc., held the dubious honour of being the most frequently sued company last year, according to the Stanford Law School study published in January. The franchising and discount-shopping company, based in Parsipanny, N.J., was the defendant in at least 70 class-action complaints.

The suits alleged that former CUC executives booked fictional revenue and used money set aside for merger-related expenses for other things. Cendant itself sued the accounting firm Ernst & Young LLP for certifying allegedly false financial statements from CUC.

"Blame the lawyers," says Steven Bankler, the investigative accountant for the U.S. Senate Whitewater Committee. "We're a litigious society and that is a big reason why forensic accounting is a boom business."

Bankler isn't complaining. His San Antonio, Tex., firm charges $300 an hour. He says big firms often charge more. Some accountants come to the field with specialized training in computers. They say the ability to retrieve and secure electronic evidence is increasingly vital to solving white-collar crimes.

"Ten years ago only the geeks had access to computers," said Lorraine Horton, a 44-year-old investigative accountant who teaches courses in accounting computer systems at the University of Rhode Island. "Now everyone has access and can hack in for nefarious purposes."

Stephen Silver, the partner in charge of business fraud in the Midwest for Arthur Andersen, said he hires people from the FBI, state police forces or district attorneys offices.

"You've got to have experience with wrongdoing. Spotting clues is a knack some experts say can't be taught. That is especially true with some accountants, trained to believe that numbers don't lie.