Pittsburgh Tribune Review
December 25, 2008
Accounting sleuths swarm to track Madoff billions
Accounting teams are sharpening their pencils and preparing to pore over spreadsheets in an effort to trace the money at Bernard L. Madoff Investment Securities, which stands accused of perpetrating the largest investment scandal in history.
If the past is any indication, this group of bean counters -- call them CSIs with eyeshades -- will uncover some assets that can eventually be returned to bilked investors.
Known as forensic accountants, they will comb through the books -- in this case, multiple sets of books -- in a bid to track $50 billion that Madoff has said disappeared in one giant Ponzi scheme.
"They will be looking for records, fake invoices, cooked books, red flags, anything that doesn't make sense," says Larry Crumbley, the KPMG-endowed professor of accounting at Louisiana State University in Baton Rouge. "They will just be following the computer and paper trail, rather than the DNA."
"The first thing the forensic accountant would have to do is locate what funds are truly available," said Bob Kollar, a certified public accountant and director of the masters of accountancy program at Duquesne University's John F. Donahue Graduate School of Business.
As Madoff is said to be cooperating, the task of finding assets should be easier than if investigators had "a defiant perpetrator," said Kollar, who sometimes investigated fraud cases while at Pittsburgh accounting firms from 1983 to 2001.
Then, the forensic accountant should get federal authorities, such as the FBI to "seal off the assets, so they don't vanish twice," he said. That process would involve other federal agencies if the assets were supposedly moved off-shore, meaning recovery will be "tricky and could take time."
No one knows exactly how many forensic accountants are available to track money lost to fraud. The Federal Bureau of Investigation has 500 to 600 such accountants whose main job is tracing various types of illegal financial activity, Crumbly estimates.
Many large accounting firms, too, have accountants who specialize in tracing missing money. Several smaller firms specialize in cases such as the Madoff swindle. Lawyers who represent the investors -- charitable institutions, European banks, and individuals who lost their nest eggs -- will be hiring some of them.
The work is not easy, say those who've worked to trace Ponzi scheme money.
"I imagine there will be many, many layers of transactions," says Ken Yormark, managing director and forensic accountant at LECG, consultants in New York. "I would be surprised if we don't find (Madoff) has money someplace other than the U.S., since he took trips overseas on a regular basis."
Crumbley compares the work to eating a bowl of spaghetti. "You look at a strand and don't know where it starts and ends."
He says it's also like searching for rare coins in a garbage dump using a metal detector. "You will get a lot of false hits."
Kollar said investigators in the Madoff scheme should "just follow the cash." They should pinpoint the source and any distributions, especially "if money was relayed to parties that shouldn't have receive the funds," he said.
Forensic accountant Mike Kessler of Kessler International in New York says he usually starts at the end and works his way back to the beginning. "You track the money going backward."
Yormark likes to follow "the flow of the funds," which he says usually leads to where the funds have been used.
Yormark used this approach in 1991 when, then at Kroll Inc., he was hired to trace the assets of John McNamara, who was involved in a Ponzi scheme involving General Motors Acceptance Corp. From 1980 to 1991, McNamara, a developer and car dealer, said he was buying new vans and other vehicles, modifying them, and shipping them overseas for sale. GMAC would fund the purchases of the vehicles.
However, there weren't any vehicles, although McNamara had told GMAC he was buying 40,000 vehicles per month. "He was their best customer," recalls Yormark.
By the time the scandal was revealed, GMAC was out $436 million.
In tracing the assets, Yormark found much had gone into purchasing real estate, plus a gold mine in Nevada. GMAC got some of its money back, but Yormark is not certain how much.