Monday, May 16, 2005

 

Kroll Lindquist Avey: Forensic Accountants are Gomery inquiry's fraud bloodhounds

Fighting crime one invoice at a time

The Montreal Gazette Monday, May 16, 2005

They're part bean counter, part gumshoe. For a year, forensic accountants from the firm Kroll Lindquist Avey have beavered behind the scenes at the Gomery sponsorship inquiry, poring over millions of documents, hunting down witnesses and feeding ammunition to inquiry lawyers.
Before the month is out, those sleuths take the witness stand.
Canadians have heard piecemeal testimony about a system allegedly involving fraud, kickbacks and money laundering. Now, the accountants will connect the money-trail dots, detailing how $100 million in taxpayer money went to Liberal-friendly firms and Liberal organizers.

Kroll's accountants are trained to ferret out wrongdoing. "A regular accountant is a bulldog - a guard dog," said Larry Crumbley, editor of the Journal of Forensic Accounting. "A forensic accountant is more of a bloodhound, sniffing around, following trails, getting into the guts of an organization and looking for red flags, for small peculiarities that will point out someone is cheating, someone is taking money."
Crumbley, a Louisiana State University accounting professor and author of a series of thrillers whose protagonist is a swashbuckling forensic accountant, recalls how such an accountant found it fishy when he came upon a $125 utility bill paid by a large company. From that thread he unravelled the truth: the company was secretly supplying a luxury home for its CEO.
In the sponsorship program, too, everything was not what it seemed. Invoices were mysteriously altered to boost amounts, companies billed Ottawa for workers who did no work, payouts to Liberal organizers were camouflaged to hide the sources.
There were fictitious bills, dummy companies, slush funds for secret payments to Liberals and cash for Liberal firms for minimal or non-existent work.
The forensic-accounting testimony is highly anticipated because Kroll Lindquist Avey is the Canadian go-to firm for deciphering financial shenanigans. It's a division of New York's Kroll Inc. Known as Wall St.'s private eye, it employs the world's top financial analysts. They have worked on finding assets hidden by Saddam Hussein, former Philippine president Ferdinand Marcos and former Haitian president Jean-Claude Duvalier. They also helped sort out the Enron scandal.
Kroll's crack financial detectives are part of an exclusive breed of high-priced accountants who are in high demand to deal with everything from divorcing couples hiding assets to major corporate malfeasance.
Business latched on to forensic accounting after a wave of financial scandals toppled such corporate giants as Enron and WorldCom. But governments have long delved into finances to catch bad guys.
"Al Capone, criminal that he was, was nabbed for tax evasion" uncovered by forensic accountants, notes veteran forensic accountant Richard Wise, whose Montreal firm - Wise, Blackman - works in Canada and the United States.
Wise hasn't brought down any crime figures, but he pointed to some of his cases involving wealthy businesspeople to illustrate his specialized work.
Take a divorce case. "In the better days, the husband is bragging to the wife how much money he's making but when it comes to a divorce, it's the doom and gloom," Wise said. So he once picked through the credit-card receipts of a communications consultant who, in divorce proceedings, claimed he was close to bankruptcy.
"If I see on the guy's credit-card statement a lot of charges for the Movenpick on the Bahnhofstrasse in Zurich, the guy was there and that's where all the Swiss banks are," Wise said. "What's he doing in Zurich for the day? Maybe he's banking."
That clue led Wise to more data that helped satisfy him "there were offshore funds," he added.
In another civil case Wise was involved in, he testified owners of a bowling-alley chain hid hundreds of thousands of dollars of business revenue annually. As part his accounting work, Wise went undercover, visiting one of the bowling alleys with his wife and children. Wise got suspicious when he tried to use his Visa card to pay but the place did not take credit cards. A cash business makes hiding sales easier.
So he compared the company's revenue with accepted industry standards and discovered that despite its status as a major player, the company was ostensibly doing very badly - yet it was investing heavily in its operations. The judge who heard the testimony agreed with Wise, ruling the owners had "substantial unreported income."
Governments can be as good as mobsters, corporations and divorcing spouses at accounting sleights of hand, experts say. Crumbley points to estimates that fraud eats 10 per cent of government spending. Crooks involved often rationalize their behaviour. "It's not their money, it's taxpayers' money, so who cares if it gets stolen," he said.
The problem: "It's very, very difficult to catch fraud," Crumbley said. "It's like taking a metal detector to a garbage dump looking for rare coins - you're going to get a lot of false hits. It's time consuming and expensive and society is unwilling to pay for it." Forensic accounting also can be excruciatingly boring for the people doing grunt work such as going through piles of paper.
The labour-intensive nature of such accounting is part of the reason it's costly to hire Kroll, some of whose 3,200 employees worldwide are plucked from the FBI and the U.S. Securities and Exchange Commission. The Gomery inquiry paid Kroll $1.5 million for its first four months of work last year. An updated figure is not available.
At the peak of their work last year, 30 Kroll employees were working around the clock, seven days a week in Montreal and Ottawa, sifting through paperwork. The number has dropped since then but Kroll workers - whose expertise extends as far as piecing together shredded paper - are still meticulously examining reports, invoices, cheques, e-mails, letters, memos, faxes, telephone logs and computer hard drives from government offices and from companies with which Ottawa did business.
For one company whose executives testified last month, Kroll went through 450 boxes of documents. Of that, the inquiry used as evidence only 20 binders, each featuring about 200 pages. (So far, Gomery lawyers have tabled more than 400 such evidence binders at the inquiry.)
"Documents aren't necessarily filed in proper order and (Kroll) gets information from different sources and has to methodically organize it," said inquiry spokesperson Francois Perreault. (Kroll officials would not be interviewed for this story.)
Once the files are organized, there's more painstaking work. Wise, the accountant, uses a $10,000 payment as an example. A forensic accountant "spreads a big net, looking at both sides of such a transaction," he said. "The first thing you say is: 'OK, $10,000 was paid to Company X, now what's this for? Where are the documents supporting it? Is there a purchase order? Is there a contract? Where's the authorization?' Then, the investigator looks at: 'Who is this other company? What services were rendered? Is it a dummy company offshore? Is it some numbered company formed by somebody related? Who's the owner? Did it comply with the contract?' "
Even before Gomery hired Kroll, the firm knew the sponsorship program inside out. In a review done for the government in 2002, it found hundreds of sponsorship contracts violated bidding rules. Kroll spelled out a pattern of mismanagement and rule breaking, including over-billing, double billing and billing for work not completed.
At Gomery, aside from deciphering transactions, Kroll also provided in-the-field detectives. "They have people out there meeting individuals, trying to get confirmations of events, conversations, meetings" so inquiry lawyers can prepare for witness testimony, Perreault said. Even as witnesses are testifying, Kroll investigators are "providing us with some interesting documents, last-minute documents that we could produce as evidence," he said. "Sometimes, because of what they found, we changed the order of witnesses or recalled some witnesses.
"All along, they keep discovering information that is useful for the examination of witnesses." On the witness stand, Kroll's accountants will be expert witnesses, Perreault said: "They'll explain how much government money was spent, how it was spent and what Ottawa got."

(source: gomery commission, photos by the gazette, compiled by andy riga of the gazette)

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