Forensic Accounting is primarily just delving into the details, going to sources of the transactions, and making sure those are what has been recorded and/or used in business transactions or in a divorce arena, that those particular assets are existing or are there other assets. So we do a lot of tracing of transactions to hopefully get all the transactions put together in a format or a summary that makes sense for whatever the project covers. In one case, it’s really interesting and certainly eye-opening, as I went through it and, many times, led me in some directions that were uncomfortable, dealing with personalities, but this was an employee benefit client that had a significant investments. Digging into this estate issue? A situation where two beneficiaries, equal beneficiaries of an estate, and parents passed. The one child of the parents was a trustee, and so this trustee made numerous withdrawals to her benefit. It was a woman in this case. To her benefit and to the detriment of her sibling. So we had to go back and figure out where the money came into the trust, where the money came out of the trust, and then subsequently into the estate.
An initial client interview easily would take us an hour or hour-and-a-half and be just kind of a fact-finding mission on our part, to really delve into what they’re after and what the issue is. It is an agreed-upon procedures type of engagement, where we outline what we would do, why we do it, and what the results would be and how we would summarize and provide that information to the client. Three broad categories: estate beneficiary, the business owner, divorce arena. Contractor case study: Two contractors and one contractor felt there could be job costs on that particular joint venture, coming from the other contractor, that were not on their joint job.
What are the one or two things that they should have uppermost in their mind about engaging forensic services? What are the things they need to be aware of and think about? Independence of that forensic person. They really want somebody that’s got experience because, obviously, experience can mean you can do it effectively and timely, so that you’re not spinning your wheels. Misconceptions about the forensic accounting? They don’t realize the nature of a lot of the transactions that they’ve looked at or been involved in. I think it’s just probably incumbent on them to, again, engage someone that has experience and exposure.
Listen to the podcast:
Bill Sanden, CEO FM Consulting, Forensic Accounting, 3 key areas
We’re lucky to have Bill Sanden. He’s the former President of SSA and currently CEO of FM Consulting. Bill has extensive experience and specializes in audit and insurance, employee benefit plans, forensic accounting, and consulting. FM Consulting serves the needs of the business owner, beneficiaries of estates in the divorce arena. Bill is a certified Public Accountant in both Colorado and Utah. He’s a member of numerous professional and local associations and has served in many positions in the Colorado Society of CPAs and the Colorado Springs Chamber of Commerce. He currently serves as Bank Director and Board Member of the Colorado Educational and Cultural Facilities Authority. Bill, thanks for taking the time. Bill, tell us a little bit about yourself.
I’ve been primarily an audit partner for many years and throughout that experience, I’ve got a lot of fun experiences and some not so fun but at this point, I wanted to change my career a little bit and simplify my life. I’ve gotten into looking at doing consulting in the forensic accounting arena and I’ve done some of that. It certainly is part of my role at SAA, but now I want to pursue that specific area going forward.
I’m thinking of forensics and I’m thinking of the TV shows, which are those guys. For the folks that don’t know what forensic work is in the accounting arena, what is forensic work?
Primarily delving into the details, going to sources of the transactions, and making sure those are what has been recorded and/or used in business transactions or divorce arena that those particular assets are existing or are there other assets. We do a lot of tracing of transactions to hopefully get all the transactions put together in a format or a summary that makes sense for whatever the project covers.
We were talking about your experience when you were with SSA, that you went into a couple of forensic situations and one had to do with a relatively sizable Ponzi scheme. Can you walk us through that moment when you got called in and when you started to discover what was going on? What was that like?
This was interesting and certainly eye opening as I went through it and many times led me in some directions that were uncomfortable dealing with personalities. This was an employee benefit client that had a significant investment in an investment firm that dealt with a lot of unconventional investments. Their rate of return was significant, and a lot of other clients went in with that idea of getting their pension fund built up, using this investment with higher returns. It came down to, in my situation, providing an audit for that employee benefit plan where I was not comfortable with the information I was getting from this investment, a firm out of Oregon. I finally came to the conclusion that I could not give an audit report on that particular investment because I didn’t have adequate information.
About the time, we started unraveling a little more. Our friends with the government came in and took over this investment operation. We discovered a lot more issues once the wrapper came off. It was interesting to go through it. I got involved in the arbitration on behalf of my client. It was settled with an arbitration, which is amazing to me because of the amount of losses or the amount of investment in this particular portfolio. My client was over $40 million, and this was one of the clients, so it was about a $900 million purported investment. We unraveled a number of things and used some former FBI agents. It was very interesting and fun in that sense of dealing with that. When it’s not your money, it’s okay to have fun trying to uncover the problems and the frauds that were involved. The good thing was the recovery was about 75% on that investment, so we were able to get into the weeds and find the investments and marshal those and get those put together. This was a global settlement, but very interesting. At the time, this was the biggest pension or employee benefit scam, a Ponzi scheme, which was subsequently eclipsed by Bernie Madoff. For me, it was the biggest and for awhile, it had a lot of notoriety in our circles anyway for being on one of the largest Ponzi schemes. It’s now number two, which is sad in a sense that there’s still someone out there trying to do that.
I think about those things and I think about the genesis of the idea and maybe somebody should look and to the fruition and final. How long did that take?
Usually, because of the amount of transactions and the record-keeping, it takes quite awhile to get those all in perspective, get access to them. In many cases, that’s a big issue. Getting access to original records sometimes is difficult, but the Ponzi scheme took over six years. One local estate issue has taken over a year because of the number of bank accounts and getting access to those.
You mentioned the employee benefits side. For some of the folks, maybe that doesn’t resonate too much, but all of us, one way or another, may or may not be the recipient of assets from a family member at some point. How did that come to be where you were digging into this estate issue?
We had a situation where two beneficiaries, equal beneficiaries, of an estate, and parents passed, and the one child of the parents was a trustee. This trustee made numerous withdrawals to her benefit and to the detriment of her sibling. We had to go back and figure out where the money came into the trust, where the money came out of the trust, and then subsequently into the estate, so we had both a trust and an estate that we had to go through and follow the transactions to the ultimate recipient. There was a significant difference over those years in one beneficiary versus another beneficiary. We’ve unraveled that. This was a case as in quite a few of these to where we work hand-in-hand with the attorneys involved. In many cases on both sides, some cases in divorce. It’s adversarial, and so you’re working on one side versus the other, but in a lot of the larger cases, you’re working for a trust, for an estate, for a corporation or business and it’s a fact-finding adventure in many cases to get to the result.
I like your description of the fact-finding adventure, and every year around tax season, that doesn’t feel like a fact-finding adventure when I have to assemble all the information. Everybody finds it where they find it.
Oftentimes, we don’t get a lot of cooperation in these matters. Getting access to some of the records, we usually find that we need more records as a result of finding what happened in one situation. We then go off in the other direction to figure out where all the tentacles of that transaction ended up. In a year-long estate engagement, that was what happened a lot of times. We had to track investments. Where did those investments go? Did we have overseas investments that got out of there? One of the parties alleged that they were perhaps out of country investments, so we had to fine tune our review of that to make sure we tracked all the in and out transactions of their assets.
For the audience, there might be that somebody says, “I need to talk to you, Bill. I think I have a problem.” How do they find you, Bill?
Probably two ways. They would come to the firm and a lot of times, they come because they’ve heard that we do that type of work. Another instance is we get referred by attorneys that are in the midst of working with that business, that estate or an employee benefit plan that’s had issues.
For the folks that want a take and reach out via email, what’s your email or social media that they can find you at?
Email is my standard. My email address is BillFMConsultingLLC@gmail.com and I can be reached there. Cell phone certainly is the other avenue that I use quite a bit because I do a lot of work out of the office in other offices or environments, so cell phone is the best way to reach me quickly.
What is that phone number?
As you’re heading out of your office to go do some work in the field, what should a potential client expect when you first meet them? What type of questions should they expect to find offered to them?
A lot of the questions come from us on that initial interview in terms of finding out what needs the client has in terms of answering their questions or issues. We try to delve into getting their questions or concerns addressed in the initial interview, so that we know what we’re dealing with and can give them some idea of what’s involved to get answers for them. An initial client interview easily would take us an hour or hour and a half and be a fact-finding mission on our part to delve into what they’re after and what the issue is.Many times at the estate level when you get at that point, marshaling the assets can be difficult and widespread. Click To Tweet
Let’s say that I’m that client and we had our initial interview last week and I elected, “It sounds like there’s something I need to find out,” what would then be the next step to engage you? What does that look like?
We would provide an atypical engagement letter that would outline what we would do and what our goal is and what we would provide as a deliverable to that client. A lot of times, that’s an agreed upon procedures type of engagement where we outline what we would do, why we do it, and what the results would be and how we would summarize and provide that information to the client.
You said that there were three types of broad categories that you specialize in. The first one you mentioned was the estate beneficiary’s side, which you touched on. Are there other things with respect to the estate side that would be subject to forensic accounting?
Many times at the estate level when you get at that point, marshaling the assets can be difficult and widespread. In some cases, we’ve assisted a client to gather all those assets, get valuations done, if that’s necessary, if it’s real estate or something that needs appraisals, so that we can provide both at gathering process and then provide that information for the estate which culminates into a tax return in most cases.
You mentioned the estate side, which we’ve dug into, and then there’s the business owner. What in the business arena typically do you find where they would engage you?
Probably when there’s a disagreement or a dispute involving business contracts or something of that nature. In my public accounting life, we have a lot of specialized knowledge in construction, mechanical, electrical, general contractors. We’ve had a couple of engagements to where we do what we call a job cost audit to where if there’s questions from an outside party or an inside question between a couple of owners, we will go in with their direction and verify the costs on a particular job. We had a joint venture with two contractors, and one contractor felt there could be job costs on that particular joint venture coming from the other contractor that we’re not on their joint job, and that was, in fact, the case. Run a gamut of whatever questions a client or a business might have, we can address those and again see if we can be of assistance to find answers to questions.
As I talk to any number of business owners over time, it seems like all of them had one instance of fraud or another, whether it’d be a partner or whether it be an employee or some other event. If I’m out in the audience and I suspect that there’s something going on and I reach out to you, how confidential does that discussion have, and at what point in time does that discussion go across all the owners of a business?
Typically, the conversation we have with whoever raises the question, we would be in privity with that person. Depending on the question or the situation, we may go and go forward to be engaged by the company to delve into that matter. If there are other owners that have the same question or issue, that would usually be the case that the corporation or partnership would engage us to go into the issue in detail and see if there is in fact a problem there. It does get perilous at times because if there are problems between two partners, they may not communicate. They may not see a company benefit and be personally entwined so that we do have to very carefully watch how and who we engage on those projects.
I would imagine, like many things, it gets complicated as soon as people disagree.
It does. We’ve had one recent case where an off-duty policeman was a part of our team going in to discuss the issues.
What role did the off-duty gentlemen play?
He was the bouncer, which is a first for certainly me to be involved in a situation where it was concerned to be volatile. The one partner was not probably going to go quietly, and personalities play into that, and so that was decided by the other partner that he would have an off-duty policeman come in for the discussion and he would lay out his plans for going forward, which were very different from the way the company had been run in the direction. It was an interesting and fairly short discussion, but you never know. If there was concern, that’s very valid to do that because if it’s each other’s livelihood, there’s a potential chance for volatility and concern. It’s well to be armed with that knowledge ahead of time and make whatever arrangements might be suited to the situation.
That’s professional risk management and that makes some sense. Going into the volatile discussion, there’s one other area that you specialize in and it has to do with the divorce arena. Walk us through that thought process.
On the divorce side, we have usually worked with either one side or the other through the attorney to gather certain details, be they investments or records that haven’t been offered. Sometimes, we have to go through banks or investment houses to get a lot of that information and go around when it’s not offered or supplied. We typically are in the background on most of the divorce situations that we’ve been in doing the document-gathering process. If there’s concern about assets that haven’t been listed in divorce disclosures, we’ll go through that and see if there are undisclosed assets.
You also get involved if there’s a benefit package for one of the soon-to-be ex-spouses where you’re trying to evaluate the current. Can you touch on that a little bit?
That used to be a real difficult area or more difficult area than it is now. Most of the retirement assets or investment assets are typically listed; securities, stocks, bonds, that sort of thing. That’s gotten to be a lot easier. We haven’t seen a lot of cases lately that involve hard to value, hard to locate assets because most people in the mainstream have those assets in brokerage houses or banks, so we can readily determine those. Personal property gets sticky, but we typically get that done through either the marriage arbitration process or the attorneys will lay that out and sometimes leave them in the room to come up with a division that they’re comfortable with.
We’ve talked about know the various areas that you work in and your experience in the past. I thought it might be interesting to go through maybe a short case study on each of those three areas, the estate side, the business side, and the divorce side. Without naming names or divulging information, can you go through, for instance, what we’re trying to do is paint the mental image of how you fit into those, so folks can draw that parallel in their mind?
Probably the easiest one, which we did spend some time on earlier, would be a trust and estate situation to where one party was frustrated with distributions in income that they receive and knowing that the other party received more. That can happen in a situation that we have to go in and find those transactions. Probably what we want to have happen is total cooperation, but a lot of times we don’t get that cooperation, so we have to make that cooperation through the attorneys. In this case, attorney for each side wanted someone outside of their trust beneficiary’s realm to come in on an independent basis, and so we were selected by the two attorneys to come in and provide that service of searching and verifying the allocation or the lack of allocation of those trust assets.
The trust situation, does it have an effect if one or the other people are either co-executors or one is the executor and one is not?
That was the case here, which one party was a trustee on the trust and that can be problematic. What we unfortunately find when that happens is that that executor, co-executor or personal representative who’s also a beneficiary gets a lot of control of assets. We see a lot of times to where there’s some greed that comes out in that process and a lot of explanations for what they’ve done, but certainly to the detriment of the other sibling or beneficiary.
Thinking past the estate, can you do a case study discussion on divorce and pros and cons of being involved? When you guys are done with the forensic work, does that help and level the playing field when you’re done?
It makes the playing field in a lot of cases rather than level it because when we get called in, there’re usually questions as to where those assets are and what they are sometimes. Thinking back, one had a lot of real estate partnerships involved to where one of the spouses was very active in developing real estate, rental projects, and apartment buildings, so getting all those pieces pulled together and verifying the numbers, the cash flows, verifying the balance sheets and income statements on those properties was vital to come up to a settlement number with that type of asset.
If I’m an attorney that works in this marketplace, what are the one or two things that they should have uppermost in their mind about engaging forensic services? What are the things they need to be aware of and think about?
The first thing is independence of that forensic person. In Colorado Springs, a lot of the attorneys work together on various cases throughout the years, and so it’s important to have a totally independent party that’s not had relationships, business relationships, with either party or any of the parties involved to come in and provide those forensic services, so there’s no issue with regard to independence and how that comes to a conclusion. The other is experience and exposure to that particular segment, if you will, of auditing that you’re looking for those issues, you’ve looked and found many issues in various situations, and so experience is another big factor that should play into that.
If you’re a corporate trustee of an asset, do they have the similar thought process as an attorney does if they want to engage your service on behalf of perhaps a beneficiary?
They typically do. The independence in that situation is vital as well. They want somebody that’s got experience because obviously experience can mean you can do it effectively and timely, so that you’re not spinning your wheels and you know where to go to get what type of information because you’ve been there and done that numerous times.
As I think about the forensic world, I suspect that it’s not that well known about and talked about. What do you think are the top one or two misconceptions that folks have about the forensic space?
In a lot of situations, they don’t realize the nature of a lot of the transactions that they’ve looked at or been involved in and getting them that information and going through an explanation as well as providing them with a report is critical to them understanding what you’re doing. It’s incumbent on to again engage someone that has experience and exposure. On the corporate side, a lot of times they may have internally people that do that. A bank trust company for example, they may have some of their internal staff as internal audit that do some of that, but I think in a lot of cases, they do that to an extent to gather and short cut the time and then they go out and find someone independent to work to a conclusion on it.
Bill, we talked about the value that you bring to the business owner that’s possibly looking at acquiring another business. Can you walk us through the thought process of what you do for somebody that’s looking at potentially acquiring another business?
We’ve done numerous due diligence engagements to where we work for the prospective buyer to verify the financials of the potential purchase of the business that he’s wanting to get into. The primary thing we do there is quite a bit of analytic work, but we’ll verify the latest balance sheet and income statement, again tracing back a few years so that we have a good view historically of where the business was for three or five years back and then what it is today. That raises numerous questions at times, some of which have a good easy answer, and if there’s a long pause when we ask those questions, it gives us concern and certainly raises a flag to our client that is a bigger question that we should spend more time at or go into more detail with.
Peace of mind. In thinking about your career and we’re heading toward the end here, what are the one or two traits that you think you have that have made you excel in this forensic space?
Whenever I take an engagement, I want to get it done as efficiently and as timely as I can because a lot of times, we have litigation looming on some of these situations or the attorneys want to come to a point of negotiation. I have prided myself on getting in and getting the work done so that those decisions can be made. Going back on my experience, I’ve seen a lot of ways that books are manipulated, and fraud can occur, and so armed with that experience, it’s easier to get a timely resolution sometimes, but also to get a look at the big picture and make sure that it’s in focus with everybody involved.The independence in that situation is vital. Click To Tweet
What are one or two pieces of perhaps parting guidance that you might offer to the audience about this space?
When we get a question, there’s always that old mantra of you may trust it but you should verify it. If there’s a question that comes up, looking at a financial balance sheet or something doesn’t feel right, we encourage our client or potential client that we need to verify. A lot of times, there’s a lot of trust and sometimes it gets misplaced, so the verifying part of it should come into play. That’s where we come in and hopefully make that an easy answer, sometimes not the one they want, but certainly an answer that we can give to the client to complete their question.
Bill, I sure appreciate you being on the show. Thanks for all the tips and insights.
Great to be here. Thank you.