The insurance company Aflac is probably known best for its ubiquitous duck mascot. It is also consistently ranked on Ethisphere magazine’s World’s Most Ethical Company list, and Fortune’s World’s Most Admired Companies and 100 Best Workplaces for Millennials lists. But in the coming months and years, it might also become well-known for fraud and worker abuses.Read More
SPECIAL TO THE WEB
Annette Simmons-Brown, CFE
A MOTHER'S LOVE RUNS DEEPER THAN PLANNED
Let's examine the case of "William," the adult son of a victim. Since 1998, William's mother (we'll call her Debra) authorized him to manage her financial accounts that had a balance of $3 million to $4 million. However, she didn't authorize William to withdraw funds from these accounts, and she never initiated the execution of a power of attorney (POA) instrument.
Over the next 11 years, William systematically transferred funds from his mother's accounts to pay his bills and to supplement his accounts. He also opened at least two credit card accounts in his mother's name and tried to hide bank statements from her. By 2009, her accounts were overdrawn. Debra — and her other adult children — finally detected William's thefts and reported them to the police. William was ultimately charged with and convicted of one felony count of theft by swindle over $35,000; he was given a stayed prison sentence of 42 months and ordered to pay restitution of $110,500.
(This is one of many cases in Hennepin County in recent years criminally charged when a POA instrument was absent; thus, the lack of a POA instrument doesn't necessarily prevent criminal charges of financial crimes against the elderly.)
THE FEVA PLAYBOOK
The Hennepin County Attorney's Office (HCAO) in Minneapolis, Minnesota — for which I am a paralegal in its complex crime unit — has long had attorneys specifically assigned to the prosecution of financial exploitation of vulnerable adult (FEVA) crimes. A review of 15 intra-familial FEVA cases charged by the HCAO within the past three years, in which the victims were elderly and related by family to the defendants, reveals a depressingly uniform fact pattern:
- The life circumstances of the defendants and the victims were similar.
- The manner and speed with which the defendants accessed the victims' funds were similar.
- The degree of the thefts was similar.
- The mindsets of the defendants as revealed in case investigation, litigation and conviction were — you guessed it — similar.
In all 15 cases, the victims were single and either widowed or long divorced. The youngest was 58 years old — a man who had been injured by a car accident and then required assistance with daily living activities and transportation. The oldest was 90.
At least 12 of the victims required professional care for daily living and health problems, either in-home or in an assisted living facility. At least three of the victims experienced memory loss or other cognitive dysfunction.
These were the family ties:
- Eleven of the victims were parents of at least one of the defendants (in two of the cases involved husband-and-wife defendants).
- Two of the victims were the defendants' grandparents.
- One victim was the defendant's aunt.
- One victim was the defendant's sister.
Six of the 15 defendants — all of whom were responsible for paying the victims' home- or assisted-living care costs from the victims' accounts — defaulted on these payments, which resulted in the threatened termination of care or even the threatened eviction of the victims from their facilities. In six cases, the amounts stolen from the victims (within the date range of the charges) exceeded $100,000 — the lowest was $107,348 and the highest was $250,196. In eight other cases the defendants stole $14,046 to $71,500.
In every case, the defendants used the victims' funds to finance their lifestyles. They accessed the victims' bank accounts using checks, ATM withdrawals, debit card payments, counter withdrawals and online transfers from the victims' accounts straight into their own accounts.
They used the victims' credit cards for their purchases and accessed the victims' funds to pay the credit card balances. They also transferred money from victims' investment accounts into the victims' bank accounts and spent that cash.
In one egregious case, the defendant took out a mortgage on a real estate parcel that was part of her father's trust estate (for which she was co-trustee) that she and her brother were due to jointly inherit. She used the proceeds of that mortgage to pay off the mortgage on another real estate parcel within the trust estate that she was due to solely inherit. This devious move left her with an unencumbered property but left her brother with the shaft.
In 12 of the 15 cases, the victims executed a POA. Judging from the defendants' spending patterns after the POAs were executed, it's clear they all felt they "owned" the victims' funds or at least had joint ownership. They failed to remember, or deliberately disregarded, that the POA confers more responsibilities than rights. Most importantly, the fiduciary responsibility is to spend the principals' money to benefit the principals rather than themselves, always.
They also all failed to remember, or deliberately disregarded, that a financial transaction always leaves a paper trail. And when their conduct came to light, the paper trail told the story far better than an interview with an enfeebled, distraught victim ever could. And they all failed to realize that their conduct couldindeed come to light, the subtleties of modern-day money transfers notwithstanding.
In 10 of the 12 cases in which a POA instrument was present, the defendants were charged with at least one count of felony — financial exploitation of a vulnerable adult — and several received an additional felony of theft by swindle. In the remaining cases, the defendants were charged with a felony of theft by swindle of amounts over various thresholds. Seven of the cases have resulted in felony convictions, one case has been sent to diversion, two cases have been dismissed and five are pending disposition.
A GROWING PROBLEM
These examples are a fraction of elderly financial crimes cases charged worldwide. Financial crimes against the elderly are growing internationally because many countries are experiencing graying populations. I can easily see the day when crimes like these replace employee theft as the standard-issue blue jeans of fraud.
Read part one of this article on Fraud-Magazine.com, and read how Annette looked at the growing incidence of family members who defraud their aging relatives and the similarities of these miscreants to traditional occupational fraudsters.
Misty Carter, CFE
ACFE Research Specialist
The International Financial Reporting Standards (IFRS) are becoming familiar to many in the accounting and auditing world, especially those who perform work internationally. For those who are not familiar with the term, IFRS are a set of accounting standards developed to drive consistency in how publicly traded companies prepare financial statements. In other words, its purpose is to ensure that companies that transact business internationally are on the same page when reporting financials. I like to refer to it as a way of “keeping everyone honest.” Personally, I think that the idea of having one global standard for how companies prepare and report their financial statements is a good one. In fact, approximately 120 nations either permit or require IFRS. The European Union (EU) has fully conformed to IFRS and requires companies whose securities are listed on the EU-regulated stock exchange to prepare their financial statements in accordance with IFRS.
If someone were to ask my opinion on the biggest impacts the IFRS have on financial statements, I would have to say it would be related to how a company recognizes its revenue and values its assets. Why? Because these are the two areas in which fraudsters most commonly manipulate or falsify financials. When it comes to committing financial statement fraud schemes, falsifying revenue and overstating or even understating assets is a common theme — a theme that is not limited to any one specific accounting standard used in any particular country. I believe that it is vital for all companies, regardless of where they operate, to be aware of financial statement fraud schemes so they can be proactive in detecting red flags and identifying ways to prevent these schemes.
For those of you interested in learning more about IFRS and common financial statement fraud schemes, I encourage you to check out the new online self-study course, International Financial Reporting Standards for Financial Statement Fraud. This course provides an overview of IFRS with an emphasis on revenue recognition and the fair value of assets. It also covers the basics of financial statement fraud schemes, including red flags and methods to detect these schemes.
With so many companies operating globally, it is vital that everyone be aware of new and emerging changes in the financial world. One way to stay abreast of these changes is by becoming familiar with IFRS and its impact on financial statements. It is also essential that all companies take the necessary steps to prevent and detect financial statement fraud schemes.
SPECIAL TO THE WEB
Robert Tie, CFE, CFP
Contributing Editor, Fraud Magazine
Despite the global financial crisis, all seemed to be well at Dewey in 2008. But then cash flow began to drop, which eventually forced the big firm to declare bankruptcy — five years after the 2007 merger that created it. Thousands of Dewey employees lost their jobs, and creditors and investors were out hundreds of millions of dollars.
According to the May 14, 2012 article, Dewey's Bienenstock Discusses Law Firm's Demise, by Peter Lattman in The New York Times, "Several former Dewey partners presented prosecutors with evidence of potential financial improprieties."
After a lengthy investigation, the U.S. Department of Justice (DOJ) on March 6, 2014, indicted the former CEO, CFO, executive director and a lower-level manager of the by then-defunct law firm for intentionally issuing false financial statements. At the same time, the SEC filed a civil complaint against the same four employees. It also filed a separate complaint against seven of their colleagues. The CEO, CFO, executive director and manager pleaded not guilty to all criminal and civil charges, and their seven colleagues all pleaded guilty to the civil charges against them.
One of the seven who pleaded guilty is Francis Canellas, the firm's former finance director, who agreed to testify for the prosecution. According to Canellas' plea and cooperation agreement with the DOJ, he and the other 10 defendants falsified the firm's financial statements to fool lenders and investors into thinking Dewey was profitable, even though it wasn't. Multiple insurance companies, deceived by the doctored records, invested $150 million in a private Dewey bond offering, and three banks gave the firm a $100 million line of credit.
"What Canellas told prosecutors about his co-defendants is as yet unproven," Sizemore says. "But we can regard as fact every fraudulent action he admitted taking himself. Each of them is a mirror image of actions taken in virtually every financial statement fraud I've investigated or studied."
As happens in many businesses, Dewey wrote off some of its receivables as bad debt. But the prosecutors and Canellas said that when it became clear the firm wouldn't meet its revenue projections, the defendants fraudulently reversed those write-offs.
"If I were called in to perform a fraud risk assessment at Dewey before the fraud was discovered, I'd want to know how much working capital the firm had and what covenants they had to meet to keep their funding in force," Sizemore says. "And I'd wonder how that firm could pay so many high-priced lawyers, finance its operations and pay its loans — all during a recession."
TIPS FOR FRAUD EXAMINERS
- Ask as many questions as necessary, and evaluate the answers for reasonability. "If you don't understand something on a financial statement, or it seems unusual, ask for support documentation," Sizemore says. "Test it for reasonableness in terms of your understanding of the company's expenses and income and the business environment in its industry and locality. If your reasonableness test reveals any red flags, perform ratio analyses. Be sure to compare the company with at least two others or with industry-wide values. Company statistics by industry — number of employees, sales and so on — are available online, and I've used them in numerous investigations. Some are available only by subscription, while others are free."
- Be flexible. Sizemore says no single ratio fits all situations. So choose a ratio appropriate for your client's industry and type of business. If you can't find one, use a universally applicable calculation, such as days' sales outstanding in accounts receivable. He also notes that ratios don't prove fraud, but they can help you detect fraud that otherwise might not be evident.
- Stay on track. "To conceal red flags, fraudsters will tell you that the support documentation you want isn't available," Sizemore says. "Most red flags have legitimate causes, such as management's inability to run the business effectively. But the only way you can tell is to check the support documentation," he adds.
SPECIAL TO THE WEB
Robert Tie, CFE, CFP
Part 1 of 2: HealthSouth Corp.
In the economic crime jungle, is one predator more rapacious than all others? If so, who is king of the fraud beasts?
Consider this. A staggering $1 million was the median loss for the 133 financial statement fraud cases tallied in the ACFE's 2014 Report to the Nations on Occupational Fraud and Abuse. A far smaller amount — $145,000 — was the median loss for all 1,483 fraud cases the Report covered.
Clearly, the executive who falsifies financial statements is king of the fraud beasts. Alton Sizemore, CFE, CPA, knows the species well and has hunted down several of its members. Sizemore, a former FBI special agent, is owner of Alton Sizemore and Associates and a consultant with Forensic Strategic Solutions — a national financial investigation firm with offices in Alabama and North Carolina. Over a career spanning more than 30 years — 25 of them with the FBI — he has investigated numerous financial statement frauds.
By interviewing the executives who committed those crimes he learned to recognize and understand their fraud motives, opportunities and rationalizations. Sizemore also became proficient in trend and ratio analysis of financial statements to detect potential signs of falsification. And by observing those entries most frequently falsified, he developed a strong sense of those supporting documents to scrutinize. This article, in two parts, discusses these investigative principles and techniques in relation to two major financial statement frauds.
Sizemore managed the 2003 FBI investigation of a $2.9 billion financial statement fraud at HealthSouth Corporation in Birmingham, Alabama. That probe led to the first prosecution of a CEO and a CFO under the Sarbanes-Oxley Act (SOX) of 2002 for fraudulently misstating information on financial statements they had certified were accurate. The second case is currently in federal criminal court in Manhattan and concerns the alleged $250 million financial statement fraud at the now-defunct law firm Dewey & LeBoeuf LLP. It will be discussed in part 2.
In an earlier Fraud Magazine Special to the Web Sizemore described the case, the culprits and the investigative techniques the FBI used to uncover documentary evidence of this fraud.
HealthSouth's book-cooking scheme persisted for 17 years before its discovery led to the prosecution and conviction of the 21 senior managers who conspired to perpetrate and hide it. How could the auditors not detect such a massive fraud? Through their repeated failure to look behind the financial statements to see whether they were accurate.
"For example," Sizemore says, "the company's balance sheet showed $300 million was in clearing between one bank and another. But the money didn't exist. The auditors never found out, though. They neglected to check again later to see if that money actually had cleared."
At HealthSouth, the fraudsters' motivation for misstating the financials was to keep stockholders from learning about slumping profits. Their opportunity was the external auditors' ongoing failure to stand up to the HealthSouth CFO who intimidated them. And their rationalization was that eventually the company would generate enough actual profit to make up for the phony revenue planted in the current financials. That fantasy never materialized, though, and the whole scheme unraveled when persistent shareholder pressure led to an investigation.
Both the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) went after the fraudsters at HealthSouth. Its then-CFO William Owens pleaded guilty and agreed to cooperate with investigators in exchange for a lighter sentence. He wore a tiny recording device in his necktie when he met with CEO Richard Scrushy, whom he had told the FBI was the leader of the fraud.
Read more about the HealthSouth investigation in the full Special to the Web article on Fraud-Magazine.com.