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Fighting Fraud: Focusing the Profession

Fighting Fraud

With the California CPA Education Foundation’s Fraud in Audit, Accounting and Tax Conference taking place June 25 in Burbank and June 26 in San Francisco, we offer some fraud tips to whet your appetite.

What should you do if you suspect fraud?

The U.S. Supreme Court decision in Garcetti v. Ceballos has renewed debate about work responsibilities and ethical duties. The decision, which denies constitutional protection to public employees who have whistle-blower duties as part of their jobs, is bound to have an effect on others, like CPAs, who are often expected to blow the whistle on behavior they consider suspicious.

The court’s decision is limited to public employees, but sets a precedent for other work-related cases. One of the main points of the decision is that if a job description includes whistle-blowing duties, the performance of those duties is to be evaluated without the constitutional protections of free speech. In other words, people need to exercise more care when speaking as part of their work duties than when speaking as citizens; they need to be sure their whistle-blowing is not misguided or doing more harm than good.

For CPAs who are expected to act as whistle-blowers when performing audits and other attestations, the message appears to be “exercise even more care” when deciding what to do in ethical conflicts. This is small comfort to CPAs, who must meet public expectations and jury standards that are often higher than professional standards.

Jury or claims standards are created by juries assessing situations with the benefit of hindsight, as every claim and trial takes place after the fact. For example, CPAs are expected to:

• Protect the public interest and “get it right;”
• Exhibit CPA-like behavior (e.g. credible, objective and knowledgeable) in their actions;
• Advise clients of all significant matters, especially risk and how to avoid it;
• Uncover fraud regardless of the services being rendered; and
• Document significant communications, decisions and observations.

The standard to protect the public interest and “get it right” may require the CPA to decide whether to inform third parties, as well as clients, of significant matters. For example, the CPA may be caught between a suspicious client and third-party investors who are relying on the CPA to report suspicious client behavior.

The AICPA said that “one of the most common ethics violations by CPAs in business and industry relates to Ethics Interpretation 102-4 on Subordination of Judgment,” which “prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services.”

For CPAs in public practice, this means challenging, alienating or losing clients, as well as considering responsibilities that may exist to third parties, such as creditors, investors, owners, boards of directors, other CPAs and attorneys. Such responsibilities are often so riddled with legal complexities that the most prudent action will be to consult with an expert on CPA responsibilities and liabilities.

When in doubt about responsibilities and possible courses of action, CAMICO policyholders can always call to speak with experts at (800) 652-1772. 

Avoiding Committing Fraud

5 Steps to an Unhappier Life (Prison)

Jerome Mayne
Many of us have a perception of what fraud is. Fraud is Enron or Bernard Madoff, where hundreds of millions of dollars are skimmed, stolen or embezzled. But it doesn’t end there. Fraud is not just major news and multimillion-dollar crimes. Fraud does not have to be profitable, or successful, to be a crime. I met unsuccessful, broke, white-collar convicts in the houscow.

How did I get there? I didn’t start out with a scheme or a plan, but I got involved and was one in the minority of the inmates who admitted to it.

I was in real estate finance in 1994 when I was approached by a group of investors who were buying and selling homes. Over the next seven months, I prepared loans for their buyers and sensed that the documentation was not on the up-and-up. They submitted fake paystubs, W2s and other standard loan forms. But I never acted on my suspicions. I didn’t ask, and they didn’t tell.

A few months into this relationship, I started getting a couple hundred bucks here and there for “looking the other way.” But I became too nervous to continue being the loan officer in these transactions, which I was sure involved too much shady stuff, and I stopped working for these folks.

I’m often asked why I kept working with these investors for all those months. Most people think it was greed—but it wasn’t. I worked with them because it was a challenge. I didn’t think of the losses my involvement would create. The head of the scam had befriended me and I didn’t want to let him down.

Over the next four years after I left these “investors,” I founded and grew a squeaky-clean real estate investment company and a mortgage company. I remembered and liked the model the investors were using—buy low, sell high—so I decided to try it myself.

I bought a house, put it on the market at a higher price, but could not find a qualified buyer over the course of a month. So I called the “investors” I was previously working with and got in on a transaction (that I knew was made out of straw) to sell my house. I made $10,000 on the sale.

After the transaction, though, my boss asked me if I was “in business” with these “investors.” I told him what transpired with my house and asked if I was in trouble. He said, “The appearance of impropriety is as bad as impropriety itself.” I got freaked out and quit my job for fear I would get fired.

At the end of 1998, however, the FBI arrested me outside of a restaurant and charged me with conspiracy to commit mail fraud, wire fraud and money laundering during my time working with the “real estate investors” four years earlier. All the loans we worked on defaulted, resulting in more than $200,000 in losses. I fought the charges, as did my co-conspirators, but we eventually plead guilty. I received a 21-month sentence, which started Nov. 4, 1999.

My business folded because my partners and employees could no longer be associated with me and I couldn’t run these companies by myself.

I have taken some time to chronicle my journey. Take the following action steps and you too can change your career and your life forever—for the worse.

Subscribe to ‘Business As Usual’
There are procedures and practices in all industries that can be termed “cutting corners.” Perhaps at one company or with one client a particular procedure isn’t done or expected, but at another company or with another client, it is. Refusing to cut corners can be exceedingly difficult when you are trying to keep your job or retain your clients. I know your mother told you that one white lie can lead to another, then another and another. Before you know it you’re in way over your head.

Don’t Just Turn a Blind Eye—Help Out
It is my understanding that most reported fraud losses involve collaboration, collusion or knowledge from industry insiders. In other words, the person keeping the books or adding up the numbers suspects, knows or is outright helping the person with the master plan. If you’re a licensed professional it is unlikely that you are being completely duped by someone at your own game.

Trust Everyone
This step addresses the balance of the “most reported fraud losses” I refer to above. Confidants are good. They construct a facade—a persona of sincerity and honesty that for most part will not be transparent. They will become your friend, and they will use every resource available to get you to do what they want—assist them in perpetrating a scam. This is an exception to the above in that you will be beaten at your own game.

Justify Your Unethical Actions
My involvement in the scam included justifying many things. I told myself that since the kingpin did not explicitly tell me that the documents I received were fakes, it was not my job to act on my suspicions and check them out. After all, I didn’t create any fake documents. I also told myself that even if I knew the documents were fakes, it wasn’t going to hurt anyone or create more risk.

If No One Knows, Is It a Crime?
This might seem like a no-brainer, but you’d be surprised. Being a felon, I’ve rubbed elbows with some unsavory sorts. I’d say that at least half of them committed “opportunistic” fraud or fraud justified by need. They had known for some time of a loophole or weakness in the system. They never exploited it because that would be wrong, unethical and perhaps even criminal. For weeks, months or years the loophole just sat there, quietly. Then one day, BAM! The sick aunt broke a hip, had no health insurance and the money available from the hole made by the loop was extracted. There was an opportunity and a need, and no one would ever know.

Some may feel that the above can be placed in categories ranging from big to small, severe to not so severe. Know this: Every corner you cut trims a little piece from your soul. And it is almost impossible to get that back. There is no gray area; there is only a thin line. You are either on one side of it or the other.

My sentence ended in March 2001. But my loss of self-confidence, self-esteem and the stigma associated with being a felon did not. Once a person with fearless entrepreneurial qualities, I was now scared to apply for a job as a copier salesman.

But I found some confidence and self-respect, or they found me, and have been able to work a career and contribute in a useful way to society. Most ex-cons aren’t this lucky. My career and passion today are speaking about the consequences of fraud and the importance of doing the right thing—helping professionals make the right decisions when the right decisions aren’t easy. 

Jerome Mayne is author of Life Saving Lessons—The Diary of a White Collar Criminal and a speaker for the California CPA Education Foundation.