FORENSIC ACCOUNTING: FOUR CAUTIONARY TALES

"Fraud has always been around," notes Kari Hall, chief association officer of the nonprofit professional society the American College of Forensic Examiners. "But many people are becoming more aware of it now and are hiring accountants who specialize in the investigative side of their field."

Get that "it-can't-happen-here" thought out of your head. Financial fraud in a co-op or condo "happens, and you have to watch for it," says CPA and fraud examiner David Glodstein of the aptly named firm Forensic Accountants. "It revolves around 'the fraud triangle,'" he describes. "You know the fire triangle? That says it takes three elements to make fire: oxygen, fuel and a spark. ... Same thing with fraud: opportunity, incentive, and rationalization. If the opportunity is there, the incentive to steal is there and people can rationalize it to themselves, you get fraud."

Brad Sargent, chair of the American Board of Forensic Accounting and the head of the forensic group at Chicago's Stout Risius Ross, talks about it in terms of "crimes of passion": "The predicating factor may be, 'I've got medical bills,' or, 'I'm going through a divorce and getting raked over the coals, and I'll be left with nothing.' There can be strong, compelling personal reasons to motivate an otherwise honest person to steal. But once that element of passion is removed, and they find they can do it for small amounts and get away with it, the historic trend is that they begin to take more and more."

What's the difference between a regular accountant and a forensic one? "Accountants make sure the numbers add up, that one plus one equals two," says Michael G. Kessler, head of the financial investigative firm Kessler International. "Forensic accountants look at an invoice and say, 'That $32 [for] a single 60-watt lightbulb [means] something might be wrong here.'"

What kind of wrong? Forensic accountants describe plots involving a company listed as doing work in 2001 and 2002, even though the New York Secretary of State's office shows the corporation having been dissolved in 2000. Another building had $50,000 worth of marble delivered to it, but no one knows where it supposedly was installed. The fraud can range from screenplay-worthy to incredibly petty, like the managing agent who tells a landscaper that he'll give him the condo's contract if the landscaper mows the agent's lawn every week.

"Look for individuals living beyond their means," advises Sargent. "If a super shows up in a brand new Mercedes and you're paying them a $60,000 salary, that's a telltale sign."

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When you call in a forensic accountant, expect them to go over the board's financial records; match invoices to checks; confirm the identities of vendors and employees; interview staff members and others; run database searches; and present a report. In the case of criminal prosecutions, they testify in court.

One crucial first step a forensic accountant takes when fraud is suspected is to get staff-member information. "The workers are called into an office and told we're conducting a forensic audit or inquiry and that we need their cooperation," Kessler notes. "You don't let them know ahead of time – you have to keep people off guard because you have usually have one shot at interviewing a person. If you don't do it right the first time around, they're going to discuss it among one another and get their stories together." Interviews are only part of the process ; a paper-trail confirmation is critical.

What can you do yourself about corruption in general? Monitor your cash accounts, since those have the highest liquidity. Separate all your monetary functions : Have one person fill out the deposit information and another person make the deposit. And remember, in the end, the perception of an effective deterrent is one of the strongest means of mitigating fraud in any organization.

Here are four real-life cases of different but typical types of co-op/condo fraud... >>