Cracking the Books II: Extreme Bean-Counters Take On Fraud, Part II - TheStreet

Cracking the Books II: Extreme Bean-Counters Take On Fraud, Part II

A look at a man who makes his living uncovering financial shenanigans.
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Continued From Part 1

Fraud investigation demands a skill set that eludes most bean counters. "Accountants aren't really trained to look for fraud, they're just looking at ledgers," says John Warren, associate general council for the Austin, Texas-based

Association of Certified Fraud Examiners

. "For that matter, police officers know how to investigate a case, but they're not trained to look for an accounting anomaly. So the skills required to examine fraud are quite rare."

Indeed, Regan and his crew are at the vanguard of their profession. Forensics is oxymoronic -- exciting accounting. It's drawing the best and brightest from the profession. Their talents are put to use in a burgeoning category of disputes such as securities fraud, embezzlement, intellectual property, insurance fraud. Divorce cases alone have richly fertilized the growth of this field -- as celebrity divorcees such as

Sylvester Stallone


Lionel Richie

will sadly attest.

That has made certified fraud investigators like Regan popular. The ranks of the Association of Certified Fraud Examiners have grown 67% in the last two years, and all the Big Five firms are trying to develop expertise in this area. For example,

Deloitte & Touche

says it has added more than two dozen investigators to its forensic group in the last two years, including senior law-enforcement professionals and former prosecutors, as well as accountants.

But Regan isn't often popular with the larger firms. Too often, Hemming Morse is called in to testify that one of the big firms hasn't done quality work. Jim Haydel, a partner with the law firm

Farella Braun & Martel

, hired Regan in a municipal bond case against

Bank of America

(BAC) - Get Report

. Haydel's firm was trying to prove that the bank had illegally held on to millions in unclaimed municipal bond principal and interest. The dispute involved the bank's accounting for more than $50 billion in principal and interest payments that it had received during an 18-year period. As if that wasn't complicated enough, many of the records had to be reconstructed by the bank, and Haydel didn't think he could trust any of the big accounting firms.

"The bank had already hired

Arthur Andersen

and Price Waterhouse," now a unit of


, says Haydel. "There's no question we couldn't go to any of the Big Five because the bank had hired them all."

In this case, Haydel says, Bank of America's accountants tried to bury Regan in paperwork. "Price Waterhouse and Arthur Andersen turned over their work papers in hundreds of boxes -- and not well indexed or organized," he explains. "Just stacks of paper, and some of it in print so small you needed a magnifying glass. Paul and his staff looked at it and analyzed it and I think we were incredibly well prepared." Haydel says that Regan's convincing testimony compelled Bank of America to settle the case for $187.5 million.

The ranks of the Certified Fraud Examiners Association have grown 67% in the last two years, and all of the Big Five firms are trying to develop expertise in this area.

Regan's associates came to their calling along circuitous paths: They range from disillusioned Big Five accountants, lawyers who have an odd bent and former law enforcement officials. "I don't carry a gun anymore," says Dan Ray, a former


agent who now serves as a Hemming Morse investigator. "Now I carry a nice computer and a better paycheck than when I was with the Bureau."

With such expertise, Regan says the clever schemes of wannabe criminal masterminds begin to look prosaic. When the numbers don't add up, he makes a general practice to look for a set of fake accounting ledgers. "The names of the books are usually more clever than the schemes themselves," says Regan. "I've seen them labeled the Cookbook, the Sins Book. My favorite was the 'NYFB' book -- the None of Your F*****g Business book."

The other thing Regan is finding is plenty of clients. Last year Hemming Morse took in $6.8 million doing forensic accounting and fraud investigation consulting. Accounting experts say that business isn't likely to dry up anytime soon. "With fewer big accounting firms, there's a greater likelihood for blown audits," says

New York University

law and accounting professor George Sorter. "These audit firms are under tremendous time and cost pressure, and as it is they're not looking for fraud. What I've found is that there tends to be an attitude among some CPA firms of 'permissive professionals.' They say 'you can do this' rather than 'you should do this.' And as these high-tech companies get increasingly complicated, the auditors are increasingly working blind. We're going to see some incredible

blowups in the future."

And when they do, Regan will surely be there. He's currently shuttling between cases in California, Florida, Georgia, New York, Texas and Guam. And he's trying to teach another generation of fraud investigators, teaching a class and working on a forensic committee of the 330,000-member

American Institute of Certified Public Accountants


"You know, sometimes when I'm teaching I'm struck by an odd idea," Regan says with a light in his eye. "Here I am telling people, teaching people exactly how to commit hundreds of millions of dollars in accounting fraud. At least they'll keep me busy in the future."