Forensically Speaking With the Justice Department

Forensic Accounting Requires Nuance

Performing forensic accounting in front of the Justice Department is like a wild rollercoaster ride, explains John DeLuca. Here’s why. 

The best definition of “forensic accounting” was provided to me by a member of Congress who, in their true profession, was a practicing physician.  This member, upon gazing my bio/CV,  quipped, “Forensic accounting—is that like doing an autopsy of the books?”  “Well yes,”  I responded.  “The entity has expired and now we have to find out what has led to its demise.” 

When performing forensic accounting services for a client under the Department of Justice (DOJ) microscope, your “autopsy” had better be performed with your sharpest scalpel!  The DOJ has unlimited resources and is generally under no time constraints.

 My experiences have taught me that this arena is one of our profession’s most challenging.  A few representative matters that I have had involvement with include:

• AOL executives accused of manipulating membership populations
• AIG marketing executives accused of selling poorly structured special purpose entities
• The criminal trial of Enron executives Kenneth Lay and Jeffery Skilling
• A former state senator accused of campaign finance irregularities
• A fund manager dealing in Japanese currency fluctuations accused of fraud— to name a few

Your first realization should be that your client (or rather, your client’s client—since you should be engaged by legal counsel) has been accused of a crime!  Unlike many forensic accounting engagements whereby you would be requested to examine existing records to determine the extent of any improprieties, the DOJ has provided an allegation of wrongdoing, and it is your job to then analyze the charges in comparison to the records and facts.  The client is bound to be extremely emotional and possibly irrational at your initial introduction.  Therefore, treading lightly has to be the modus operandi.

Engagement Process

The scope of the engagement, as usual, will be set by legal counsel.  But, your tone, actions, and involvement in the engagement will be dictated by the current status as labeled by the DOJ.  The client may have been labeled as a witness, a subject, a target, or may have charging documents in place upon your entry.   Based upon the status provided to you by legal counsel, your work will—in all likelihood—involve:

• The breakdown and analysis of the subject transactions
• A review of transcripts and correspondence
• An analysis of supporting documentation
• Gain an understanding of the governing laws applicable
• Individual interviews with key players
• Your opinion of the allegations

Your overall goal is to assist legal counsel with their defense strategy that precludes a client/witness from turning into a subject,  a client/subject from turning into a target, and etc.  Let’s delve deeper into each category.  Hang in there, the “war stories” will be along shortly.

The heart of the engagement will be the effort produced in the initial breakdown of the transaction[s].  This is the core concentration area.  And, as such, particular attention to detail is a must.  I even enjoy laying out the initial details on a large white board using erasable ink, so that there is room to interject additional information as it arises. 

The information needs to be arranged in chronological order.  This will help you set your timeline and assess the client’s involvement.  Supporting documentation also needs to be assembled, in chronological order, to support the breakdown.  This is actually a “living document,” in that it will continue to grow and change during the process of the engagement as details are revealed.

A review of the transcripts (i.e., depositions, court testimony, 302s, etc.), correspondence, and individual interviews will provide what the client and others had initially deemed to be the intent of the transaction[s], how they viewed the context of their application, and their participation in the process.  Many times, a DOJ witness’ testimony is at odds with the chronology of supporting documents and events.  This is because the “bright light” of the DOJ may cause certain individuals to attempt to recreate history in order to avoid further scrutiny in an attempt to be “helpful.”   Well, these inconsistencies are like golden nuggets for your engagement as they appear on your “living document white board.”

Having a degree in law is not essential to this type of work.  What is essential is the ability to grasp an understanding of the law surrounding the allegations perpetrated upon the client.  The allegations are the culmination of a process the DOJ has endeavored upon and must be supported by the underlying accounting principles and transactions.  Basically, “if the glove does not fit, you must acquit.”  It is important that you are able identify the inconsistencies.

All communications with legal counsel, especially those whereby you are stating an opinion, should be supported with an accompanying memo and supporting documentation.  This will preclude any misunderstanding as to the nature and context of each and every conversation. 

DOJ Process

The DOJ is a “Goliath” that possesses extreme wealth and power.  Their reach and resources are unlimited.  On the other hand, their size and nature prohibit them to turn on a dime, nor move swiftly. Their process is akin to a “passive/aggressive personality disorder.” 

You may be aware that most of their information is initially gleamed from “whistleblowers” and/or cooperating witnesses.  These are mostly lower level employees who have felt that management has harmed them in some manner or form.  Or who have been accused of another crime and are willing to discuss this matter that may be to the liking of the DOJ to minimize their punishment. 

When your starting point is with either a disgruntled employee or an otherwise accused party, then the initial information will tend to be self-serving and one sided.  And, depending upon what light your client has been introduced into the process, the initial speed of the process will be determined.

It is also extremely important to know as to where your client is pegged in the chain of the subject transaction[s].  If your client is in the lower to mid-point of the “food chain,” chances are that your client will be viewed as a way to a means.  The DOJ is not “targeting” your client for prosecution, but needs your client’s cooperation in order to link a series of events to get to the so-called “big fish.” 

The “passive/aggressive” part may raise its head at any moment.  It will seem that there is a non-stop march to the courthouse steps and then…it just stops.  No further inquiries, questions, or assistance requested for months—maybe years.  Then, without warning, the process kicks into overdrive with new questions and allegations.  It takes “Goliath” an inordinate amount of time to synthesize the explanations that your client has provided and the further assistance that is coming in from outside, interested parties.  It is like a huge puzzle that the DOJ needs to construct to get the clear picture.

War Stories

I spent approximately a year working on the Enron—Jeffrey Skilling and Ken Lay—forensic accounting trial team.  I actually spent six weeks in Houston, on-site, during the criminal trial and left prior to the verdicts.  We analyzed and broke down most of the so-called “Star Wars” special purpose entities (SPEs) that were at the heart of the DOJ’s prosecution.  I can now divulge this because it is now a matter of public record.

The DOJ allegations of the SPEs were not that: (a) they were poorly structured; (b) properly funded; (c) accounting sufficient; or (d) properly documented!  No…the allegation was that the SPEs were improper because there was a “verbal” [not written] commitment that the SPEs would be bought back.  This, on top of  the fact that the totality of the SPEs, in comparison to total revenues and net income, would be that of a pebble on a beach —decimal dust.

The basic structure of Enron was that of an extremely aggressive, highly leveraged public entity—as borne out by their public filings.  Their borrowings were leveraged and collateralized by Enron stock. When their stock price began to fall, Enron’s financing dried up and the financiers demanded immediate, unrealistic cash calls that sent the company into a death spiral.

It was the largest bankruptcy in history [to that date].  Pensions were lost, 6,000 jobs gone, and the Houston economy was in the tank.  Someone had to pay.  So the DOJ set off on a criminal track.  Imagine if the DOJ had recognized this for what it was—an aggressive business enterprise that failed—and headed onto a civil track?  Wouldn’t the time, energy, and $120 million in defense legal fees be better spent on lost pensioners?  Somehow, logic was never a metric in the DOJ formula.

Conclusions

Forensic accounting in white collar criminal defense world is highly emotional for the client due to the ramifications aligned with the failure to dissuade your accusers, the DOJ.  The DOJ is enormous in size and strength and basically works on no form of deadline.  The engagement may resemble a rollercoaster ride with an unlimited ticket.  The underlying logic for the DOJ action may not reveal itself immediately or ever, based upon their information gathering techniques.

The work is not your normal debits and credits.  It will not follow an engagement program nor will it abide by stringent rules that you would follow in a business valuation.

What the engagement will do is tax your life experiences in the profession to assist with best possible outcome for a client that is facing jail time, heavy fines, and a life-ending event. 

John J. DeLuca, CPA, CVA, is currently the Managing Director of Succisa Virescit, LLC, an international consulting firm specializing in the areas of forensic accounting, litigation support, business valuations,  and expert witness testimony.  Mr. DeLuca’s experience spans more than 30 years of practice.