CPAs on front lines of cracking criminal intent

Kemp Shiffer isn't a big believer in trust.

"There is no such thing as a trusted employee in any business," says Shiffer, private investigator and certified financial examiner. "A trusted employee can steal a business blind."

Shiffer, president and chief investigator at Financial Investigative Services, Inc., told Reno-area members of the Nevada Society of CPAs a few days ago that he's seeing a strong flow of requests from business owners who want investigative work.

Embezzlement is the most common business fraud he said, but CPAs and other financial professionals can look for the warning signs that Shiffer calls "Badges of Fraud":

* Concealment of assets, in which property or funds are put in the name of family members. A $2 million house at Lake Tahoe, for instance, was seized in an investigation of a Boeing Aircraft executive. He had bought the property for cash, paying with the millions in illegal kickbacks he'd taken from contractors. But after he tried to hide the house in the name of his sister-in-law, an investigation of her tax return showed an annual wage of $27,000 hardly sufficient to buy a mansion for cash.

* Creation of two sets of books by a business owner who wants to reduce his taxes. Tax investigators,

Shiffer said, sometimes stage a sting at a business listed for sale. The agent poses as a prospective buyer and is shown the true profits to justify the asking price. But if those figures don't match the company's

IRS tax filing: Busted!

* Destruction of books and records to obliterate evidence that could be used against a business owner. Mustang Ranch owner Joe Conforte burned records at the brothel every night, then picked a number out of thin air and called that the day's take. Meanwhile, he moved the money offshore to a Swiss bank account put in his mother's maiden name. (He was indicted in the mid-1990s.)

* Large or frequent currency transactions, common to the illicit drug trafficking trade. Police once stopped a car stuffed so full of trash bags filled with cash that the driver couldn't see out the back window, Shiffer said. When asked why the car was full of cash, the driver replied, "Because the trunk is full."

* Payments to fictitious companies. Those payments are often a sign of a gambling addiction, Shiffer said, noting that 85 percent of embezzlement cases have a tie to a gambling problem.

* False or altered entries, made easier by new copiers and scanners. A ringleader takes a job, gets his first paycheck, then scans it and replicates it in dozens of different names. The group creates fake IDs to match those names. They fan out and cash $1,000 checks at casinos across town on Friday night. The bogus checks hit the bank Monday morning and are blocked, but the casinos have already paid out the money.

* Excessive billing discounts or write-offs. Accounts receivable employee calls customers in arrears, offers to settle for half the bill if it's paid in person in cash, then writes off the loss and pockets the payment.

Other common frauds, Shiffer said, include false invoices or billings, company loans to employee or owner, and payment of personal expenses with company checks.

The biggest fraud danger, Shiffer said, remains the least suspected: the dedicated employee, the one who hasn't taken a vacation in five years. Too often, he warns, they sit tight because they need to cover up a scam.

A northern Nevada furniture store, he noted, lost a bundle and was driven to bankruptcy by a dedicated office manager. Any employee can be suspect. In one case, a business owner's daughter stole $440,000 during three years.

Shiffer's firm, Financial Investigative Services, employs two, plus a part-time former federal and state investigator as needed. Shiffer sets his rate at $120 to $125 an hour plus expenses.

He got into investigation during the 1970s. After graduating with a degree in criminal justice, he worked at a Southern California police department.

Then 25 years for the U.S. Treasury Department, Internal Revenue Service, IRS Criminal Investigation Division. In 2003 Shiffer retired to start his own business.

Each year he passes on that lifetime of experience to accountants still naive. For the past 15 years, Shiffer has taught classes in financial investigation at University of Nevada, Reno.