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Fraud and Forensics

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About the Authors and Editor

Editor, Author of Chapters 1 and 6

Kathy Bazoian Phelps is a partner in the Los Angeles office of law firm Diamond McCarthy, LLP and has 24 years of ex-perience as a lawyer in bankruptcy law and fraud litigation. Her practice includes representing trustees and receivers, debtors, and secured and unsecured creditors in bankruptcy cases and other insolvency proceedings. She has served as chapter 11 trustee and frequently represents operating and liquidating trustees and receivers in the U.S. District Court, U.S. Bankruptcy Court and the Superior Court of the State

of California. She also represents defendants in bankruptcy litigation, including fraudulent transfer defendants in Ponzi scheme cases, and has extensive litigation experience in a variety of bankruptcy litigation matters. Ms. Phelps has spoken and written widely on a broad range of fraud and bankruptcy-related matters, and co-authored The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (Lex-isNexis® 2012) with Hon. Steven W. Rhodes (ret.). Her other recent publications in-clude Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams (IRR Publishing 2013); The Depths of Deepening Insol-vency: Damage Exposure for Officers, Directors and Others (American Bankruptcy Institute 2013) with Jack Williams; and “Equity Receivers and the In Pari Delicto Defense,” The Business Lawyer (American Bar Association, May 2014). Ms. Phelps is a member of the board of directors of the California Receivers Forum, National Association of Federal Equity Receivers, Financial Lawyers Conference, ABI, Na-tional Association of Bankruptcy Trustees, Los Angeles Bankruptcy Forum, and the Los Angeles County, Beverly Hills and Armenian Bar Associations. She also serves as editor-in-chief of the Receivership News and co-chairs ABI’s Commercial Fraud Committee, and she is a mediator on the Bankruptcy Mediation Panel for the Central District of California. Ms. Phelps received her B.A. in international relations from Pomona College and her J.D. from University of California, Los An-geles in 1991.

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Chapter 2 Authors

Jeffrey E. Brandlin, CIRA, CFF is the founder of Brandlin & Associates in Los Angeles and provides consultative account-ing and financial advisory services. His clients have includ-ed top-tier banks, private-equity firms, and non-bank senior and mezzanine lenders, and he assists middle-market com-panies with gathering the financial information they need to make intelligent decisions, both in advance of an invest-ment and when a company’s performance deteriorates. He is also experienced in forensic accounting, concise reporting

and expert witness testimony in helping to resolve highly contentious situations. Throughout his 40-year career, Mr. Brandlin has uncovered numerous financial frauds, accounting malpractice and complex grafts. He often remains involved in these situations to provide forensic accounting services and litigation support or to assist with financial restructurings or workouts. He has also provided thorough financial due diligence in support of hundreds of successful M&A transactions for equity and debt capital providers, and has saved clients from committing to mon-ey-losing investments on numerous occasions. Previously, Mr. Brandlin was a Big 4 audit manager. He is experienced in such industries as entertainment, manufac-turing, wholesale distribution, retail, technology, apparel, oil and gas, food service, health care, construction, automotive, financial services and professional services. Mr. Brandlin is a frequent speaker to industry organizations, financial institutions and law firms on the topics of fraud, forensic accounting and financial statement analysis, and has been licensed to practice accountancy in California since April 1976. He received his B.S. in 1972 from San Diego State University.

David R. Bell, CPA is a senior consultant with Brandlin & Associates in Los Angeles and has more than 20 years of ex-perience in public accounting, private industry and transac-tional services. Since joining the firm in 2003, he has assisted in over 100 mergers-and-acquisitions transactions ranging in value from $5 million to $250 million. He has also con-tributed to several litigation support and forensic accounting assignments for senior and mezzanine lenders. Mr. Bell has provided expert testimony in the U.S. Bankruptcy Court for

the Central District of California in Los Angeles regarding fraud, conversion and

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civil conspiracy matters. Among several successful outcomes involving litigation, his work and testimony were instrumental in obtaining a $40 million judgment against the defendant’s principals in a civil matter. In another matter, he provided expert testimony for the bankruptcy trustee’s prosecution of accounts receivable debtors, leading to a series of default judgments and negotiated settlements. Previ-ously, Mr. Bell was manger of financial reporting for the mortgage division of one of the nation’s largest publicly held residential builders, where he was responsible for financial planning and budgeting, due diligence and compliance reporting. He was also an audit manager with Ernst & Young LLP in Los Angeles, where his cli-ents included both private and public companies of varying sizes and industries, including financial services, pension plans, software and manufacturing. Mr. Bell received his B.S. in accounting in 1992 from the University of Southern California.

Garret L. Martucci is a consultant with Brandlin & Asso-ciates in Los Angeles, where he uses his knowledge of pro-cess improvement methodologies to identify the budgetary impact of operational business decisions. He analyzes per-formance data from company-specific issues to long-term industry outlooks. Mr. Martucci earned his Six Sigma Green Belt Certification (CSSGB) from the American Society for Quality (ASQ). Prior to joining Brandlin & Associates, he was a senior associate with Grant Thornton’s Advisory Prac-

tice in Alexandria, Va., where he assessed the operations of public sector entities and established and implemented process-improvement initiatives. Mr. Martucci received his B.A. in political science from The American University.

Chapter 3 Authors

Maryellen K. Sebold, CPA/CFF, CIRA is a managing di-rector with BDO USA LLP in Los Angeles and oversees the firm’s West Coast Litigation Consulting and Forensic Ser-vices group. She has nearly 30 years of experience in forensic accounting and fraud investigations, litigation consulting, bankruptcy and corporate restructuring, and has signifi-cant experience in calculating economic damages, evaluat-ing shareholder and partnership disputes, analyzing budget overruns, determining lost profits, evaluating alter-ego is-


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sues, tracing assets and calculating royalties. In addition, she has performed inves-tigations into allegations of fraud and mismanagement and conducted operational assessments for businesses struggling with underperformance issues. She also has experience performing shadow investigations. In the bankruptcy arena, Ms. Sebold has worked in various capacities, including acting as accountant to trustees and creditors’ committees in chapter 7 and 11 matters, performing asset-tracing, pref-erence and fraudulent transfer analyses, insolvency analyses, claims evaluations and plans of reorganization, and overseeing the operations of a business in chapter 11. She has also worked with bank syndications in efforts to restructure multimil-lion-dollar loans made to companies on the brink of collapse. Ms. Sebold has tes-tified numerous times as an expert witness in trials, depositions and arbitrations, applying her specialized knowledge to a wide range of issues and industries. Some of the issues in which she has testified include lost profits, rescission claims, tracing of assets and partnership disputes, often stemming from breach-of-contract alle-gations. The industries she has experience in include manufacturing, construction, entertainment, franchises, health care, insurance, publishing, real estate, securities, solar and transportation. Ms. Sebold has presented to various professional organi-zations on a wide range of accounting, fraud and litigation consulting topics. Pre-viously, she worked with large public accounting firms and regional firms, and had her own firm. Ms. Sebold is a councilmember of the American Institute of Certi-fied Public Accountants. In addition, she sits on the board of directors for CalCPA and is a former board member of CalCPA’s Education Foundation, for which she has held various officer positions, including president. She is also a member of the Association of Insolvency & Restructuring Advisors. Ms. Sebold received her B.S. from Ithaca College in 1986.

Judith K. Spry, CPA is a consulting partner with BDO USA LLP in Chicago. She has more than 30 years of experience providing dispute advisory, forensic accounting, post-acqui-sition disputes and investigative services to a wide range of organizations and their counsel in such industries as manu-facturing, retail, wholesale, pharmaceutical, health care, real estate, agricultural, education, and financial and professional services industries. Ms. Spry is experienced in preparing fi-nancial analyses, expert reports, profitability analyses and fo-

rensic studies for various companies. She also assists clients with the measurement of business-interruption losses, lost profits, property damage analyses, and intellectual

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property and product-liability cases. Ms. Spry has served as a neutral arbitrator and assisted clients with the preparation of arbitration matters. She also has significant ex-perience providing expert witness testimony on matters involving accounting issues, and frequently presents on accounting topics to accountant, attorney and insurance audiences. Prior to joining BDO, Ms. Spry provided forensic accounting services as a director of Financial Services at Navigant Consulting, Inc. and as a director of Dis-pute Advisory Services in the Midwest at KPMG, LLP. She also spent 15 years with Campos & Stratis, CPAs, and started her own forensic practice, Spry & Company, P.C. Ms. Spry is a member of the American Institute of Certified Public Accountants, Association of Certified Anti-Money Laundering Specialists, Association of Certi-fied Fraud Examiners and the Illinois Society of Certified Public Accountants. She received her B.B.A. in business administration and accounting from Loyola Univer-sity and her M.J. in business law from Loyola School of Law.

Chapter 4 Authors

Michael E. Brodsky is a director with Deloitte Financial Ad-visory Services LLP in Boston and has more than 20 years of experience providing forensic accounting, investigative, au-diting and consulting services. He also has extensive experi-ence in investigative, forensic and advisory projects to the fi-nancial services industry working with multiple banking and securities, insurance and investment management clients. Mr. Brodsky has participated in operational/compliance projects and regulatory investigations involving Ponzi schemes, asset

misappropriations, financial statement fraud and potential violations of the Foreign Corrupt Practices Act (FCPA). He has also presented and spoken on fraud, corrup-tion and other risk matters impacting the financial services industry.

Anthony DeSantis, CFA is a principal with Deloitte Trans-actions and Business Analytics LLP in New York and has more than 16 years of experience specializing in the foren-sic analysis of electronic data, primarily for the purpose of identifying fraud, waste, abuse and corruption. His techni-cal experience includes the analysis of complex structured and unstructured data, management and implementation of information management systems, the design and oper-


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ation of relational databases in investigations, litigations, claims processing and settlement administration environments, and the use of databases and advanced analytic methodologies for identifying indicators or creating risk profiles of fraud and corruption. Mr. DeSantis has presented on international e-discovery issues, investigative data considerations, technology to detect potential violations of the U.S. Foreign Corrupt Practices Act, health care data mining and string matching for fraud detection. He received his B.S. in finance and operations management in 1999 from the University of Delaware.

Jonathan Nash is a principal with the Corporate Restruc-turing Group of Deloitte Transactions and Business Ana-lytics LLP in Austin, Texas, and has more than 20 years of experience providing strategic leadership in crisis situations and serving in interim management roles. His experience includes driving performance improvement, managing re-organization and turnaround strategies, negotiating place-ments of debt and equity, and successfully guiding clients through bankruptcy and out-of-court restructuring.

Chapter 5 Author

S. Gregory Hays, CTP, CIRA, CSAR is a court-appointed fiduciary and forensic accountant with Hays Financial Con-sulting in Atlanta, specializing in recovering funds from in-solvent companies and investment offerings. He manages a firm of corporate financial consultants that specializes in turnarounds, workouts, asset recovery, forensic accounting, litigation support and interim management. In addition, he is routinely appointed by federal and state courts as a re-ceiver or bankruptcy trustee to manage businesses in order

to maximize recovery for creditors, and has been appointed by courts in Georgia, Florida, Alabama, South Carolina, Texas, California and New York. Mr. Hays has been recommended to the court by the Securities & Exchange Commission and the Commodity Futures Trading Commission to serve as receiver or special mas-ter, and has been appointed in 10 securities enforcement action cases representing over $1 billion in investor-claimed losses from more than 5,000 investors. Addi-tionally, he has been appointed by the U.S. Trustee to serve as a chapter 11 trustee

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in 18 business cases, 11 of which were operating at the time of his appointment. He has also served as a chapter 7 trustee and has managed over 10,000 cases. Mr. Hays has served as plaintiff in hundreds of lawsuits, including causes of action against attorneys, accountants, sales agents, directors & officers, and bankruptcy prefer-ence actions. He is a recognized expert in Ponzi schemes and receiverships and has been quoted, or articles regarding his cases have appeared, in the The Wall Street Journal, Business Week, Money Magazine, Barron’s, The Washington Post, Sports Il-lustrated, Bloomberg.com, Forbes.com, Wired Magazine, Palm Beach Daily News, The Atlanta-Journal Constitution, The Atlanta Business Chronicle and the Fulton County Daily Report. In addition, the TV show “American Greed” featured a story on the Al Parish Ponzi scheme, for which he served as receiver. Mr. Hays has 35 years of financial experience, including 25 years managing bankruptcy and receiv-ership cases and investigating fraudulent activity. He serves on the board of direc-tors for the Association of Insolvency & Restructuring Advisors (AIRA) and of the National Association of Federal Equity Receivers (NAFER), and he previously served as a member of the advisory board of the International Association of Asset Recovery (IAAR). Mr. Hays received his B.B.A. from Stetson University in 1979 and his M.B.A. from Georgia State University in 1981.

Chapter 7 Authors

Marion A. Hecht, CPA, CFF, CFE, CIRA, MBA (and author of Chapter 14) is a principal with CliftonLarsonAllen LLP in Arlington, Va., and has extensive experience tracing inap-propriate disbursements involving fiduciary funds, as well as illegal payments through slush funds and multi-tiered enti-ties, including tracking and identifying shell companies and other entities used to divert funds for illegitimate purposes. For more than 25 years, she has worked with attorneys in all phases of litigation beginning with pre-trial investigation

and planning, discovery, fact and expert testimony at mediation, U.S. district court settlement conferences, bankruptcy hearings and trials. Ms. Hecht often works with the FBI, the IRS’s Criminal Investigation Division, Inspector Generals and U.S. Attorneys offices on parallel criminal investigations. She has significant expe-rience in bankruptcy and receivership litigation cases that involve fraud investiga-tions, asset management and liquidation, mortgage company and title company frauds, clawback and constructive trust actions, and dispute resolution and diplo-


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macy. Ms. Hecht leads forensic fraud and financial examinations relating to civil and criminal investigations, bankruptcy fraud, receivership of venture capital com-panies and Ponzi schemes, fraudulent conveyances, constructive trust actions and preferences, white collar crimes, money laundering, mortgage and title company fraud, “piercing the corporate veil” analyses, misuse of federal funds, regulatory and compliance violations, civil RICO issues, conversion of assets, EEOC claims, insurance claims, kiting, kickbacks, and self-dealing and breach of fiduciary claims against officers and directors of private-equity companies, banks, attorneys, ac-countants and other parties. Her forensic examinations of corporate books and financial records total more than 300 and include hundreds of interviews, and she investigates allegations of fraud and other improprieties for audit committees, pri-vate companies and NGOs, domestically and internationally. Ms. Hecht formerly served as principal agent for the SBA and as receiver of small business investment companies, and she managed 18 federal equity receiverships. She is a former CFO of an international environmental venture capital corporation and managed a Lat-in American subsidiary. Ms. Hecht is a former director for the National Associa-tion of Federal Equity Receivers (NAFER) and chairs the International Committee for NAFER. She also co-chairs ABI’s Commercial Fraud Committee. Ms. Hecht received her M.B.A. from Loyola College in 1991.

Mark Michels is a director with Deloitte’s Discovery practice in San Jose, Calif., where he specializes in advising on elec-tronic discovery management related to complex litigation, patent litigation, class actions, bankruptcy, commercial dis-putes, pre-merger reviews and internal investigations. He is also a nationally recognized expert on in-house e-discovery implementation, patent litigation discovery management and litigation cost control. Mr. Michels is admitted to the Califor-nia State Bar. He graduated from the Georgetown School of

Foreign Sevice and the Georgetown Law Center, and has been an advisory board member of the Georgetown Law Advanced E-Discovery Institute since 2005.

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Kenneth Dante Murena is a partner with the Miami firm of Damian & Valori, LLP, where he has spent most of his career representing federal and state court-appointed re-ceivers, monitors, distribution agents and other fiduciaries, as well as defrauded investors, in government enforcement actions brought by the SEC, CFTC and FTC, clawback and class actions arising therefrom, and complex commercial and fraud litigation matters. He also represents individu-als, small businesses and public companies in commercial

and real property disputes, and in securities, commodities and consumer fraud litigation matters. In bankruptcy cases and adversary proceedings, he routinely represents trustees and has represented a broad range of interests, including liq-uidating trustees, creditors’ committees, and individual and corporate creditors, including financial institutions and private lenders, as well as corporate debtors in possession in chapter 11 reorganizations and liquidations. In addition, Mr. Murena has significant experience in assignment for the benefit of creditors proceedings, in which he serves as the fiduciary charged with operating, winding down or selling a going concern, liquidating assets and distributing proceeds to creditors, or as counsel to individuals and companies seeking to purchase the going concern or its assets. Mr. Murena was admitted to the Florida Bar in 1998 and is licensed to practice in all state and federal courts in Florida and the U.S. Courts of Appeals for the Third and Eleventh Circuits. He received his B.A. in 1995 with honors from the University of Florida College of Liberal Arts & Sciences, where he graduated in the top 1 percent of his class and was inducted into Phi Beta Kappa, and his J.D. from the University of Florida College of Law in 1998, where he served as the Senior Articles Editor for the Florida Law Review.

Chapters 8 and 9 Authors

Elaine Carey, CFE, CAMS is a managing director in FTI Consulting Inc.’s Forensic and Litigation Consulting group in Los Angeles, where she manages complex investigative, business intelligence and risk-mitigation consulting as-signments undertaken by FTI Consulting globally. She has served as advisor and problem-solver to senior executives of Fortune 100 and multinational corporations and law firms for more than 20 years, overseeing clients’ most complex


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and sensitive problems around the globe involving integrity, political, security and reputational risks. Ms. Carey speaks Spanish and has extensive experience in work-ing with multinational corporations and law firms on FCPA and anti-corruption issues globally, particularly in Mexico, Brazil, Venezuela and Colombia. She has managed corruption and fraud investigations that often involved political and gov-ernmental corruption, cartels and organized crime, and she has led investigations that uncovered money laundering by cartels through investment firms and money laundering and supply chain infiltration through Fortune 500 corporations. She has also led anti-money laundering reviews and investigations for Latin Amer-ican banks and money service businesses. Previously, Ms. Carey was a director with PricewaterhouseCoopers Investigations in Los Angeles, where she managed a broad range of complex matters, including anti-corruption investigations in Latin America, Asia and the Middle East. She also served as managing director for Kro-ll Associates in Southern California, where she managed firm-wide operations in Southern California. Early in her career, Ms. Carey was an investigative journal-ist, reporting from more than 30 countries on political, economic, business and social developments. She was both a print and radio journalist for American and British media, including the Atlanta Constitution, Christian Science Monitor, The Economist, ABC Radio, The Financial Times Newsletter and UPI, and established an office in Moscow for Cox Newspapers in 1988. Ms. Carey has been interviewed frequently on issues of risk, fraud and money laundering in the national media. She received her B.A. in English literature from Grinnell College and also attended Harvard University’s Russian Research Center.

Katya Hirose, CAMS-Audit, CFCS, CFE is a director in FTI Consulting Inc.’s Forensic & Litigation Consulting segment in Los Angeles, where she carries out and manages complex in-vestigative, business intelligence and risk-mitigation consult-ing assignments undertaken by FTI Consulting globally and domestically. She has served as an adviser and problem-solv-er to senior executives of multinational corporations and law firms for more than nine years, overseeing clients’ most complex and sensitive problems around the globe involving

integrity and reputational risks. Ms. Hirose blends public records, databases and so-cial media research with extensive field work and interviewing techniques, and has managed a wide array of cases ranging from check fraud to product tampering and FCPA compliance-driven due diligence, and has also conducted complex multi-ju-

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risdictional asset searches. She has spoken on panels for webinars on topics ranging from anti-bribery and corruption to ethics and liability of professional service firms, and has spoken at various financial crime and fraud conferences on utilizing open-source intelligence and working with law enforcement. Ms. Hirose recently served as a senior consultant in corporate investigations for Control Risks and has served as a certified mediator, interned for the U.S. Navy JAG in Yokosuka, Japan, and was a summer associate at a patent law firm in Tokyo. She is also trained in the advanced course of the Reid Technique of Interviewing and Interrogation. Ms. Hirose is a na-tive Russian speaker, speaks intermediate Japanese and has working knowledge of Mandarin Chinese and Spanish. She holds a B.A. in Asian studies from Baylor Uni-versity and a J.D. from the University of Houston.

Chapter 10 Authors

James S. Feltman, CPA is a senior managing director with Mesirow Financial Consulting, LLC in Miami and has more than 30 years of experience providing a broad range of lit-igation, forensic and investigative services. He served as an appointee with the U.S. Department of Justice for over a de-cade and has also served as both a consulting and testifying expert, led cross-border forensic and investigative engage-ments, been appointed as an advisor by both federal (U.S. district and U.S. bankruptcy) and state courts, served as an

arbitrator and mediator, and has been appointed as a monitor by the U.S. Federal Trade Commission (FTC). Mr. Feltman has been established as an expert in de-termining the underlying fact pattern, establishing liability and determining dam-ages in myriad engagements. In his capacity as an expert, he has been engaged in providing both consulting and expert testimony in the areas of money laundering, Ponzi schemes, asset-tracing and recovery, accounting and financial statement re-porting issues, potential causes of action against certain current and former offi-cers, directors and third parties, securities fraud, misrepresentation, hedging and trading in complex securities schemes, and bankruptcy and insolvency issues. Mr. Feltman is a frequent speaker at industry conferences and has been interviewed by Bloomberg, NPR, CNN and CNBC on the regulatory environment in China and the challenges of Chinese companies listed on U.S. markets. He has been quot-ed and featured in a number of industry and non-industry related publications, including Bloomberg.com, Bankruptcy Insider, thestreet.com, Crain’s Chicago, The


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Wall Street Journal, Reuters and Business Travel World, ABI Journal and Bankruptc-yLaw360. Mr. Feltman has more than two decades of experience with Big 4 ac-counting firms and was previously a partner at Arthur Andersen LLP and KPMG LLP. He is a Fellow of the American College of Bankruptcy and a member of the American Institute of Certified Public Accountants and Florida Institute of Certi-fied Public Accountants, and is a former ABI Board member. Mr. Feltman received his B.A. from the University of Wisconsin at Madison and his M.P.S. from Cornell University.

Melissa Kibler Knoll, CPA, CIRA, CTP, CFF, CDBV is a se-nior managing director with Mesirow Financial Consulting, LLC in Chicago and has more than 25 years of experience providing restructuring, litigation, forensic, valuation and related financial advisory services to companies in a vari-ety of industries. Her experience includes advising debt-ors, unsecured creditors, secured lenders and other parties in addressing a variety of financial, accounting, valuation, operational, liquidity and leverage issues in chapter 11 and

chapter 7 bankruptcies, out-of-court workouts, receiverships/trusteeships, and other insolvency proceedings. Ms. Knoll specializes in bankruptcy-related litiga-tion and has provided a variety of litigation support, expert testimony and inves-tigatory services in matters such as fraudulent conveyance and other avoidance actions, as well as various commercial litigation matters in other forums. She has provided assistance with forensic accounting, asset-tracing, investigative analysis and insurance claim resolution in fraud-related matters. She has also advised par-ties in a variety of litigation matters, including merger-and-acquisition disputes, statutory appraisals, director and officer claims, breaches of contract, securities fraud, intellectual property, lender liability and other commercial litigation. Ms. Knoll has provided expert testimony on a number of occasions in district, bank-ruptcy and state courts, arbitrations and other venues. She has also assisted lenders and borrowers in a number of confidential out-of-court workout matters and has experience operating and managing companies in receiverships and trusteeships. Ms. Knoll is a frequent speaker and has served on the faculty of ABI’s Litigation Skills Symposium. She is a former ABI president and serves as treasurer of the American College of Bankruptcy, and she is a director of INSOL International (as ABI’s representative) and a member and the immediate past chair of the Ameri-can Institute of Certified Public Accountants (AICPA) Bankruptcy Task Force. Ms.

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Knoll has been named the 2003 CIRA Gold Medal Winner, one of Crain’s Chicago Business 2004 “40 Under 40,” the IWIRC 2010 Woman of the Year in Restructuring, one of Illinois CPA Society’s 2011 Women to Watch Award recipients, and one of Consulting Magazine’s 2013 Women Leaders in Consulting. She earned her B.B.A. in accounting summa cum laude from Texas A&M University and her M.B.A. from Southern Methodist University.

Michael N. Zembillas, CPA, CIRA is a senior associate at Alvarez & Marsal in its North American Corporate Restruc-turing Group in Atlanta and has significant bankruptcy-re-lated litigation experience advising examiners, trustees, plan administrators and counsel. He has advised on financial, economic and accounting matters related to complex busi-ness disputes, including preferential transfers and fraud-ulent conveyance actions; reasonably equivalent value and solvency analyses; investigative services relating to account-

ing malpractice claims and liability issues; and forensic analysis and asset-tracing. Mr. Zembillas also has financial advisory experience with services designed to as-sist an array of stakeholders in distressed business and workout situations, and has worked with companies regarding their financial and operational restructuring needs, the strategic and financial assessments of companies, business units and assets, the implementation of operational and performance-improvement initia-tives, working-capital management, debt capacity analyses and financial forecast-ing. Previously, Mr. Zembillas was with Mesirow Financial Consulting, where he provided corporate restructuring and litigation support services, and with Ernst & Young, where he provided audit and advisory services. He holds a FINRA Series 7 General Securities license and is a member of the American Institute for Certified Public Accountants, the Association of Insolvency & Restructuring Advisors and ABI. Mr. Zembillas received his B.S. in accounting from Florida State University and his M.B.A. from Florida Atlantic University.


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Chapter 11 Author

Hon. Steven W. Rhodes is a retired U.S. Bankruptcy Judge for the Eastern District of Michigan in Detroit and served for nearly 30 years until his retirement on Feb. 18, 2015. He served as its chief judge from 2002-09, and was also ap-pointed to the Bankruptcy Appellate Panel of the Sixth Cir-cuit from 1997-2004 and 2008-11, serving as its chief judge from 2002-2004. Judge Rhodes was an associate editor of the American Bankruptcy Law Journal, published by the Nation-al Conference of Bankruptcy Judges, from 1994-96, and in

1995 he was inducted as a Fellow of the American College of Bankruptcy. From 2002-04, he chaired the National Conference of Bankruptcy Judges Endowment for Education, and from 2005-09 he was ABI’s Vice President-Research. On April 3, 2009, ABI awarded him with its 2009 Distinguished Service Award. Judge Rhodes is a co-author, with Kathy Bazoian Phelps, of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, published by Matthew Bender LexisNexis (March 2012), and is a frequent speaker. In July 2013, the chief judge of the Sixth Circuit Court of Appeals appointed him to preside over the historic bankruptcy case of the City of Detroit, and he confirmed the city’s plan of adjustment in November 2014. As a result, Crain’s Detroit Business honored him as one of its 2014 Newsmakers of the Year, and Michigan Lawyers’ Weekly named him 2014 Lawyer of the Year. Judge Rhodes received his undergraduate degree in mechanical engineering from Purdue University and his J.D. from the University of Michigan Law School, where he served as an editor of the Michigan Law Review.

Chapter 12 Author

Linda L. Northrup is a founding partner of Northrup Schlueter, APLC in Westlake Village, Calif., where she heads the firm’s complex business litigation and appellate practice groups. She has more than 30 years of experience handling complex financial disputes in multiple business sectors from construction to medical device and technology companies. In addition, she has acted as independent counsel in share-holder disputes involving publicly held companies, over-seeing audits and investigations during shareholder suits

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in the federal district court. She has handled cases in all levels of the state and federal courts of California and has also handled matters pro hac vice in the U.S. District Courts for the District of Columbia and the Northern District of Texas. Ms. Northrup was instrumental in obtaining orders that effectively shut down a multinational enterprise involved in bootlegging and financial fraud in which the perpetrators ultimately faced federal criminal indictments for bankruptcy fraud handed down during the civil case. She also joined with attorneys from the Federal Deposit Insurance Corporation to successfully oppose a petition for certiorari be-fore the U.S. Supreme Court after defeating challenges to transactions conducted by the FDIC under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. In another matter, handled for a high-level executive in the biotech industry, she led the team that traced asset transfers through numerous complex financial vehicles designed to hinder detection of a massive fraud with investor funds, obtaining turnover orders preserving investor assets and dismantling the fraudulent investment vehicles. Ms. Northrup is a regular speaker at legal seminars and a guest lecturer on ethics and professional responsibility at local law schools. She received her undergraduate degree from the University of California at Los Angeles and her J.D. from Hastings College of the Law.

Chapter 13 Authors

Michael P. Richman is a partner in the Bankruptcy, Re-structuring & Creditors’ Rights practice group of Hunton & Williams LLP in New York and has more than 30 years of legal experience, and he is skilled in all aspects of chapter 11 bankruptcy. He focuses on representing chapter 11 debtors and creditors’ committees, and has advised and continues to represent secured and unsecured creditors, equity-holders, purchasers and other parties in interest on virtually every aspect of financial distress and bankruptcy. He has repre-

sented Puerto Rico’s Department of Treasury, as well as the principal bondholder opponents of the fast-track sale of General Motors. Mr. Richman has appeared as counsel in state, federal and bankruptcy courts in nearly 20 states and terri-tories. An active member of ABI and a former ABI president, he co-chaired the Section 363 subcommittee of the ABI Commission to Study the Reform of Chapter 11 and served as co-vice chair of ABI’s National Ethics Task Force. In addition, he is an advisory board member of ABI’s New York City and VALCON annual con-


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ferences. A frequent speaker and lecturer on bankruptcy law and related topics, Mr. Richman was a contributing editor to the ABI Journal and is the founder and a performing member of ABI’s house band, the Indubitable Equivalents, which regularly performs at bankruptcy conferences around the country. He received his undergraduate degree with honors from Vassar College and his J.D. from Colum-bia Law School, where he was a Harlan Fiske Stone scholar and was awarded the David M. Berger award in honor of Prof. Wolfgang Friedmann for distinction in international law. He also served as managing editor of the Columbia Journal of Transnational Law.

Justin F. Paget is an associate in the bankruptcy and cred-itors’ rights practice group of Hunton & Williams LLP in Richmond, Va., where his transactional and litigation prac-tice focuses on the domestic and international representa-tion of clients on issues related to bankruptcy and creditors’ rights, secured loan workouts, and the purchase and sale of bankruptcy claims. Previously, he clerked for Hon. Rob-ert G. Mayer of the U.S. Bankruptcy Court for the Eastern District of Virginia. Mr. Paget has represented debtors in

complex chapter 11 cases in the mining, printing and mortgage lending industries within and outside of Virginia. He also regularly represents creditors’ commit-tees in chapter 11 cases, as well as individual creditors and trustees in a variety of bankruptcy proceedings, and he also represents secured creditors in out-of-court restructurings, with a focus on commercial loans in complex real estate develop-ments involving community development authority financing. Mr. Paget’s practice includes the representation of alternative investment firms in the purchase and sale of bankruptcy claims in mega-chapter 11 bankruptcy cases, including Leh-man Brothers Holdings Inc., Lehman Brothers Inc. (SIPA), MF Global Inc., AMR Corporation, and other chapter 11 cases and international insolvency proceedings. He has published numerous articles on a variety of bankruptcy and insolvency issues, including credit bidding, the bankruptcy safe-harbor provisions, provisions governing the purchase and sale of bankruptcy claims, and chapter 11 plan voting issues, and he was recognized as a “Virginia Rising Star” by Super Lawyers in 2015 and as an “Associate to Watch” for bankruptcy and restructuring in Virginia by Chambers & Partners. Mr. Paget received his B.A. in economics and mathematics from the University of North Carolina at Chapel Hill and his M.B.A. and J.D. from the University of Richmond.

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Chapter 15 Author

Rebecca Callahan is a full-time mediator and arbitrator with ADR Services, Inc., a leading provider of neutral services in California. Prior to becoming a full-time neutral, Ms. Cal-lahan was an insolvency attorney representing debtors or creditors in chapter 11 reorganizations and related litigation. Her experience covers a broad spectrum of industries and subject matters. Ms. Callahan has been involved in fraud/fraudulent transfer/misappropriation disputes involving the computation of compensatory and punitive damages, as well

as efforts to trace and recover the defendant’s bad acts. She is director of the Or-ange County Bar Association, a past chair and current program chair of the ADR Section of the Orange County Bar Association, and a past president of the Peter M. Elliott Inn of Court. Ms. Callahan is admitted to the California Bar and is admitted to practice before the U.S. Supreme Court, the Ninth Circuit Court of Appeals, and the U.S. District Court for the Central, Eastern, Northern and Southern Dis-tricts of California. She has also been admitted pro hac vice in numerous jurisdic-tions, including New York, Pennsylvania and Wyoming. Ms. Callahan speaks and writes frequently on ADR topics and is on the faculty of the Straus Institute and the American Arbitration Association University. She received her bachelor’s degree from the University of Southern California and her J.D. from Boalt Hall/University of California at Berkeley, and in 2007, she earned an LL.M. in Dispute Resolution from Pepperdine University School of Law/Straus Institute.

Chapter 16 Authors

Melissa Davis, CPA, CIRA, CFE is a partner with KapilaMu-kamal, LLP in Ft. Lauderdale, Fla., where she concentrates her practice on providing insolvency, litigation and forensic investigation services to fiduciaries, debtors and creditors. She has assisted bankruptcy trustees and has acted as CRO for a variety of companies in chapter 11 bankruptcy, and she is experienced in 363 sales and liquidating chapter 11 plans. Her experience in insolvency matters also encompasses in-vestigating fraudulent and preferential transfers and related

defense and solvency analyses. Ms. Davis has assisted clients in bankruptcy-related


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financial reporting, claims review and litigation support in adversary proceedings. She has also provided litigation support and damage calculations through forensic financial investigations in a variety of industries, and has assisted with the investi-gation of securities fraud, corporate business conduct and Ponzi schemes. Ms. Da-vis has worked in conjunction with the Securities and Exchange Commission, the Federal Bureau of Investigation and the U.S. Attorney’s Office. She has also served as a court-appointed assignee in assignment for the benefit of creditors matters and has served as a post-confirmation liquidating plan trustee. Ms. Davis has authored several articles that have been published in the ABI Journal and the journal for the Bankruptcy Bar Association of the Southern District of Florida. She received her B.B.A. in accounting from Florida Atlantic University.

Soneet R. Kapila, CPA, CFF, CFE, CIRA is a founding part-ner of KapilaMukamal, LLP in Ft. Lauderdale, Fla., and has concentrated on the areas of consulting in litigation support, restructuring, insolvency, fiduciary and creditors’ rights matters for 20 years. He is a federal bankruptcy trustee and has served as an examiner, chief restructuring officer, chap-ter 11 trustee, liquidating trustee, corporate monitor (SEC appointment), and state and federal court-appointed re-ceiver of operating businesses in numerous matters in the

Southern and Middle Districts of Florida. As a trustee plaintiff, Mr. Kapila has managed complex litigation in significant cases. He has advised and represented debtors, secured creditors and creditors’ committees in formulating, analyzing and negotiating plans of reorganization. As a recognized expert in fraudulent convey-ance, Ponzi scheme and insolvency issues, he has also provided expert testimony and extensive litigation support services to law firms involving complex insolvency issues and commercial damages. Mr. Kapila has worked in conjunction with the SEC, the Federal Bureau of Investigation and the U.S. Attorney’s Office, and has served both as a consultant and expert witness for litigation matters in state and federal courts. He is a frequent speaker on topics related to insolvency, underper-forming businesses and insolvency taxation. Mr. Kapila is a Fellow of the American College of Bankruptcy and has been a past president and former chairman of the Association of Insolvency and Restructuring Advisors. He serves on the advisory board of ABI’s Caribbean Insolvency Symposium, co-chairs ABI’s Southeast Bank-ruptcy Workshop and has been published in the ABI Journal. Mr. Kapila received his M.B.A. in 1978 from Cranfield School of Management.

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Table of Contents

Chapter 1Introduction ....................................................................................... 1

I. The Uniqueness of a Forensic Accountant ............................................................. 2

II. The Roles of a Forensic Accountant ....................................................................... 3

III. Why Forensic Accountants, Managers and Lawyers Need This Book.................. 5

IV. Conclusion .............................................................................................................. 8

Chapter 2Red Flags and the Development of a Fraud Investigation .................... 9

I. Organizing a Fraud Investigation ........................................................................... 11A. Planning .................................................................................................................... 11B. Execution .................................................................................................................. 11

II. Indicia of Fraud: The Warning Signs ..................................................................... 12A. External Market/Industry Factors ......................................................................... 13B. Borrowing Base Reports ......................................................................................... 14C. Operations ................................................................................................................ 15D. Annual Audit Problems .......................................................................................... 16E. Financial Reporting, Internal Controls and Other Accounting-Related Issues ..17F. Management Transgressions and Sins .................................................................. 23G. Sales Cycle Red Flags .............................................................................................. 24H. Third-Party Documentation Concerns ................................................................ 26

III. False Positives: Signs of Financial Distress ............................................................ 27

IV. Conclusion .............................................................................................................. 29

Chapter 3Types of Fraud in an Operating Business and Preventative Measures .. 31

I. The Team ................................................................................................................. 33

II. How Is Fraud Detected? .......................................................................................... 33A. Analyze Cash Flow .................................................................................................. 34B. Review Employee Files ........................................................................................... 35C. Inspect Company Credit Card Usage ................................................................... 35D. Note Changes in Lifestyle or Bad Habits .............................................................. 36E. Evaluate Management Expectations ..................................................................... 36

III. Types of Fraud in Operating Businesses ................................................................ 37


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A. Asset Misappropriation .......................................................................................... 37B. Corruption ............................................................................................................... 39C. Financial Statement Fraud ..................................................................................... 40

IV. Fraud Issues Detected Within Small Companies .................................................. 41A. Segregation of Duties .............................................................................................. 41B. Misappropriation Despite Segregation ................................................................. 42

V. Fraud Issues Detected Within Large Privately Held Companies .......................... 42

VI. Preventative Measures ............................................................................................ 43A. What Is the Fraud Diamond?................................................................................. 43B. How to Reduce the Risk of Fraud .......................................................................... 44C. Insuring Against Fraud ........................................................................................... 45

VII. Limitations of a Fraud Investigation ...................................................................... 46

VIII. Conclusion ............................................................................................................. 46

Chapter 4 Forensic Accounting and Fraud Detection: The Increasing Role of Data Analytics ................................................................................. 47

I. Why Data Analytics? .............................................................................................. 48

II. Analytics and Forensic Accounting: Upping the Detection Game with Risk Engines....49

III. Applying Data Analytics to Fraud Detection ......................................................... 50A. Visual Analytics ....................................................................................................... 50B. Transactional Data Analytics ................................................................................. 51C. Text Analytics ........................................................................................................... 52D. Link Analysis ............................................................................................................ 53E. Predictive Analytics ................................................................................................ 53F. Social Network Analytics ....................................................................................... 53

IV. Conclusion .............................................................................................................. 54

Chapter 5The Role of the Forensic Accountant in Fraudulent Transfer Litigation ..55

I. Identification of Fraudulent Transfers ................................................................... 57A. Freeze Evidence and Assets .................................................................................... 57B. Red Flags of Potential Fraudulent Transfers ........................................................ 58

II. The Need for a Database ......................................................................................... 59A. The Importance of a Database ............................................................................... 59B. Building the Database ............................................................................................. 59C. Use of Database as a Reference .............................................................................. 59

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III. Collecting Data ....................................................................................................... 60A. Records of Debtor Obtained from Debtor or On-Site Collection .................... 60B. Documentation and Information Maintained by Third Parties ........................ 62C. Documentation and Information Maintained by Financial Institutions ......... 62D. Bank Account Information from Sources Other than Financial Institutions .....65

IV. Processing the Documents and Data and Preparing the Database ...................... 68A. Systemic Approach .................................................................................................. 68B. Document Index ...................................................................................................... 69

V. Analyzing Data........................................................................................................ 73A. Sorting by Date or Amount .................................................................................... 73B. Ways to Analyze Data ............................................................................................. 73

VI. Tracing Funds ......................................................................................................... 76A. Identify Transfer of Interest of Debtor in Property or Obligation Incurred

by the Debtor ........................................................................................................... 77B. Subsequent Transferees ........................................................................................... 78C. Actual Tracing vs. Fictional Tracing ..................................................................... 78D. Instances Where Tracing Is Not Required or Appropriate ............................... 80E. Tracing Into or Through a Commingled Fund ................................................... 81

VII. Conclusion .............................................................................................................. 85

Chapter 6Discovery Battles over Electronically Stored Information ................... 87

I. What Is ESI? ............................................................................................................ 88

II. Special Discovery Rules as Between the Parties for Production of ESI ................ 89A. Federal Rule of Civil Procedure 34 ....................................................................... 89B. Unique Nature of ESI .............................................................................................. 93C. Form of Production................................................................................................. 94D. Scope of Discovery .................................................................................................. 97E. Allocating Costs of Discovery ............................................................................... 101F. Inadvertent Waiver of Attorney/Client Privilege or Work-Product Doctrine ....103G. Preservation of ESI ................................................................................................. 107

III. Obtaining ESI from Third Parties .......................................................................... 110

IV. Cooperation and Coordination of ESI Discovery .................................................. 113

V. Conclusion .............................................................................................................. 115

Chapter 7 Collecting and Using Electronically Stored Information in a Fraud Case .................................................................................... 117


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I. Identifying ESI ........................................................................................................ 118

II. Collecting ESI .......................................................................................................... 119A. Leading Data-Collection Practices ....................................................................... 120B. ESI Collection Scenarios ........................................................................................ 124C. Impact of Corporate Policies on Data Collection ............................................... 127D. Chain-of-Custody Issues in Collection Process .................................................. 129

III. Review, Data Processing and Hosting .................................................................... 131A. Reviewing the Collected ESI .................................................................................. 132B. Data Processing ....................................................................................................... 132C. Predictive Coding .................................................................................................... 133

IV. ESI in the Bankruptcy Process ............................................................................... 134A. Preserving ESI in a Bankruptcy Case ................................................................... 134B. How ESI Can Help in a Bankruptcy Case ............................................................ 137C. Discovery of E-Clues Through Data Analytics .................................................... 137D. Locating Hidden Assets and Claims .................................................................... 138E. Discovery of Intellectual Property ........................................................................ 141F. Transfers Outside the Estate: Possibility for a Consolidation? .......................... 142G. ESI Can Assist with Solvency Analysis or Asset Valuation ................................ 142H. Discovery of Backdated or Altered Documents .................................................. 143

V. Conclusion .............................................................................................................. 143

Chapter 8Investigative Interviewing Techniques for the Forensic Accountant .... 147

I. What to Prepare in Advance ................................................................................... 148

II. Setting Up the Room .............................................................................................. 149

III. Additional Considerations ..................................................................................... 150

IV. Forming a Rapport with the Subject ...................................................................... 150

V. Information-Gathering ........................................................................................... 152A. Asking Open-Ended Questions ............................................................................. 152B. Evidence vs. Hearsay ............................................................................................... 153C. Never Fill the Silence .............................................................................................. 153D. Engage in Active Listening ..................................................................................... 153

VI. How to Detect Deceptive Behavior ........................................................................ 154A. Verbal Cues .............................................................................................................. 154B. Nonverbal Cues ....................................................................................................... 155C. How to Respond to Evasiveness or Lying ............................................................. 155

VII. Conclusion .............................................................................................................. 156

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Chapter 9Social Media as an Investigative Tool................................................... 159

I. Where to Begin? ...................................................................................................... 161A. Paid Public Records Searches ................................................................................ 161B. Email Address Searches .......................................................................................... 161C. Extending the Search to Linked Accounts and Names ...................................... 162D. Extending the Search Beyond U.S. Borders ......................................................... 162

II. Business vs. Personal Sites ...................................................................................... 163A. Business Social Networking Sites .......................................................................... 163B. Personal Sites............................................................................................................ 163C. How to Search the Sites .......................................................................................... 164

III. Navigating Facebook .............................................................................................. 164

IV. Navigating Google+ ................................................................................................ 165

V. Twitter ..................................................................................................................... 165

VI. Aggregators ............................................................................................................. 166

VII. Photo and Video Sites ............................................................................................. 166

VIII. eBay, Amazon and Other Public Information ...................................................... 167

IX. Use in Evidence ....................................................................................................... 167

X. Conclusion .............................................................................................................. 168

Chapter 10How to Write an Effective Expert Report ............................................. 169

I. Industry Guidance Applicable to the Preparation of Expert Reports .................. 171A. American Institute of Certified Public Accountants .......................................... 171B. Association of Certified Fraud Examiners ........................................................... 176

II. Federal Rules of Evidence Applicable to the Preparation of Expert Reports ....... 180A. FRE 702: Testimony by Expert Witnesses ............................................................ 180B. FRE 703: Bases of an Expert’s Opinion Testimony ............................................. 181C. FRE 704: Opinion on an Ultimate Issue ............................................................... 182D. FRE 705: Disclosure of Facts or Data Underlying Opinion ............................... 182E. FRE 706: Court-Appointed Expert Witnesses ..................................................... 183

III. Other Legal Considerations .................................................................................... 183A. State and Local Rules .............................................................................................. 183B. Court and Authoritative Orders ............................................................................ 184C. Alternative Dispute Resolution Rules ................................................................... 184


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IV. The Expert Report ................................................................................................... 185A. The Purpose of the Expert Report......................................................................... 185B. Who Must Provide an Expert Report ................................................................... 185C. Elements of the Expert Report .............................................................................. 186D. Assistance of Counsel in Preparing Expert Report ............................................. 190

V. Techniques for Drafting an Effective Expert Report ............................................. 190A. Report Structure and Formatting .......................................................................... 191B. Proper Review and Disclosure of Documents Produced ................................... 192C. Stating the Expert’s Qualifications Accurately and Objectively ....................... 193D. Presenting Factual Assumptions that Serve as a Basis for Opinions ............... 194E. Formulating Opinions and Conclusions in a Defensible Manner .................... 195F. Drafting a Powerful, Persuasive and Understandable Expert Report .............. 196

VI. Discoverability of Expert Reports and Related Materials ..................................... 198A. Written Work Product ............................................................................................ 198B. Communications with Counsel ............................................................................. 199C. Nontestifying Experts ............................................................................................. 201

VII. Rebuttal and Supplemental Reports ...................................................................... 201A. Purpose of Rebuttal Reports .................................................................................. 201B. Supplemental Reports ............................................................................................. 202C. Timing of Rebuttal Reports .................................................................................... 202

VIII. Conclusion ............................................................................................................. 203

Chapter 11Effective Expert Testimony .................................................................. 205

I. Admission of Expert Testimony ............................................................................. 206

II. How to Win the Battle of the Experts .................................................................... 208A. Nonverbal Communication ................................................................................... 208B. Verbal Communication .......................................................................................... 209C. The Balance Between Objectivity and Advocacy ................................................ 210D. Professionalism and Competence ......................................................................... 210

III. Preparing for Testimony ......................................................................................... 212A. Preparing for Direct Examination......................................................................... 212B. Preparing for Cross-Examination ......................................................................... 215C. Helping the Attorney Prepare for the Cross-Examination of the Opposing Expert .......................................................................................... 220

IV. Demonstrative Evidence ......................................................................................... 221

V. The Most Common Problems................................................................................. 222

VI. Conclusion .............................................................................................................. 223

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Chapter 12The Lawyer’s Role in the Forensic Accountant’s Work.......................... 225

I. Choose the Best Accountant/Accounting Firm ..................................................... 226A. Understanding Designations/Certifications ........................................................ 226B. Researching Through the Internet and Social Media ........................................ 227C. Obtaining and Reviewing Reported and Unpublished Cases ........................... 227

II. The Pre-Litigation Phase ........................................................................................ 228A. Use Accountant to Help Define the Claims ......................................................... 228B. Consideration of Accountant’s Pre-Lawyer Relationships ................................. 230

III. Establishing Budgeting and Staffing ...................................................................... 231A. Review, Assessment and Forensic Accounting Services ..................................... 231B. Testifying Expert...................................................................................................... 232C. Role in Mediation .................................................................................................... 232

IV. Evidence Preservation ............................................................................................ 233A. Litigation Holds and Spoliation ............................................................................. 233B. Working In-House with the Client ...................................................................... 234C. Third-Party Evidence .............................................................................................. 235

V. The Discovery Process ............................................................................................ 236A. Know Your Forum ................................................................................................... 236B. Mapping Out a Discovery Plan ............................................................................. 237

VI. Mediation/Settlement Conferences ....................................................................... 240A. Confidentiality Concerns ....................................................................................... 241B. Negotiating and Drafting Settlement Agreements .............................................. 242

VII. Trial/Hearing ........................................................................................................... 242A. Ability to Speak to the Jury .................................................................................... 242B. Use of Demonstrative Exhibits .............................................................................. 243

VIII. Post-Trial Issues ..................................................................................................... 244

IX. Conclusion .............................................................................................................. 245

Chapter 13 Ethics Issues in Retaining and Using Forensic Accountants as Expert Witnesses and Consultants .................................................. 247

I. Identifying the Consultant/Witness ....................................................................... 249A. Vetting the Witness ................................................................................................. 249B. The Engagement Letter and Assignment Instructions: Consulting Experts vs. Testifying Experts .......................................................... 253

II. Preparing for Trial .................................................................................................. 257


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A. The Basic Dilemma: How to Assure in an Ethically Permissible Way that the Retained Expert Tells the Story that the Attorney Hopes Will Be Told .............................................................................................................. 257B. The Expert’s Findings Are Not What Was Expected: Now What? .................... 261

III. The Expert Witness’s Testimony Is Unexpectedly Hurting the Case: Now What? .. 266A. Communicating with the Attorney During a Deposition.................................. 266B. Communicating with the Attorney During Trial ................................................ 267

IV. Conclusion .............................................................................................................. 267

Chapter 14Qualifications and Traits of a Good Forensic Accountant .................... 269

I. What Is a Forensic Accountant? ............................................................................. 270A. Categories of Forensic Accounting ....................................................................... 271B. Professional Skeptics ............................................................................................... 272C. Not Arbiters of Legal Issues ................................................................................... 272

II. The History of Forensic Accounting ...................................................................... 273

III. Personality Traits of the Forensic Accountant ....................................................... 274A. Integrity and Ethics ................................................................................................. 274B. An Inquisitive Mind ................................................................................................ 275C. Cautious and Thorough .......................................................................................... 276D. Credibility ................................................................................................................. 276E. Professional Demeanor, Cooperativeness and Collegiality ............................... 277F. Objectivity and Absence of Bias ............................................................................ 277G. Attention to Detail ................................................................................................... 278H. Confidence Without Arrogance ............................................................................ 278

IV. Skills and Practices ................................................................................................. 279A. Organization Skills .................................................................................................. 279B. Communication Skills: Oral and Written ............................................................ 280C. Legal and Technical Skills....................................................................................... 282

V. Training and Credentials ........................................................................................ 284A. Professional Credentials and Standards ............................................................... 284B. Specialized Certificates ........................................................................................... 285

Chapter 15Effective Use of a Forensic Accountant in Mediating Commercial Fraud Disputes ................................................................ 293

I. Mediation Overview ............................................................................................... 294A. Voluntary Process .................................................................................................... 295B. Autonomy ................................................................................................................. 295C. Confidentiality ......................................................................................................... 295

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II. The Bottom Line: Time and Cost ........................................................................... 296A. Risk vs. Reward of Litigation ................................................................................. 296B. Methods of Evaluation ............................................................................................ 296

III. Mediation Is a Staged Process ................................................................................ 299A. It’s a Walk, Not a Race ............................................................................................. 299B. The Search for Options and Solutions .................................................................. 300C. The Challenges and Uncertainties ......................................................................... 300D. Everybody Needs to Be Heard ............................................................................... 301

IV. The Forensic Accountant’s Role .............................................................................. 302A. Help State Financial Aspects that Define the Dispute ........................................ 302B. Help Tie Reasons to Proposals .............................................................................. 305C. Help Close the Deal ................................................................................................. 306

V. The Role of the Accountant in Setting Realistic Settlement Goals ....................... 307A. Tax Implications of Settlement .............................................................................. 308B. The Opening Offer .................................................................................................. 309C. Evaluation of Risks Avoided by Settlement .......................................................... 309

VI. Present the Best Data to the Right Audience ......................................................... 311

VII. Conclusion .............................................................................................................. 312

Chapter 16Forensic Accounting in Health Care Fraud .......................................... 313

I. Health Care Fraud Legislation ................................................................................ 314A. Health Insurance Portability and Accountability Act of 1996 ........................... 315B. Anti-Kickback Statute ............................................................................................. 316C. The Stark Law ........................................................................................................... 317D. The False Claims Act ............................................................................................... 317E. Combating Medicare Fraud ................................................................................... 317F. Medicare and Medicaid .......................................................................................... 319

II. Health Care Fraud Schemes ................................................................................... 320A. Patient Fraud ............................................................................................................ 320B. Provider Fraud ......................................................................................................... 321C. Institutional Provider Fraud .................................................................................. 324D. Insurance Company Fraud ..................................................................................... 327

III. Investigation and Prevention ................................................................................. 329A. The Role of a Forensic Accountant ....................................................................... 330B. Investigating Provider Fraud ................................................................................. 330C. Detection of Medicare Fraud ................................................................................. 331D. Use of Technology to Detect Fraud ....................................................................... 332E. HIPAA Regulations ................................................................................................. 333

IV. Health Care Fraud Intersects with Insolvency ...................................................... 333


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V. Conclusion .............................................................................................................. 334

Chapter 4

Michael E. Brodsky

Anthony DeSantis

Jonathan Nash


48 Chapter 4

The key stakeholders in a midmarket merchandising company were baffled. The company’s financial statements showed positive cash flow, but its revolving line of credit was insufficient to fuel the business. Standard metrics, notably

EBITDA and the balance sheet, indicated that the business was healthy. Yet directors, private-equity shareholders and lenders realized that its performance was quickly de-grading to the point that the company’s lenders were threatening foreclosure action.

The lenders called for a collateral “audit.” The analysis revealed a massive, brazen fraud by the company’s tenured CFO, not for personal gain but simply to hide the deteriorating conditions. The CFO was fired, and the company was ultimately sold below liquidation value, with the extent of the fraud never fully determined.

Could the company have avoided this fate? A proper fraud-prevention pro-gram that employs both data analytics and the skills and experience of forensic professionals very likely could have detected the fraud earlier and helped avert the meltdown.

How can organizations evolve from reacting to damaging fraud incidents such as this to proactively identifying fraud threats and indicators? This chapter provides an overview of the data analytics tools and methodologies available to fight fraud originating internally or externally, both to test for instances during a restructuring and as an ongoing organizational priority. In the hands of forensic accountants and other investigators of varying experience levels, data analytics can become a potent tool both for fraud prevention and retrospective assessment of fraud incidents.

I. Why Data Analytics?

Individuals who come forward with information on existing or potential fraud can find themselves praised by investigators, thanked by victims, and occasionally romanticized in literature and film. Indeed, whistleblower tips are vital to uncover-ing many schemes, and encouraging and pursuing them is an obvious component of an effective anti-fraud strategy.

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Forensic Accounting and Fraud Detection: The Role of Data Analytics 49

However, less than half (about 42 percent) of occupational frauds — those committed by employees — have been found as a result of tips.15 Many more schemes can be uncovered through other means, such as management reviews and internal audits, while others may never be found or may only be “stumbled upon” inadvertently. A more proactive approach involving data analytics can be vital to uncovering fraud. Fueled by increasing computing power and new tools, analytics complement and strengthen in a cost-effective manner the capabilities of forensic accountants and other professionals engaged in fraud discovery and investigation.

Analytics can uncover patterns and clues in voluminous data that humans sim-ply cannot divine on their own, leading to faster, more targeted analysis. Analytics can help investigators such as forensic accountants and data analysts to focus their attention on data subsets that are likely to reveal fraud such as anomalies, outliers and missing items.

II. Analytics and Forensic Accounting: Upping the Detection Game with Risk Engines

Many organizations frequently take a risk-based sampling or transactional test-ing approach to investigation, relying purely on the concept of “test failures” to detect fraud or corruption. Sampling and testing are typically conducted based on known patterns of behavior, or they focus on perceived areas of risk, such as duplicate payments.

These approaches may result in missed transactions or may simply return too many results for effective review. The output is often full of “noise” or false posi-tives, requiring analysts to sift through rows and rows of transactions to identify those “hits” that are truly indicative of an issue.

As forensic accounting focuses more and more on data analytics, methods for targeting an investigator’s focus and identifying areas with the highest potential of fraud, waste or abuse can add efficiencies while also increasing the likelihood of identifying issues before the tip comes in. Rather than simply running a series of

15 Key Findings and Highlights of the 2014 Report to the Nations, Ass’n of Certified Fraud Exam’rs, available at www.acfe.com/rttn-highlights.aspx.


50 Chapter 4

pass/fail tests, investigators should look at the transaction or the entity as a whole and try to understand the various transactional attributes in order to determine the overall risk. For example, rather than just focusing on round-dollar payments, a data analytics-based transactional analysis can look at specific types of round-dol-lar payments, such as those to a Russian organization from a freight forwarder with known political ties. In other words, each “test” can now focus on indicators or attributes of an entity or a transaction that, when combined, can help focus and target investigative efforts. This approach, when combined with risk measurement, gives the investigator the opportunity to prioritize and rank transactions and/or entities and to focus investigative efforts on areas of higher priority.

In this way, the use of analytics can both leverage and enhance the capabilities of investigators. Less-experienced staff can be pointed toward issues and indicators that most warrant investigation. At the same time, staff with more experience in issues facing the business can contribute their knowledge and insights to the pro-cess, helping determine which patterns and combinations of indicators are most important. The improved investigative efficiency also provides the opportunity for cost efficiency.

III. Applying Data Analytics to Fraud Detection

The tools and methodologies for data analytics continue to evolve. Companies that take advantage of data analytics tools, from the simple to the more advanced, may position themselves to evolve from the pay-and-chase approach to proactively combating fraud. They can pursue the ultimate goal of stopping frauds before they occur. Below are the analytic methods for detecting financial fraud.

A. Visual Analytics

Both novice and experienced investigators can use data visualization tech-niques to explore and analyze patterns, relationships and anomalies in data. The ability to actually see the connections between entities and individuals can reveal levels of relationships not readily apparent in a spreadsheet, as well as highlight ab-normal patterns. While spreadsheets offer a quick way to understand simple facts and figures, their utility diminishes as the data grows in volume and complexity.

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Visual analytics build on humans’ natural ability to absorb a greater volume of information in visual rather than numeric form and perceive certain patterns, shapes and shades more easily than others. Over a defined time period, spikes or anomalies in a pattern that don’t make sense could warrant further investigation.

Visual representations such as social networking diagrams, which indicate re-lationships within a given community, are examples of expressing complex data in a form that can be understood intuitively. Using mathematical techniques to evaluate patterns and outliers, effective visuals can translate multidimensional data such as frequency, time and relationships into an intuitive picture. For example, hi-erarchically structured tree maps show relative volume through size and shading to highlight differences in variables. A tree map of vendor payments and risk scores, for instance, can help highlight vendors that may present the greatest risk.

By using visual analytics, the merchandising company described earlier may have been able to detect the CFO’s efforts to cover up the company’s deteriorating performance. A visual display could have shown a classic “bill and hold” fraud in one of the company’s locations; the visual display may likely show downward spikes that indicate increased sales before the end of several quarters, followed by unusually large return activity after the new quarter begins. The scheme would likely have been discernible because the visual display could allow the investigator see how several variables — sales, returns, date and office — all worked together to reveal the bill-and-hold pattern. Using visual analytics in this way can enable an investigator who may not be a specialist in statistics to see patterns without first knowing what they might expect to find. It also permits the data to reveal itself into such patterns and anomalies. Without visual analytics, patterns such as these would typically be more difficult to detect without first knowing what to look for.

B. Transactional Data Analytics

Transactional data analytics involve the detailed analysis of general ledgers, ac-counts payable and other transaction records. Transactional analytics can be either rule-based or risk-based.

Rule-based analytics rely on a library of tests to identify whether a transaction, business process or entity passes or fails the rule. These rules may be simple busi-ness rules and logic based on known problems, and may identify whether transac-


52 Chapter 4

tions meet the criteria of a potential issue. Categories can include customer sales, employee time and payments over a certain threshold, to name a few.

Risk-based analytics involve identifying indicators or attributes of a transaction, business process or entity through the use of traditional tests and other known schemes. The indicators are then applied to a risk model to calculate areas with higher potential risk.

Transactional analytics can help organizations focus fraud investigations. For example, a high, round-dollar payment to a foreign freight forwarder might raise greater concern than a round-dollar payment to a domestic janitorial service.

C. Text Analytics

Text analytics refers to a process of automatically deriving useful information from textual data. Text analytics technologies that can be used for forensic ac-counting include keyword searches, document clustering and near-duplicate doc-ument detection, text classification, information extraction and sentiment analysis. A simple text analytics technology is a keyword search. Keyword searches can be used to extract indicators for developing predictive risk models. For example, in the merchandising company situation described above, occurrences of the key-words “revenue” or “profit” in an email between the CFO and an external person could have been an indicator of insider information.

Two types of information — facts and opinions — may be extracted from tex-tual data. Facts are objective information about entities or events. Opinions are sub-jective information that include people’s sentiments, attitudes, or feelings toward entities or events. Both types of information can reveal potential problems. For example, in the merchandising company situation, “sentiment analysis” technolo-gies could have enabled investigators to extract and analyze opinions from meet-ing minutes and emails to help identify corporate executives’ attitudes, feelings, or moods about the performance of the corporation. Prior to issuing financial re-ports, the company’s CFO may have expressed feelings of uncertainty in his emails, using words such as “shall,” “may,” “probably,” “possibly” and “might.” These words could have provided possible clues into the mindset of that executive and poten-tially indicated a propensity for doctoring the company’s financial reports.

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D. Link Analysis

Interrelationships can often be sources of information that help identify or highlight fraud schemes, rings of illicit activity or unexpected relationships. Re-lationships — such as between entities, employees, employees and vendors, and vendors and vendors — when visualized through link analysis can be uncovered. These relationships include ones that extend beyond a first-level relationship to the “nth” level, which are not typically apparent through simple queries. For example, link analysis may uncover fictitious vendors set up by an employee, all of which share bank accounts or mailing addresses. Cleansing and standardizing certain information, such as phone numbers, addresses and identification numbers (e.g., Social Security numbers or tax IDs), can facilitate making these connections.

E. Predictive Analytics

More advanced analytics techniques involve incorporating supervised and un-supervised machine learning to identify transactions and entities with a higher like-lihood of fraud. Leveraging enhanced computing power, these predictive models can analyze past findings, as well as trends and patterns, to identify anomalies that might not otherwise be recognized. For example, in the case of the merchandising company, predictive models might have been built using performance indicators from the company’s historical data. Those models, in turn, may have highlighted anomalies in current and future performance that didn’t align with predicted out-comes, thereby “raising flags” much earlier.

F. Social Network Analytics

Examination of emails, instant messages and other communication methods can help determine who is talking with whom. Also, individual relationships can be identified through social media engagement in forums such as Facebook and Twitter. Tying together these interactions may be critical in uncovering the extent or specifics of a fraud scheme.

Effective use of these tools requires weighing fact-based factors against judg-mental factors, as well as assessing different items within categories using knowl-edge and experience alongside analytics. Also, the process is necessarily iterative, with investigators making adjustments as more insights are revealed and as they


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take into consideration risk tolerances and establish thresholds for triggering ad-ditional investigation. Applying different resolution processes to different types of fraud risks can help improve overall cost-effectiveness and increase risk-manage-ment effectiveness, allowing investigators to be more targeted in their efforts.

IV. Conclusion

Technology advances in the past 10 years have brought data analytics to the forefront, whether for “business intelligence” purposes, legal and regulatory en-forcement and compliance, or enterprise risk management, including anti-fraud efforts. The computing power available today, along with the wide variety of ana-lytics tools and methodologies at a company’s disposal, offer a potent combination that businesses can use to protect themselves against the growing risk of fraud, waste and abuse.

However, an effective anti-fraud program requires more than technology. Combining data analytics with the capabilities of forensic professionals can help organizations more carefully and quickly identify fraud risks and determine the level and type of risk they potentially represent. Rather than relying solely on in-tuition or experience, investigators can use data analytics to help establish facts that validate or refute assumptions, guide decisions, reduce effort expended sifting through the “noise,” and focus and target anti-fraud efforts.

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