Episode 61: Truth v Fiction - How a Forensic Accountant Can Help in an Embezzlement or Partnership Dispute
In this week's episode of The Investigation Game Podcast, Leah talks to Megan Brown, CPA, PI. Leah and Megan discuss the top three misconceptions of financial investigations and forensic accounting. Learn about law enforcement’s response to embezzlements, whether the client will recover stolen money entirely, and how long a financial investigation may last.
This information-packed episode is the second of three conversations with Megan. It is just a sample of the content found in Leah's new book: Data Sleuth: Using Data in Forensic Accounting Engagements and Fraud Investigations. Coming to stores April 2022. Preorder now on Amazon!
Megan is a CPA and PI. In addition to being the forensic accounting manager at Workman Forensics, Megan serves on the board for Street School Inc., a local nonprofit that combines alternative education and therapeutic counseling to help Tulsa students. Read Megan's full bio on the Workman Forensics website.
Connect with Workman Forensics
Youtube: @WorkmanForensics
Facebook: @wforensics
Twitter: @wforensics
Instagram: @wforensics
LinkedIn: @workmanforensics
Subscribe and listen to this and more episodes of The Investigation Game on Apple Podcasts, Android, or anywhere you listen.
Transcript
Intro:
Welcome to the Investigation Game podcast, brought to you by Workman Forensics.
Leah Wietholter:
Hey everyone, it's Leah. I want to tell you about a project I've been working on that I'm really excited about. Coming in April 2022, the data sleuth process that we use every day when working investigations at Workman Forensics is being made available in my book, Data Sleuth: Using Data in Forensic Accounting Engagements and Fraud Investigations. In it, I share stories from my journey, including building Workman Forensics, as well as case stories. But most of all, I lay out the data sleuth process. It's all in the book. When I started Workman Forensics in 2010, I looked everywhere for a reliable process for financial investigations, but I came up short. So, I decided to build one. It is possible to have a data-driven approach to financial investigations in a team environment. Pre-orders are available now. Check the show notes for details.
Leah Wietholter:
Welcome to the Investigation Game podcast. I'm Leah Wietholter, CEO, and founder of Workman Forensics in Tulsa, Oklahoma. Today I have with me Megan Brown. Megan is a CPA and a private investigator, and she's also the forensic accounting manager here at Workman. Megan has experience in both public and corporate accounting for both the private industry and public companies. After receiving a bachelor of science in accounting from Oklahoma State University, she moved to Tulsa and subsequent joined the Workman Forensics team. Currently Megan serves on the board for Street School, Inc., a local nonprofit that combines alternative education and therapeutic counseling to help Tulsa students. She also volunteers as a driver for the American Cancer Society's Road to Recovery program, and is a member of both the American Institute of Certified Public Accountants and Oklahoma Society of CPAs. Megan, welcome back.
Megan Brown:
Thanks. Thanks for having me.
Leah Wietholter:
So, today I would like to kind of debunk some beliefs about financial investigations and forensic accountants, specifically as it relates to embezzlements or partnership disputes. First to start us off, do you want to talk about the difference between an embezzlement and a partnership dispute? We get partnership disputes and they say, "I want my partner to go to prison for embezzlement." So, let's talk about why that's actually not a thing.
Megan Brown:
So embezzlement is a state crime in which someone entrusted with property for another takes the property through fraudulent means. A partner does not fit this definition because he or she owns those business assets. Partnership disputes are more of a civil matter, not a criminal matter. They cannot be charged with embezzlement.
Leah Wietholter:
Right, because they actually own it. They don't have that, I want to be careful about how I kind of talk about this too, is that it's... I don't want to get into this gray area of fiduciary, just in case some attorney decides they're going to make me talk about this later. Whenever it comes to embezzlement, it has to be that the person entrusted with the assets doesn't own the assets. I think that's probably the simplest definition of that.
Leah Wietholter:
I was actually talking to somebody the other day that I think the greatest risk, I know this isn't really on our list to talk about today, but I feel really passionate about it, is that the greatest risk in partnerships disputes is when one party is solely the investor and the other party is a sweat equity partner. Because the typical thing we see is that the sweat equity partner... If we think about the fraud triangle, pressure incentive on one side of the triangle, opportunity on the other side of the triangle, and rationalization, well, if the sweat equity partner gets into some sort of cash crunch personally, and they have an opportunity because they have access to all of the funds of the business and the partnership and the investors' funds, and then the rationalization that I've often seen is, "Well, they're just giving me money. They're not actually like working in this partnership," or, "I put in more hours than the investor does." But without that investor's money, the partnership wouldn't have become a thing anyway, at least at that point in time with just the sweat equity partner.
Leah Wietholter:
I think that always puts partnerships at a huge risk. And what I've seen is that somebody wants this sweat equity partner to have whatever it is they're wanting. They want to empower them and help them grow. And they want to invest and hopefully get a return on their investment. That would be the intention. But, when there's an embezzle... It may feel like that partner is working for the investor, but if they have ownership, they're an owner to those funds. So, there's some sort of civil fraud to talk about, but not criminal fraud because of that ownership. I don't know of an insurance policy, it might exist, but in my experience, the insurance policies that exist for theft of funds, it's specific to employees. If a partner is wanting to empower someone, maybe make them an employee, and then maybe they earn shares later in life or some... There's a lot of different... I'm not a transactional attorney or business advisor, but make that partnership between the two like this employee-partner arrangement so that there's some protection either from an insurance standpoint. Also, not that you want to ever think that your business partner's going to steal from you, but especially if someone doesn't have the resources to pay you back, I just think that having that employer-employee relationship is probably a better way to go.
Megan Brown:
Yeah, I would agree. Because a lot of times the person investing, they're not the ones actually managing the money or doing all the work. And so the rationalization of the sweat equity partner, I think, is something we see a lot.
Leah Wietholter:
So I think the situation that we don't see, because often they're not needing our help to find money, are those partnership arrangements where the investor, the one that's financing the venture, actually keeps track of where money's coming from, where is it going, and incorporates that type of review into the relationship. I just think that a lot of times when an investor just wants to put money into something, they trust the individual, they appreciate the drive of that individual, they think that that individual's going to go somewhere, but you still have to... Brian [inaudible 00:06:34], all of his merch that says trust, but verify. That's what we have to do in partnerships. That's what we have to do in businesses when it relates to embezzlement.
Leah Wietholter:
So, okay, Megan, I'm going to list some common misconceptions about financial investigations and/or our role in those investigations. So I'd like to just get your responses based on your experience. So I'll say something that clients typically believe, and then I'd like to just know what you think about them. Okay?
Megan Brown:
Okay. I'm ready.
Leah Wietholter:
Okay. When a client discovers fraud and files... In their business, we're talking about businesses today. So they discover embezzlement or fraud within their business and they file a police report. They believe that law enforcement will arrest this subject immediately.
Megan Brown:
That is a false statement. No. And I think TV shows have done a big disservice for this because everything happens so fast on a TV show, but you also have to keep in mind that they're trying to wrap up a case in one hour. But first of all, law enforcement needs proof to make any kind of arrest or press any charges. So the more organized you are before filing a police report, the more likely your case will move forward. And having a letter or report from someone like us, a forensic accountant, will lend your case credibility and also be more likely that law enforcement will move forward with the case. But, a person is very unlikely to be arrested on the spot right after you file charges.
Leah Wietholter:
Right, and really if at all. So many of these cases, and I talk about this more in the book, but so many of these cases, whenever they're turned over to law enforcement and law enforcement has this report from a forensic accountant or financial investigator, and then they go interview the subject and the subject says, "Yeah, I did it. I'll work with you," then they're probably never going to be arrested. They're not usually a flight risk. And I won't spoil any answers, but usually they're not a flight risk. We'll stop with that one.
Megan Brown:
And white color crime, it's just treated differently than murder. You're not at risk... Society is not at risk with you on the streets.
Leah Wietholter:
Another business might be. Once you get fired for embezzlement, we've seen where they go and get another job in accounting because the case is still ongoing. And I think that that is really difficult for clients, to see that they've fired someone so often their attorneys recommend that they keep their mouth shut. And then it's really advisable if we're getting federal law enforcement involved, because we try to encourage the client not to talk about it at and let the federal law enforcement decide when they're going to reach out to the subject and other witnesses, just to kind of give law enforcement that edge. And so it's really hard, especially when cases go on for a couple of years, especially those cases that happened during COVID and all the shutdown. That just prolonged everything. So, all right. Next statement or things we hear from clients often. Client believes that when a subject is charged with fraud, they will serve prison time.
Megan Brown:
No. And I know you have a good example of this.
Leah Wietholter:
Yeah. If anybody's interested in playing this, I'll do a little plug here for the Investigation Game, case of the cash flow fiasco. This individual stole over $500,000, I think it was actually over a million dollars, from a bank. Once it was prosecuted and the bank was able to collect some collateral on it, so that reduced their loss and the restitution amount. So he ended up with five months of house arrest. So whether that's fair or not, that's not for me to say. But that client never... That client did not go to prison for that theft.
Megan Brown:
And again, I think we see that more oftentimes than not in the type of cases that we work.
Leah Wietholter:
I was also reminded of another one, also from a financial institution, where this individual, she stole less than $100,000, but she ended up with probation or supervised release for three or four years. I'm also reminded of a case that involved a manager of a restaurant. And I think that loss was right around $80 to $100,000. And that was significant for this restaurant to have lost that much money in the amount of time. I don't even think it was over that many years. And so that was significant and causing cash flow issues for this restaurant owner. And likely, I believe that case has been finished, but I don't remember, but for that dollar amount and the fact that it was being prosecuted at the state level, it is not uncommon if someone's cooperating at the state level, for those charges to be reclassified from felony to a misdemeanor. So then it doesn't even show up as a felony on their record. So they're definitely not going to prison for that.
Megan Brown:
And again, it's a nonviolent crime, and prisons tend to be overcrowded. So they're going to have you serve that at home. Just works out better in the system.
Leah Wietholter:
I think my disappointment of crimes like this being pled down to a misdemeanor, I don't think I really have an opinion on the sentencing, like the length of a sentence or whether they go to prison, I don't like the fact that it gets moved to a misdemeanor from a felony. Because if somebody's running a background check, I just don't think that stands out as much as a felony.
Megan Brown:
I would agree. And a lot of times you don't even have to report that you have a misdemeanor. The employment applications just ask if you've ever been arrested or convicted of a felony. It doesn't even mention a misdemeanor.
Leah Wietholter:
Yeah, that's true.
Megan Brown:
So you wouldn't have to report it. But as an employer, I would want to know if someone had embezzled money from a previous employer.
Leah Wietholter:
Right. And I think for the PI license and maybe the CPA license as well, they just ask about felonies, right?
Megan Brown:
Yeah, just felonies. And a lot of times, they just ask you, "Have you been arrested or convicted of a felony in the past, say, five years?" I recently read an article about a guy who convicted of... He went on to make a lot of money, but it was because he served a prison time of 15 years. So he hadn't actually been convicted when he got out. He hadn't been convicted and arrested in the last five years, it had been 15.
Leah Wietholter:
Oh gosh.
Megan Brown:
And I guess it didn't show up in a background check. So he was able to just... I think he did his time and was rehabilitated and went on to be very successful. But he kind of found a loophole in that application process.
Leah Wietholter:
Yeah. So you could technically have a controller, who maybe wasn't a CPA when they stole the money, and then they decide they're going to become a CPA. It gets pled down to a misdemeanor. And then they could probably say that or do all the CPA stuff. That's cool.
Megan Brown:
Yeah, I don't remember if it specifies a time on the CPA application. Now I feel like people ask, "Have you ever been," they don't specify it just to the past five years or so.
Leah Wietholter:
So, if a client is listening to this, you really need to do some research at the state court level at least, just to see what kinds of things are out there and make sure that your background check company is looking also for misdemeanors. Not to put another thing on somebody's list of things to do. All right, let's move to the next one. Clients do believe that when a subject has stolen a lot of money, and that's different for every client what somebody's threshold or determination is for "a lot of money," but when a subject has stolen money, a lot of money, they've saved it somewhere like a hidden bank account or under the subject's mattress.
Megan Brown:
Yeah, this is an odd misconception to me because usually when people are stealing money, it's not because they have a savings account. It's because they have a lack of a savings account. So they've spent that money. And a lot of times we see it's due to a substance abuse problem, a gambling problem. They're already in a lot of debt and maybe trying to find ways to get out of debt. They're maybe keeping up with the Joneses and living well beyond their means to look like they're living a certain lifestyle. Or sadly, they have a lot of medical expenses they're trying to pay. We just see a lot of things like that. And they're not squirreling away this money. They're spending it. And they are rarely... Well, I have yet to see a case where they still had all the money. It was usually spent buying things, maybe college tuition for their children, a number of things. But rarely does someone still have that money that they stole.
Leah Wietholter:
Yeah. I had one case, and I've worked well over a hundred financial investigations, I think we're close to 200. I think I've been saying that for a while, so it might be over 200 now, I don't know. But I worked so many financial investigations, and I can only remember one subject who purchased investment property with stolen money.
Megan Brown:
Smart criminal.
Leah Wietholter:
Yeah. So at least that gave the client a little something to recover and decide... Because at least they could sell the houses and stuff like that. And then in the case of the man cave, fortunately he bought stuff, it still was depreciable stuff, but because he bought race cars and trucks and trailers and whatever, firearms, things like that, because he bought those things, that at least provided some recovery. But yeah, most of the time it's gone. Because it is, on that fraud triangle, whatever that pressure incentive is. If it's, like you said, gambling. I think the majority of our cases, people just shop.
Megan Brown:
Yeah, that's what I was going to say. And we had a consultation once with a person going through a divorce, and I think he was just so shocked at how much his wife was possibly taking and what she could be doing with it. And she's spending it. That's just what we see time and time again is they're just spending the money.
Leah Wietholter:
One of my last cases before I started Workman Forensics was a bank embezzlement by a bank employee that was $3.5 million. And, the bank president was convinced that that money existed somewhere. And she was using lots of different bank accounts. She would take accounts that belonged to her clients that were dormant, that hadn't been used in a long time, or she would take accounts that clients wanted to close, but she wouldn't actually close them, and then she'd hijack them. And then she'd advance loan funds from these loans that either she created or they were totally fake. Like maybe I had a loan, I'm a business owner, I have a line of credit with a bank, she would open another one in my name, but I didn't know about it. Or, what was messier was if she advanced... She would increase the line of credit amount and then she would make advances from my real loan to her to these bank accounts. But she was sending it to dormant accounts and then eventually she'd get it out of the bank through her account, accounts she set up for her kids and her husband or cashiers checks.
Leah Wietholter:
So this went on for a long time. I can't remember the relevant period on that. But it was at least five years, if not seven. But anyway, so I remember we would work on site, just day in, day out on this. And the bank president would come in and he'd say, "Did you find where she's hiding it yet? She has to be sitting on this." But we could see out of all these different bank accounts how it was being spent. And then once we told him, "We think she's a shopaholic, and we think that she just has a bunch of crap somewhere..." They lived in a house that was less than $100,000. It was a smaller home in one of the suburbs in Tulsa, an older home. Because he was convinced she has to have purchased a new house with 3.5 million, something that was recoverable.
Leah Wietholter:
She spent $350,000 on jewelry, which the recovery on jewelry is not $350,000. I don't care when she bought it. It depreciated as soon as she walked out of that store. They would roll out the red carpet for her at Saks. I mean they saw her coming, she got first class treatment at all of these... She would wear these, I don't know, I personally don't spend $3,000 to $5,000 on suits because I don't like suits, also, I'm not going to spend that much on a suit. But yeah, she loved these very fancy suits and she loved... She would buy gifts for people at the bank with the bank's money. It was really weird. But, he was convinced and he wanted her arrested because he thought by her stealing this much money, she was definitely going to fly out of the country or whatever. But no, she had none of the money left over at the end.
Megan Brown:
I think most people just can't conceptualize spending money that frivolously, but people do it every day.
Leah Wietholter:
And also when you haven't earned it. When you're stealing the money, you haven't earned that money, so I think it's easier to just let it go.
Megan Brown:
Yeah. Get rid of it.
Leah Wietholter:
Yeah. All right, Megan, here's another one. Clients often believe that a client will recover the stolen money entirely, including legal fees and investigation fees.
Megan Brown:
Well, the answer to this kind of ties into the subject we were talking about before, but that's not true. Because as we stated, as we were talking about before, a lot of times that money is spent. The person, the subject of the investigation, they no longer have the money to pay back. Or they have assets, as you mentioned in the case of the man cave, but they're depreciated. They're not going to be worth as much as they were when they were bought new. So you can recover some money, but definitely not all of it.
Leah Wietholter:
Yeah. And then when it comes to legal fees and investigation fees, there's several different avenues to navigate. And I talk about that a lot in the book, actually. There's half a chapter on that. If you're going to take the criminal route, any investigation fees and legal fees, that's not included as part of your loss. The loss that can be tied to future restitution from the subject is all that's going to be included in restitution. So a lot of times clients say, "Well, I want them to go to prison. I want them to pay me back. And I want to include all of these legal fees and investigation fees." The only way to really recover that is sometimes through the civil route, which you'll have to talk to your attorney, and then that's also going to be based on state civil procedure and stuff like that. So, yeah, unfortunately when the money is gone...
Leah Wietholter:
And then that kind of leads to restitution. Restitution payments are calculated based on whatever income the subject is generating after they've lost their job with the employer that they used to have the job with. And depending on how that's affected their life, I actually had a client that I worked with on a criminal defense matter, and this was in my, I don't know, not very smart business practices day, so I worked on his case and there was a very large bill that he never paid. And so I was trying to collect this from him. And in doing so, we found him and tried to work that process. But he was being paid under the table. And if anything was being reported, it was being reported on a 1099 for contract labor. And so getting to collect on that payment wasn't going to help anything. But, he had been charged and convicted of about $480,000 of fraud. And so that was his restitution amount. So his restitution payment back to the victim was based on whatever reported income he has. And so I knew just from my little bill that was due, that a lot of his money was not being tracked and reported. And so, if a client is really hopeful that they're going to recover something in restitution, I hate to be the bear of bad news, but the realistic outcome is that likely they're going to pay $100 or $200 a month.
Megan Brown:
And what about insurance? I've only dealt with a couple of cases in my career where I've seen where a client actually has the insurance to cover employee theft of assets. But of course, a lot of them are capped at how much money they'll receive as a payout. What's your experience with companies that have insurance? And is that a separate policy they have to purchase to cover that kind of thing?
Leah Wietholter:
Yeah. Some general liability policies, so general business policies, will cover up to, I've seen $10,000 or $25,000 of employee theft. And that will at least cover some of the legal fees or investigation fees, like some, depending on what routes you go. But, you can get employee theft policies or fidelity bonds for anyone who's handling money. And I think that if anyone is handling money in your business, you definitely need that. Because that's when you can get a much larger recovery from the insurance company. So on this large bank case, I think their policy was around $3 million. So of the 3.5 that she stole, they were able to get the insurance to pay three million.
Megan Brown:
Oh wow.
Leah Wietholter:
Yeah. Definitely thinking about how much money does your employee have access to and then getting a policy like that is really advised. I think insurance recovery is the best route. Of course, there's going to be some sort of deductible. But at the end of the day, it's still better than... Gary [inaudible 00:24:05] who was on the podcast a few months ago, he likes to say that law enforcement is not a debt collection or a collection agency. And it's true because of just how restitution works. I think they all play together really well, insurance plus a criminal case. Because if you file an insurance claim, you also have to file a police report. Because the insurance is going to look for a way to recoup that money and then they'll collect the restitution. So that's how they can pay this stuff out is by having some of that come back in.
Megan Brown:
Yeah. And I know that we've issued reports where it's gone to law enforcement and the insurance companies for the client to recover money.
Leah Wietholter:
Exactly. And then if somebody did purchase a lot of assets, if somebody did purchase $350,000 of jewelry or race cars or building a building or rental property, then that's where I think a civil lawsuit fits in really nicely. So if you could do civil, if they're not a gambler or a shopper of just junk, then you could have a civil lawsuit, insurance recovery, and have an insurance policy, have insurance recovery, and then also have the criminal prosecution. And to me, it's about giving the next employer a way to research somebody's background and find out if this is the best employee for them, if they're willing to take on that risk. All right, so we have, have one more and I feel like you're going to have quite a bit to say on this one. But the belief that a financial investigation will be worked in just a few weeks.
Megan Brown:
Yeah, this is my favorite misconception. And the answer of course is that's not going to happen. It typically takes a few weeks just to get the documents we need in. And we mentioned in another podcast, that episode, that we would like to have a majority of the documents in before we even start the analysis. That just makes it more efficient for our process and it's more efficient in our billing to the clients so we're not just starting and stopping and trying to figure out where we were. So a lot of times, especially if we're waiting on the opposing council to obtain documents, it's going to be at least a few weeks to get what we need. And then after that, it really is dependent upon the type of data you have as a client. A bulk of what we do is our data entry, where we're digitizing everything and putting it into Excel. Well, if you have payroll reports that are kind of formatted odd and you can't easily put them into the same format, that's just going to take a while. Or a lot of times we found where clients just don't have the best reporting systems, maybe their accounting systems don't export the best reports. So just getting through that data takes a really long time. And data entry alone can take a few weeks as well. So it can be a long time before we even get to the analysis part.
Megan Brown:
And once we do, we have a pretty standard process. But it really is just dependent on the type of data we were able to receive and kind of what shape it's in. And we don't really have any control over that. So I know we've had clients who think, "Well, I could look at these bank statements in one day and see what's happening," well, that's not how our process works. I could eye bank statements too and maybe figure out what's happening, but I'm going to miss things. You can't just eye something. We need to convert it into data that we can then analyze.
Leah Wietholter:
Yeah. And, even the idea of a financial investigation being worked in just a few weeks, the whole point of an investigation is to see what you discover, which might lead you to other things that you need to investigate, which causes more discovery. And so this process can kind of keep going on. And we try to cut it off at that point of diminishing returns, maybe it's immaterial. But just the nature of an investigation, I find myself saying this a lot, but it is exploratory. And so, yes, we have a standard process, but we don't necessarily know what we're going to find through that process. And because of our process, I don't think there's ever been an embezzlement case where we didn't find more than the client thought we would find. Every time, we find more because of our process, because we're looking at data, we're not just eyeballing statements, like you said. It's very thorough and identifying maybe somebody knew that this individual is paying their credit cards, but maybe they just knew about one credit card being paid. But then we do the analysis and we find two more credit cards that didn't belong to the business.
Megan Brown:
Yeah. And then it takes time to maybe subpoena those other credit cards to look at those statements. And it's all a process. And we could also be waiting on feedback from a client or they're trying to figure some things out. We want to get things done as efficiently as possible. So we're not trying to stretch things out. But it's just we've got to stay true to our process because that's what's going to get the results.
Leah Wietholter:
It's going to be the most reliable thing for the client to be able to take their next steps. All right. Well, thank you, Megan, for spending this time with me today, and look forward to doing it again soon.
Megan Brown:
Yeah. Thanks for having me. I enjoyed it.
Outro:
Thank you for are listening to the Investigation game. For more information on any of the topics brought up on this show, visit Workmanforensics.com. If you enjoyed our show, be sure to subscribe and leave a review. You can also connect with us on any social media platform by searching Workman Forensics. If you have any questions or topic ideas, please email us at podcast@workmanforensics.com. Thank you.