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How Con Artists Get Caught by Accountants

Just imagine. At 20 years old, you're the CEO of a $300-million company. With personal wealth of more than $100 million and a signature red Ferrari, even Oprah is scrambling to book you on her show. It's the stuff of fairy tales, but for one man, it was the beginning of an odyssey that would lead to prison, redemption, and a new life as a sort of accounting super-hero. Meet Barry Minkow. At just 16, Minkow founded ZZZZ Best Carpet Cleaning. Over the next several years, he franchised the chain and took it public. And at 22, he was convicted of 57 counts of fraud and headed to federal prison where he spent nearly seven and a half years.

Minkow's harrowing tale is hardly an isolated case. Each year, the total amount lost to con games and financial fraud is simply staggering. And employers are among the biggest losers. According to the Association of Certified Fraud Examiners, "the estimated [annual] cost of occupational fraud to American employers is approximately $600 billion." That's more than the GDP of all but 16 nations across the globe. And employers aren’t alone. The Federal Trade Commission estimates that more than one in 10 Americans lose money in financial scams each year. Most victims are between the ages of 25 and 44, with baby boomers running a close second. Astoundingly, those with higher incomes and financial education are actually more likely to fall for investment scams, according to the National Association of Securities Dealers.

Minkow's case was a textbook example of what forensic accountants refer to as the fraud triangle -- pressure, opportunity, and rationalization. Pressure typically comes in the form of financial hardship, including lack of operating funds, unrealistic performance goals, and untenable lifestyles on the part of company executives. And Minow's case certainly fit the bill. "When economic pressure reared its ugly head and I couldn’t make payroll, I lied and stole and cheated," he said.

The second ingredient, opportunity, typically stems from lack of financial supervision. When ZZZZ Best's cash reserves were running out, Minkow borrowed money from mob-affiliated loan sharks and cooked the books to create the appearance that the money was coming from insurance contracts on damaged buildings. When independent auditors asked to see one of the buildings under repair, Minkow bribed a security guard at an unrelated facility, and guided auditors on a tour of the building he claimed was under repair. He even put a ZZZZ Best sign on the building to make it look more official. In total, investigators estimate that Minkow and his associates forged more than 22,000 documents to prop up his failing company.

And finally, there's rationalization. "I started with the best of intentions, really I can say that," says Minkow. But when ZZZZ Best finally collapsed, investors lost more than $26 million, and many lost their life savings. Minkow was sentenced to federal prison and emerged a changed man. Following his release, he embarked on a personal crusade to fight financial fraud. He founded the Fraud Discovery Institute with the mission of educating students, law enforcement agents and executives on financial crime. And he became a sort of Clark Kent of accounting, running his company by day and investigating con artists by night. Working on personal tips, he's helped unveil 11 suspected scams, the largest of which was Financial Advisory Consultants. That case lead to the indictment of CEO James Lewis who was accused of stealing more than $300 million in retirement money from elderly investors. Lewis was eventually sentenced to 30 years in prison and $156 million in restitution in what the presiding judge referred to as "a crime against humanity."

But there's more to forensic accounting than the classic fraud triangle. According to Lorraine Horton, owner of L. Horton & Associates in Kingston, R.I., it all boils down to asking the right people the right questions. "Someone knows what is going on," she says. "If you tune in, you will get a feel for it."  Robert J. DiPasquale, partner with the Business Investigation Services Group of Parsippany, N.J., suggests interviewing someone from customer complaints or an employee who didn't get a raise for two years. These are the individuals, he says, that will likely yield the needed information.

As for Minkow, he's done enough to vindicate his past life. So much so that Judge Dikran Tevrizian released Minkow from the terms of his probation. Tervizian, who originally sentenced Minkow to 25-years, was impressed with Minkow's newfound role as good guy in the dog-eat-dog world of investment. "He has done some good things. He's uncovered several hundreds of million dollars worth of frauds," said Tevrizian. "And I give him credit for that."