Mike Rosten, CPA, CFE on Financial Fridays Radio Show

To listen to Financial Fridays, visit http://www.pbtk.com/newspage.asp?AID=563

Mike Rosten, CPA, CFE, a forensic accountant and expert witness with Piercy Bowler Taylor & Kern, hosted this week’s show for Scott Taylor. Our guests included:

Jay Beltz, ERPA, QPA with Integrity Pension. Jay is a pension consultant with 30 years experience in designing, administering and consulting on tax-qualified retirement programs like defined benefit plans and Section 401(k) plans. He has been involved in establishing and terminating more than 5,000 plans.

Bob Green is a trader and author of Green’s Trader Tax Guide.

Andrea Murad, a freelance journalist whose career has spanned Wall Street and Main Street, understands how the financial markets affect the average consumer. You may also recognize the recurring Financial Fridays guest from BBC Capital, FoxBusiness.com, InstitutionalInvestor.com, American Banker magazine, and LearnVest.com.

Tune in live every Friday at 3 pm on KLAV 1230 Las Vegas online, on your radio dial or load the application (free) for your I-phone/smart phone “Tunein Radio”, which easily coordinates all AM radio stations nationwide.

If you have any questions about anything discussed on the show, or if you would like to be a guest, please contact Financial Fridays host Scott Taylor at staylor@pbtk.com or 702-384-1120. Scott W. Taylor’s tax practice focuses on services for a wide range of clients including real estate partnerships, limited liability companies, large and small closely-held corporations and not-for-profit organizations. He started with PBTK in 1992 and was made a Shareholder in January 2005. In addition to his tax work, he also provides services for business consulting, deal structuring, receivership and litigation support services.




Nevada Lawyer Magazine: Stress and Addiction May Lead to Fraud in the Legal Community

December 2013 Nevada Lawyer: Stress and addiction are among the main triggers of fraudulent behavior within an organization. These pressures often make people cross an ethical line and engage in illegal behavior. High-stress jobs in the legal field may have a heightened susceptibility to occupational fraud schemes ranging from altering cash receipts and cash disbursements cycles, to the victimization of the trust accounts for which they have fiduciary responsibility.

According to the most recent Report to the Nations on Occupational Fraud and Abuse from the Association of Certified Fraud Examiners (2012 Global Fraud Survey), reported cases of fraud within the professional services industries, which includes law firms, increased over 40 percent between 2010 and 2012.[i] Attorneys can be susceptible to fraudulent activities due to stresses from practicing law and dealing with emotional and physical demands from clients, family and the courts, especially when coupled with a perceived need to “numb out” the pressures with substance abuse.[ii] Add in the fact that the risks of problem and pathological gambling doubles within 50 miles of a gambling facility,[iii] and the risk of fraud is intensified for law firms in Nevada.

But how can the pressure of stress and possible addictions lead someone down the path to fraud? In most instances, a variety of common conditions may lead to fraudulent activities, as illustrated by the fraud triangle, below. The fraud triangle is now commonly-accepted in the fraud investigation and financial-professions, but originated from Donald R. Cressey’s hypothesis:

Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.[iv]

Fraud Triangle
Based upon the fraud triangle, three circumstances must be present when fraudulent conduct occurs: pressure, opportunity, and rationalization.
•Pressure – Motivates a fraudster to commit an illegal act. Typically, the individual has a financial problem he or she is unable to solve by legitimate means. Oftentimes, the underlying problem arises from stress and/or addiction related issues such as alcoholism, gambling addiction, health issues, or loss of employment.
•Opportunity – Represents the method a fraudster uses to commit an illegal act. By violating his or her position of trust, the financial problem can be solved with a low perceived risk of detection.

Frequently, either a breakdown or void in internal controls, such as incompatible job duties or lack of oversight, allows the fraudster to misappropriate funds, and to conceal those activities from others.
•Rationalization – After committing a fraudulent act, the fraudster will typically attempt to distance him or herself from their act(s) by advancing excuses that characterize their behavior as acceptable or justifiable. Common excuses include:
◦I am underpaid and underappreciated; and therefore, was entitled to the ill-gotten funds.
◦I was only borrowing, and would have eventually repaid the funds taken (had I not gotten caught).

Fighting Fraud with Internal Controls

Minimizing opportunities available to potential fraudsters is the most commonly accepted method for organizations to combat the risk of fraudulent conduct because said organizations are usually not able to meaningfully address the underlying personal financial problems or the fraudster’s ability to rationalize their behavior. In the 2012 Global Fraud Study, all internal controls were associated with a reduction in losses, indicating the importance thereof. From an effectiveness perspective, formal management review, employee support programs and hotlines were correlated with the greatest decreases in financial losses. However, external financial statement audits, the most commonly implemented control, showed the least impact on losses suffered.[v]

Behavioral Red Flags

Armed with an overview of the fraud triangle, managers, owners and other responsible parties should be on alert for behavioral traits typically exhibited by fraudsters that serve as warning signs of their actions. According to the 2012 Global Fraud Survey, the most common indications (Red Flags) of fraudulent activity are:[vi]
•Living Beyond Means
•Financial Difficulties (perhaps caused by living beyond means)
•Unusually Close Association with Vendor/Supplier/Customer
•Control Issues, Unwilling to Share Duties
•Divorce/Family Problems
•Wheeler-Dealer Attitude
•Irritability, Suspiciousness, or Defensiveness
•Addiction Problems

Examples of Fraud Occurring in Law Firms and the Repercussions Therefrom

Oftentimes, an attorney’s fraudulent acts brought on by addiction not only negatively impacts that individual, but the attorneys’ colleagues and law firm as well. Earlier this year, a suburban Chicago law firm sued a former named partner, William Brestal, alleging Brestal spent over $1 million dollars of company funds to pay for personal gambling expenses. Brestal’s actions went unnoticed for a lengthy period of time because he was in sole of the law firm’s finances and there was no oversight by other partners. After the firm experienced financial difficulties which resulted in attorney and staff lay-offs, and voluntary pay cuts, Brestal’s partners requested a forensic audit of the firm’s finances. During said audit, Brestal’s actions were uncovered. However, as noted, discovery of Brestal’s conduct did not occur until after others had lost their jobs or agreed to a reduction in salary.

In a matter where an attorney “lost all reason”, stress was cited as the catalyst for an attorney’s fraudulent acts against his law firm resulting in a criminal conviction and a prison sentence. Christopher Grierson, a partner at Hogan Lovells, pleaded guilty to four counts of fraud related to a travel expense scam wherein Grierson bilked his law firm of nearly $2 million dollars. Grierson, who regularly worked 3,500 hours a year, experienced financial difficulties after spending lavishly as a stress reliever. After borrowing on a series of bank loans, reaching the borrowing limit on his credit cards and refinancing his primary residence to double the amount owed, Grierson was unable to repay certain obligations. In 2008, Grierson began falsifying travel expenses in order to satisfy outstanding debts. As a senior member of the firm, Grierson was able to authorize his own expenses, oftentimes charging said expenses against dormant client accounts. Grierson continued the fraud for three years before an internal audit uncovered the nefarious acts.

How Can Law Firms Avoid Fraud?

In both examples, an employee of a law firm, when left unsupervised and without a system of checks and balances, was able to perpetuate a fraud to feed that attorney’s stress and addiction debts. It was only after millions of dollars were misappropriated and, in the case of the actions of Brestal, colleagues lost their jobs and/or agreed to decreased pay, that the fraud was ascertained.

The 2012 Global Fraud Study offers the following recommendations to minimize risk of occupational fraud:[vii]
•Provide a means for individuals to report suspicious activity, such as hotlines for employees and vendors.
•Don’t rely on external audits for detecting fraud. They are ineffective, with a reported detection rate of only three percent.
•Be aware of the common Red Flags that may be indicative of fraudulent behavior.
•Small firms are particularly vulnerable to fraud, since they have fewer resources and segregation of duties is more difficult. Due to these challenges, owners and partners should become more active in oversight and monitoring, and focus anti-fraud controls on the highest risk areas.

An awareness of the common schemes perpetrated by fraudsters is a key to prevention and detection. The top five fraud schemes for a professional services firm, based upon the 2012 Global Fraud Study, were:[viii]
•Billing Schemes
•Check Tampering
•Expense Reimbursements
•Bribery or conflicts of interest

Concluding Thoughts

To counter the increased fraud risks for Nevada law firms, organizations should take proactive steps to incorporate the following as standard policies and procedures. In the examples used above, if the law firms had been trained on the standard Red Flags for possible fraud, leadership within the firms may have noticed the change in the attorneys’ behavior and lifestyle. Attorneys can learn from these situations and decide to proactively:
•Conduct an Internal control assessment to identify possible areas of high fraud risk.
•Provide employees with treatment assistance for problems arising from stress and addiction.
•Involve owners or managers in oversight and monitoring, to help identify potential fraud risks.
•Implement a hotline for reporting fraud, suspicious conduct or breaches of policies and procedures. If the two aforementioned law firms had implemented a hotline for reporting fraud or suspicious conduct, co-workers may have noticed something amiss long before salaries were reduced and employees were terminated.
•Educate management personnel on the recognition of stress and addiction symptoms, and conduct internal fraud awareness training seminars.
•Be aware of the standard Red Flags, as possible indicia of fraudulent conduct.

Lawyer assistance programs may be of assistance in addressing issues beyond an organization’s purview, such as underlying personal financial problems and the more subjective area of rationalization (contact Lawyers Concerned for Lawyers at 866-866-3211).

Stress and addiction can negatively impact a law practice if not actively monitored by management. Awareness of assistance programs, along with the other steps mentioned here, can drastically decrease the risk of fraudulent actions. Also, when warranted, a Certified Fraud Examiner can assist by conducting a fraud check-up to identify Red Flags and potential opportunities for fraud.

Mike Rosten is a Principal at Piercy Bowler Taylor & Kern CPAs and Business Advisors. You can reach him at mrosten@pbtk.com or 702-384-1120. Jason Wiley is a Shareholder at Kolesar & Leatham. You can reach him at jwiley@klnevada.com or 702-362-7800


[i] 2012 Global Fraud Study, Association of Certified Fraud Examiners, p. 28.

[ii] Problem Gambling and the Law, an information and resource guide, Nevada Council on Problem Gambling, p. 16.

[iii] National Gambling Impact Study Commission Report, Chapter 4 on Problem and Pathological Gambling, p. 4-4.

[iv] Cressey, Donald R., Other People’s Money (Montclair: Patterson Smith, 1973), p.30.

[v] 2012 Global Fraud Study, Association of Certified Fraud Examiners, p. 36.

[vi] 2012 Global Fraud Study, Association of Certified Fraud Examiners, p. 57.

[vii] 2012 Global Fraud Study, Association of Certified Fraud Examiners, p. 5.

[viii] 2012 Global Fraud Study, Association of Certified Fraud Examiners, pp. 10, 12 & 30.