Fraud can grow quickly.

• Author: Leib, Barclay T.
• Position: Forensic Accounting

Everyone knows that accounting irregularities haven't disappeared. In fact, more than 500 anonymous tips on corporate accounting irregularities have recently been pouring into the Securities and Exchange Commission's Web site each month, says Simon Platt, Deloitte & Touche LLP's national director of Forensic and Investigative Services. In addition, he says, 20 percent of American corporations are likely to have changed auditors this year.

It has been a busy year for Platt, who regularly gets called in when unexpected corporate losses lead to board-level investigations. The Boston-based accountant's basic tools include not only employee interviews and close examination of balance sheets and sub-ledgers, but sophisticated investigative techniques not unlike those used by the FBI.

"One of the first things that we do is to take virtual copies of all the hard drives of key employees--personal laptops included," says Platt, "Then we scan these hard drive copies for certain key word phrases. You would be amazed at what the average corporate executive will say via email--stuff that would normally never make it on to paper. And yet e-mail correspondence tends to be much easier to retrieve and examine than paper ever is."

According to Platt, once forensic accountants like those at Deloitte get called in, wrongdoing tends to be unearthed in about 98 percent of cases. Sometimes this is just mild earnings manipulation, and less often actual fraud, but "distinguishing between the two of these is certainly an art, not a pure science," Platt says.

The FBI has estimated that the chances of actually being prosecuted for corporate fraud are 20,000-1. This is because a prosecutor must not only find accounting misstatements, but then must prove that there was actual intent to deceive, and not a simple error or oversight.

Given such a low probability of getting caught, it may be unsurprising that 68 out of 100 major corporate CFOs responded "yes" when asked anonymously at a 1998 BusinessWeek conference: "Has your CEO ever asked you to falsify financial results?" Twelve percent of the CFOs admitted to committing the falsification.

And from whence does most of this malfeasance spring? "It almost always starts very innocently," says Michael Young, a New York-based litigation partner for Wilkie, Farr & Gallagher. "Far and away, most executives are honest and decent people. But problems usually start when these same people...