Fraud Spotlight: A Forensic Accountant Discovers Two Schemes

This is the first in a series of blog posts highlighting real auditors who have uncovered major frauds. We’ll break down the frauds, explore auditing theories and concepts, and get to know the people who brought these frauds to light.

Brad Powell is the CEO and founder of Redboard, a software platform that provides a full range of audit process automation for the Credit Union industry. He graciously agreed to sit down for an interview with Olivia Whipple to discuss fraud lessons he’s learned over the course of his career.

Olivia Whipple: Brad, thank you so much for participating in this series! First off, tell the readers a little bit about yourself.

Brad Powell: I graduated from Georgetown University in Washington D.C. and my first job after college was with the professional firm Arthur Andersen. After that, I started my own software company, and in 2004 I started another software company that eventually evolved into Redboard. I am married with three kids. My oldest (a son) is about to go off to college, my middle son is a freshman, and my youngest is my daughter who is in sixth grade. My oldest is also an Eagle Scout, so I do a lot of volunteer work with the Boy Scouts of America. I am also an active volunteer with youth sports. My kids have always been in either baseball or softball. I’m not even sure for how long; close to ten years. So I stay pretty busy.

OW: I love to hear about all the volunteering you are doing. John and I try to encourage volunteerism in our industry as much as possible! Tell us a bit about where you were in your career when the fraud occurred.

BP: I worked for Arthur Andersen my first three years out of college. I have two different stories to tell that relate to frauds that were uncovered during this time. They are not what you might call “traditional” audit stories, because I was not a traditional auditor. I didn’t even have an accounting degree; I worked for a litigation unit. “Forensic accounting” is the term that best describes what I did, but this wasn’t what we called it at that time.

One of the things I worked on was recovery for life insurance companies. If you can imagine the FDIC or NCUA, but for the insurance industry, that was the ultimate client. When a life insurance company would become insolvent, they would contract with us to figure out what to do with it. For example, how much was the company worth? How much must be paid out, to whom, and on what schedule? Those kinds of issues.

One story I remember to this day involved National American Life Insurance Company of Pennsylvania, and this was the mid-nineties. I didn’t discover the fraud, exactly, but the fraud was apparent to me. The reason it became apparent was because as part of this insolvency investigation I had to develop an understanding of what their portfolio looked like. Who were their customers? How much are they owed? What does the law allow/not allow?

What I discovered was that this company, and specifically several of their sales agents, had been selling their products to the nursing home circuit. This sounds legitimate on the surface, but think of it this way: If you are selling an annuity with a 10-year surrender charge, to someone in their eighties, it’s almost guaranteed that the company will benefit from policy holders living out their normal life expectancy.

OW: And this was in the mid-nineties. How did society at the time influence this situation?

BP: Today, we see a scheme like this and it’s almost criminal. I don’t know if you remember, but in the nineties, there were a lot of news stories about life insurance companies having unethical sales practices. This scheme was before the public started becoming more aware of financial products, and corporations are now held to a much higher standard. I’m not a practicing attorney, but I’m pretty sure this is all illegal now, it certainly is in California where this happened.

OW: How were the fraud victims affected?

BP: Well, I never met any of the people that were affected. I only saw the data coming through. It did affect me. It was just one of those things that made me queasy. I could tell how old the customers were when the policy was sold, and their financial situation, and it was just a horrible, horrible thing. So like I said, I didn’t discover the fraud, I just happened upon it, and it really impacted me. It has even influenced what I’ve done with Redboard.

OW: I think frauds really impact the people who discover them… And I think you did discover this one, even if you describe it differently. Tell us about the other story you have from this time.

BP: Well, I really did discover this one, by my own definition. My Arthur Andersen team was working for a company via their attorney. The law firm was technically our client, so that we could have attorney client privilege. We would be brought in on legal cases anytime there were numbers involved, for whatever reason. Our job was to figure out the numbers.

OW: Attorney client privilege… are you sure we can post this!

BP: Yes, because I’ll leave the company’s name out of it. That last story is all on the public record; I’m just giving you my perspective. And Arthur Andersen closed in the fallout of Enron and other scandals, as your readers probably know.

OW: Phew!

BP: The company involved in this story was a manufacturer of medical products and devices. They were being sued by their distributors. In this type of investigation, we had to go digging. Looking for things that might or might not be there, and we weren’t sure early in the investigation what we would find. It was looking for a needle in a haystack that might or might not even exist!

I always looked for patterns. I would get this big stack of papers dumped on my desk and just had to figure out if anything was there related to the case. I didn’t know whether something was wrong, but my “spidey sense” started going off one day. I didn’t know what, but I knew something just wasn’t right.

Due to my position, I had a lot of access to the company. But no matter what I tried, I just couldn’t make sense of the data. After much research, I called the CFO and explained I was running into a problem. This part of the exchange is so vivid in my memory, it’s like it happened yesterday! I asked “Hey, I’m looking at these numbers. They don’t look right to me. Can you help me understand?” He takes a pause and then asked me to confirm that the company had attorney client privilege. I said “Yes, we work for your attorney so anything you say to me is protected.” He says “Okay, good. That’s all fraud.” He just came right out and said it!

What ended up happening was the entire locus of the litigation was due to the company padding the numbers. So once this was uncovered, it all started coming home to roost.

OW: Wow, it is so amazing that he just came out and told you it was fraud. Can you explain the concept of attorney client privilege in the context of this fraud?

BP: Sure, so as a professional you are always trying to help your client and do the right thing. In that sense, we continued to serve the client and their interest. But the numbers we had been working with were fraudulent, and we couldn’t do our job properly with incorrect information. Once the fraud was uncovered, we knew what we were working with and could create a defense strategy. Attorneys serve guilty clients all the time!

OW: That’s true. Let’s go back to you personally and your career trajectory after these events.

BP: This occurred in 1996 or 1997. I was 23 or 24 years old at the time. These incidents definitely shaped how I started to look at things. I’m sure you can relate; you start out with an attitude that everything is bright, sunny, happy, and all that. And then relatively early in my career I had these experiences that showed me another side. Eventually, I left Arthur Andersen, and about six months after that the Enron scheme unfolded. It was a rapid succession of events from my perspective.

OW: Did any audit concepts or elements from your formal education help you uncover or understand the frauds.

BP: When I was in college, there were not forensic accounting courses. I mostly learned on the job.

OW: You said that your experiences with fraud investigations have influenced how you run your own company, Redboard. Can you speak to that?

BP: Sure. Once I started getting large clients, I understood a bit more about how fraud schemes can go undetected. If you don’t have a strong audit function, or a strong control environment, it is not that hard to commit fraud. That’s just the unfortunate truth. I see the audit processes and solutions that Redboard provides as crucial. This is something that I always talk to my customers about, to make sure they understand their own value. Their auditees are like internal customers, and they need to know you are there for them, and you help keep them out of trouble. As an auditor, you are an integral part of the organization. It is your duty and obligation to protect the company, and Redboard can help you do that.

OW: This is great perspective, Brad! Thank you for telling your story; it is always a pleasure to speak with you! I hope that your story will inspire our readers to look at things differently, to trust their instincts, and encourage them to speak up when they discover fraud.

To learn more about Redboard, visit their website or connect with Brad on LinkedIn. The Audit Library and Redboard frequently work together to deliver solutions to Credit Union clients. We encourage all subscribers in the Credit Union industry to attend Brad’s FREE webinar, The Findings Accountability Framework.  It covers core concepts that everyone should be using in their remediation efforts.

More fraud stories from real people like Brad will be coming to the blog. If you would like to contribute to this series, contact us for details!

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