CPAs are exposed to numerous financial records and transactions and can be a significant line of defense against crime. While performing audit engagements, they may be first to discover evidence of illicit acts, activity or fraud. Their investigative skill set allows them to engage in detailed reviews of the internal accounting and management processes of an organization. They uncover, calculate and report on misuses of funds and other organizational assets as well as the effectiveness of organizational processes. From time to time, they are brought into a business situation to police and evaluate books, records, bank accounts and other documents with a “fine-tooth comb.”

In addition to a financial inspector's role, independent CPAs should conduct themselves with “professional skepticism” and “objectivity.” A questioning attitude is what brings a CPA to the discovery of potential financial misstatements. Critical thinking, digging deeper and an investigative mind set may uncover information that reveals or confirms improper acts.

Professional skepticism as well as objectivity are critical components assisting professional practitioners. That said, the big question remains: Are CPA's just putting numbers together? What will they do if something “peculiar” stands out? It boils down to how well CPAs know their customers—know your customer (KYC). Although KYC is primarily associated with bankers, it is also fundamental to the practice of accounting.

According to The Public Company Accounting Oversight Board (PCAOB), possible illegal acts involve:

• Unauthorized transactions, improperly recorded transactions, or transactions not recorded in a complete or timely manner in order to maintain accountability for assets
• Investigation by a governmental agency, an enforcement proceeding or payment of unusual fines or penalties
• Violations of laws or regulations cited in reports of examinations by regulatory agencies that have been made available to the auditor
• Large payments for unspecified services to consultants, affiliates or employees
• Sales commissions or agents' fees that appear excessive in relation to those normally paid by the client or to the services actually received
• Unusually large payments in cash, purchases of bank cashiers' checks in large amounts payable to bearer, transfers to numbered bank accounts, or similar transactions
• Unexplained payments made to government officials or employees
• Failure to file tax returns or pay government duties or similar fees that are common to the entity's industry or the nature of its business

When a CPA bumps into, discovers or confirms any of these types of situations, a CPA has an ethical obligation to “report.” The PCAOB states that a CPA must first bring an issue at hand to the management of the company under audit and obtain information related to the illegal act, why it occurred and the possible impact of the illegal act on the company's financial reporting.

If the CPA is not satisfied with management's response, contacting the company's legal counsel may be appropriate. This is when matters can complicate the life of a CPA. There will be potential conflicts with obligations of confidentiality. It is best that a CPA consult with legal counsel before engaging in conversations with a third party about a company's illegal acts.

Services provided by forensic CPAs serve as: monitoring mechanisms, checks on financial information accuracy and a deterrent for financial misappropriation. Over time, Forensic CPAs have been instrumental in the deterrence of financial crimes such as:

1. Corruption: people paying or accepting bribes for personal gain.
2. Tax Evasion: nonpayment of taxes and lack of income disclosure.
3. Capital Flight: over-invoicing and black market goods.
4. Smuggling: import/export tradeable goods without customs clearance.
5. Bank Fraud: defraud a financial institution.
6. Insurance Fraud: application and eligibility process.
7. Terrorist Financing: tracing and following funding sources for terrorist organizations.
8. Financial Statement Fraud: overstatement of revenues and understatement of expenses.
9. Pyramid Schemes: Ponzi schemes.

IRS offers the following forms for reporting suspected tax crimes:

• Form 3949-A: False exemptions or deductions, kickbacks, false/altered document, failure to pay tax, unreported income, organized crime or failure to withhold.
• Form 14039: Identity theft or use of a Social Security number (SSN) for employment purposes or to file a tax return.
• Form 14157 and Form 141157-A: Fraudulent activity or an abusive tax scheme by a tax return preparer or tax preparation company or suspect a tax return preparer filed a return or altered a return without taxpayer's consent and taxpayer is seeking a change to their account.
• Form 14242: Abusive tax promotion or promoter.
• Form 13909: Misconduct or wrongdoing by an exempt organization or employee plan.

To continue being considered experts and members of society's line of defense, forensic CPAs must be able to simplify information, stay factual and communicate effectively. Further, they ought to have a sound understanding of the industry in which they are engaged. Meaning, their understanding of the industry should address industry specific challenges, compliance needs and industry standard tax practices. Niche expertise serving specific industries is critical to identifying risks, capital structures, leverage composition and critical success factors.

Accountants are often gatekeepers for their clients and a primary source of contact. At times, accountants may undertake transactions on behalf of their clients, putting them at risk of money laundering or illicit activities. The Financial Action Task Force (FATF) outlines some of the functions performed by accountants that could lead them to the discovery of financial crimes. According to the FATF, the functions performed by the accountants are:

1. Financial and tax advice—Criminals with a large amount of money to invest/launder may pose as individuals hoping to minimize their tax liabilities or desiring to place assets out of reach in order to avoid future liabilities.
2. Creation of corporate vehicles or other complex legal arrangements (trusts, for example)— such structures may serve to confuse or disguise the links between the proceeds of a crime and the perpetrator.
3. Buying or selling of property—Property transfers may serve as either the cover for transfers of illegal funds (layering stage) or else they represent the final investment of these proceeds after their having passed through the laundering process (integration stage).
4. Performing financial transactions—Sometimes accountants may carry out various financial operations on behalf of the client (for example, cash deposits or withdrawals on accounts, retail foreign exchange operations, issuing and cashing cheques, purchase and sale of stock, sending and receiving international funds transfers, etc.).
5. Gaining introductions to financial institutions.

Accountants play different roles with businesses, individuals, financial institutions and other professionals. Their knowledge and expertise in customer due diligence and accurate recordkeeping is critical. The FATF mandates that accountants pay attention to all complex and unusual large transactions in the following activities:

• Buying and selling of real estate;
• Management of client money, securities or other assets;
• Management of bank, savings or securities accounts.
• Organization of contributions for the creation, operation or management of companies.

The AICPA (American Institute of CPAs) states in the statement on auditing standards No. 99 (SAS No. 99): Consideration of fraud in a financial statement audit) that: “In exercising professional skepticism in gathering and evaluating evidence, the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest”.

What this all means is that CPAs should not “over-rely” on a client's representations and should procced with an inquisitive, critical and skeptical mindset. With this type of approach, CPAs will set aside pre-conceived notions and personal relationships and get to the bottom of the matter at hand.

Stanley Foodman is president and CEO of Foodman CPAs & Advisors in Miami.

CPAs are exposed to numerous financial records and transactions and can be a significant line of defense against crime. While performing audit engagements, they may be first to discover evidence of illicit acts, activity or fraud. Their investigative skill set allows them to engage in detailed reviews of the internal accounting and management processes of an organization. They uncover, calculate and report on misuses of funds and other organizational assets as well as the effectiveness of organizational processes. From time to time, they are brought into a business situation to police and evaluate books, records, bank accounts and other documents with a “fine-tooth comb.”

In addition to a financial inspector's role, independent CPAs should conduct themselves with “professional skepticism” and “objectivity.” A questioning attitude is what brings a CPA to the discovery of potential financial misstatements. Critical thinking, digging deeper and an investigative mind set may uncover information that reveals or confirms improper acts.

Professional skepticism as well as objectivity are critical components assisting professional practitioners. That said, the big question remains: Are CPA's just putting numbers together? What will they do if something “peculiar” stands out? It boils down to how well CPAs know their customers—know your customer (KYC). Although KYC is primarily associated with bankers, it is also fundamental to the practice of accounting.

According to The Public Company Accounting Oversight Board (PCAOB), possible illegal acts involve:

• Unauthorized transactions, improperly recorded transactions, or transactions not recorded in a complete or timely manner in order to maintain accountability for assets
• Investigation by a governmental agency, an enforcement proceeding or payment of unusual fines or penalties
• Violations of laws or regulations cited in reports of examinations by regulatory agencies that have been made available to the auditor
• Large payments for unspecified services to consultants, affiliates or employees
• Sales commissions or agents' fees that appear excessive in relation to those normally paid by the client or to the services actually received
• Unusually large payments in cash, purchases of bank cashiers' checks in large amounts payable to bearer, transfers to numbered bank accounts, or similar transactions
• Unexplained payments made to government officials or employees
• Failure to file tax returns or pay government duties or similar fees that are common to the entity's industry or the nature of its business

When a CPA bumps into, discovers or confirms any of these types of situations, a CPA has an ethical obligation to “report.” The PCAOB states that a CPA must first bring an issue at hand to the management of the company under audit and obtain information related to the illegal act, why it occurred and the possible impact of the illegal act on the company's financial reporting.

If the CPA is not satisfied with management's response, contacting the company's legal counsel may be appropriate. This is when matters can complicate the life of a CPA. There will be potential conflicts with obligations of confidentiality. It is best that a CPA consult with legal counsel before engaging in conversations with a third party about a company's illegal acts.

Services provided by forensic CPAs serve as: monitoring mechanisms, checks on financial information accuracy and a deterrent for financial misappropriation. Over time, Forensic CPAs have been instrumental in the deterrence of financial crimes such as:

1. Corruption: people paying or accepting bribes for personal gain.
2. Tax Evasion: nonpayment of taxes and lack of income disclosure.
3. Capital Flight: over-invoicing and black market goods.
4. Smuggling: import/export tradeable goods without customs clearance.
5. Bank Fraud: defraud a financial institution.
6. Insurance Fraud: application and eligibility process.
7. Terrorist Financing: tracing and following funding sources for terrorist organizations.
8. Financial Statement Fraud: overstatement of revenues and understatement of expenses.
9. Pyramid Schemes: Ponzi schemes.

IRS offers the following forms for reporting suspected tax crimes:

• Form 3949-A: False exemptions or deductions, kickbacks, false/altered document, failure to pay tax, unreported income, organized crime or failure to withhold.
• Form 14039: Identity theft or use of a Social Security number (SSN) for employment purposes or to file a tax return.
• Form 14157 and Form 141157-A: Fraudulent activity or an abusive tax scheme by a tax return preparer or tax preparation company or suspect a tax return preparer filed a return or altered a return without taxpayer's consent and taxpayer is seeking a change to their account.
• Form 14242: Abusive tax promotion or promoter.
• Form 13909: Misconduct or wrongdoing by an exempt organization or employee plan.

To continue being considered experts and members of society's line of defense, forensic CPAs must be able to simplify information, stay factual and communicate effectively. Further, they ought to have a sound understanding of the industry in which they are engaged. Meaning, their understanding of the industry should address industry specific challenges, compliance needs and industry standard tax practices. Niche expertise serving specific industries is critical to identifying risks, capital structures, leverage composition and critical success factors.

Accountants are often gatekeepers for their clients and a primary source of contact. At times, accountants may undertake transactions on behalf of their clients, putting them at risk of money laundering or illicit activities. The Financial Action Task Force (FATF) outlines some of the functions performed by accountants that could lead them to the discovery of financial crimes. According to the FATF, the functions performed by the accountants are:

1. Financial and tax advice—Criminals with a large amount of money to invest/launder may pose as individuals hoping to minimize their tax liabilities or desiring to place assets out of reach in order to avoid future liabilities.
2. Creation of corporate vehicles or other complex legal arrangements (trusts, for example)— such structures may serve to confuse or disguise the links between the proceeds of a crime and the perpetrator.
3. Buying or selling of property—Property transfers may serve as either the cover for transfers of illegal funds (layering stage) or else they represent the final investment of these proceeds after their having passed through the laundering process (integration stage).
4. Performing financial transactions—Sometimes accountants may carry out various financial operations on behalf of the client (for example, cash deposits or withdrawals on accounts, retail foreign exchange operations, issuing and cashing cheques, purchase and sale of stock, sending and receiving international funds transfers, etc.).
5. Gaining introductions to financial institutions.

Accountants play different roles with businesses, individuals, financial institutions and other professionals. Their knowledge and expertise in customer due diligence and accurate recordkeeping is critical. The FATF mandates that accountants pay attention to all complex and unusual large transactions in the following activities:

• Buying and selling of real estate;
• Management of client money, securities or other assets;
• Management of bank, savings or securities accounts.
• Organization of contributions for the creation, operation or management of companies.

The AICPA (American Institute of CPAs) states in the statement on auditing standards No. 99 (SAS No. 99): Consideration of fraud in a financial statement audit) that: “In exercising professional skepticism in gathering and evaluating evidence, the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest”.

What this all means is that CPAs should not “over-rely” on a client's representations and should procced with an inquisitive, critical and skeptical mindset. With this type of approach, CPAs will set aside pre-conceived notions and personal relationships and get to the bottom of the matter at hand.

Stanley Foodman is president and CEO of Foodman CPAs & Advisors in Miami.