Forensic Accountants Uncover the Facts about Ponzi Schemes

Source: CPA Trendlines

Following are excerpts, reproduced with permission, from a blog post by Sareena Sawhney.*

Suddenly, Ponzi schemes seem to be everywhere.

Credit for the renewed attention to this classic financial fraud is of course due in large measure to Bernard Madoff, the now-convicted financier who defrauded investors of an estimated $65 billion.

The Red Flag for a Ponzi Scheme is an Investment that Performs Too Well
An investment, whether it's yours, your organization's or your client's, is suspect when it produces a much higher than normal yield, or behaves in a too predictable way — for example, producing steady income with no fluctuations.

A Forensic Accountant is an Essential Member of the Investigating Team
While the investigation of a Ponzi scheme is often led by law enforcement officials, or by lawyers and bankers concerned about their and their client's assets, the detection of the scheme itself can be a highly demanding, highly technical matter, and that's where forensic accounting excels.

Cash Flow Analysis is Central to Detecting the Scam
The first evidence that investments are not what they seem — that they are not, in fact, being made — is usually revealed in cash flow analysis. This cash flow analysis is often used by attorneys to establish exactly how the offender received and depleted the victims' funds, and to determine the total amount that's been stolen.

Forensic Accountants “Follow the Money”
Forensic accountants reconstruct the scheme by first obtaining all relevant banking records — checks, deposit slips, and monthly bank statements from the banking institutions into which the scammer placed the victims' funds. The results of the forensic cash flow analysis are critical to the investigation.

To read the entire post, click here.

From CPA Trendlines, http://cpatrendlines.com, June 27, 2010, “The Case for the Forensic Accountant.”

*Sareena Sawhney, MBA, CFE, CFFA, is senior manager in Marks Paneth & Shron's Litigation and Corporate Financial Advisory Services Group. Ms. Sawhney provides forensic accounting services as well as services related to commercial litigation and economic damages.