'Bloodhounds' sniff out the money trail

Experts say the job of forensic accounting likely began the minute Allfirst Financial Inc. officials first detected something was awry in its currency trading room.

It's a task that involves gathering documents, scrutinizing trade histories and interviewing employees in an attempt to unravel what bank officials say was a sophisticated scheme to hide about $750 million in losses resulting from risky trades.


It's a specialized field of accounting in which the detectives are crunching numbers rather than dusting for fingerprints.

It's also a profession that's getting a lot of attention in these days of high-profile bankruptcies and complicated business deals. In recent months, forensic accountants have been pressed into service to sort out the off-the-books partnerships that brought down Enron Corp. and to follow the elusive money trail of the terrorists who brought down the World Trade Center towers.


"As an auditor, you're acting as a watchdog. You have a certain checklist to satisfy that things are as they should be," said Howard Silverstone, a principal in the Philadelphia office of Kroll, a worldwide risk consulting company that specializes in forensic accounting. "As a forensic accountant, you're a bloodhound. You're going in there with a specific purpose."

The slumping economy has only added to the industry's momentum as faltering companies discover losses that were masked when profits were soaring. When the economy turns sour, companies also often cut back on internal financial controls to save money. The cost-saving strategy sometimes backfires, and forensic accountants go to work.

"We have seen a steep increase in the number of fraud cases we are being asked to look at," Silverstone said.

Experts say Allfirst officials are probably following familiar procedures as they sort out the financial mess allegedly created by a rogue trader in their Baltimore trading office. Once an inkling of a problem turned into certainty, it likely evolved into a fullblown pursuit of paper and electronic evidence that might expose the weaknesses that allowed the financial institution's huge losses to occur.

"You could end up with a room full of documents and a few [computer] hard drives," said Robert Crockatt, a Toronto-based forensic accountant.

In Allfirst's case, the trader, John M. Rusnak, is suspected of falsifying numerous options contracts in an effort to conceal extensive losses incurred while trading U.S. dollars for yen.

Experts said the trail should be easy for Allfirst to follow. Currency trades typically leave a substantial paper trail and are subject to numerous internal checks as they work their way through the trading and accounting system. The first task of the company's financial experts would be to gather the trader's monthly accounting reports and begin looking for unusual activity. Then it's a matter of following the money.

Because the trades are alleged to have occurred over the course of a year, investigators must confirm which trades were real and which were fictitious.


"Once you have isolated the suspicious accounts, then you start collecting those transactions," said John Harvey, a managing principal with Capco, a New York firm that designs risk-management procedures for major financial institutions.

Records of such trades are meticulously kept at major banks. Generally, they are easy to search and difficult to tamper with, making the task of unwinding fraud less difficult. The forensic accountant's biggest enemy is time and tedium.

"Sometimes it sounds sexy, but a lot of times it's more meticulous than sexy," said Warren Schneider of the New York-based Forensic Accounting Group. His job has taken him to the Dominican Republic, Mexico and the Virgin Islands. He is often greeted by a room full of documents in boxes.

Because Allfirst has been able to pinpoint the size of its losses, experts said it's likely the company has finished the task of isolating and unwinding the fraudulent claims. But the task of figuring out exactly what went wrong and how to fix it will probably take longer.

In the end, the process inevitably exposes the company's weaknesses and can establish whether the losses are the result of fraud or poor management, experts said.

It's unknown whether Allfirst has hired independent forensic accountants to investigate its Baltimore trading operation, but experts said the practice is common. Companies that uncover major fraud on the part of employees will often bring in outside accountants to demonstrate to investors that all of the losses have been reported and that internal safeguards have been fixed to prevent a recurrence.


"Forensic accountants aren't beholden to anybody in the case," Silverstone said. "We are the storytellers."