Hoisted from Comments: Are Ethics Rules Making CPAs Vulnerable in Court?

Let this be a warning to CPAs working in forensics at a risky company.

This comment post is such an amazing and frightening story that we thought it was worth a full post of its own. It comes in response to Be a Hero, Not a Chump.

Currently I am in year 3 of fighting a Chapter 11, now Chapter 7 filing. Our firm consists of three very experienced practitioners with approximately 80 years of aggregate experience. Collectively we have CPA, CFE, JD, MS, and BBA degrees. My wife and I are now working on MS degrees in digital forensics. This was brought about by an agreed-upon procedures engagement involving an oil and gas drilling company that we took on in December 2006.

Even though we found and documented evidence of:
(1) material financial statement fraud,
(2) mail fraud,
(3) wire fraud,
(4) securities fraud,
(5) tax fraud,
(6) asset conversion,
(7) skimming,
(8) embezzlement,
(9) bankruptcy fraud, and
(10) numerous other violations,

For our efforts to-date we have gotten:

• Threatened with loss of our CPA licenses by the former debtor-in-possession’s attorney,
• Sued by the company for some of the fees they paid our firm before filing Chapter 11 under several different legal theories,
• Currently we are being sued by the Chapter 7 trustee to “claw-back” preference payments,
• Threatened twice with murder,
• Been told by the State Board of Public Accountancy that we cannot disclose any “facts” of this former client arrangement unless we want to lose our licenses.

As a firm we were set-up to ferret out fraud, document it, provide evidence of it, and then placed in a position where the power of the federal bankruptcy court system could be used against us. All of the time the IRS which was owed over $7M by the debtor, the U.S. Trustee, and the federal attorney for that district did very little.

My point is this that when a CPA decides to work on a client in “financial distress” they should realistically consider consulting their priest, psychiatrist, and very good attorney first. The monetary loss has been huge, but the impact on us personally has been beyond description.

Very few CPA firms are “large-enough” in terms of resources to handle this type of situation. We brought in one of the largest law firms in the state, as well as a prominent law firm from out of state specializing in bankruptcy. None of that has been enough to stop the collective loss across many innocent parties.

This is what happens when fraudsters infect a company, provide the representation in bankruptcy court, and manage the debtor-in-possession.

There is, unfortunately, a lot of this and I don’t know a single CPA that can play this game well. What we should be taught as professionals is “how to defend ourselves” and “how to take the gloves off” when it is necessary.

Given the ethical nature of our profession we are “ripe” for picking by corporate organizers that aren’t ethical. In that respect we need to catch up to the current business environment.

Posted on May 11, 2010