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Being Careful with New Clients – Spotting Scams as a Lawyer or Certified Public Accountant

Exercising Skepticism When Assessing Prospective Clients

(Your Best Protection Against Falling Victim to a Scam)

By Ralph G. Picardi, Esq.

In February I wrote in this space about the importance of your firm’s engagement risk assessment function, i.e., your policies and procedures surrounding whether to accept or continue with an engagement. At the foundation of that function is skepticism: questioning the information with which you are provided and being prepared to decline the proposed services. Nowhere is skepticism more important than in helping you avoid becoming a victim of a scam disguised as a legitimate business opportunity. This week on the Hotline I had a discussion that made this point emphatically, as a scam that had presented itself a few years ago in a slightly different context arose again in an attempt to ensnare a CPA firm that I know well.

Law Firm Scam

Four or five years ago the FBI caught wind of a creative scam by which the perpetrators enriched themselves at the expense of professional firms eager to accept new business. In those cases, the victims were law firms that handled a large volume of transactional engagements and associated escrow funds, and it is easy to see how those firms were deceived.

The process began when a representative of what purported to be a foreign company contacted the firm with a business proposal that involved a transaction with a domestic company. The contact may have been via the law firm’s web site, and the transaction may have been a complex acquisition of the domestic target company. The law firm’s role would be, primarily, to advise the foreign company and assist it during the various stages of the transaction, and would seemingly result in a sizeable fee. However, the law firm would also be asked to act as an escrow for certain payments flowing to and from the target company, which would be a real, incorporated entity. And, it would be one of those payments, in the form of a counterfeit check allegedly drawn on the bank account of the target company, sent to the law firm at the very outset, before any other services had been rendered, that would embody the scam.

The law firm would be asked to act as an escrow for certain payments flowing to and from the target company, which would be a real, incorporated entity

It would be a quick strike, leaving the law firm wondering what had just happened, and then, how it could be so stupid. The client would tell the firm to expect such a check, likely in the amount of several hundred thousand dollars, to deposit the check, and to immediately write a check out to some purported third party after deducting the firm’s fee for the handling of the funds. The check, being counterfeit, would bounce of course, but before the firm could receive notice of that fact and move to stop payment on its own check to the client or third party, that check would have been cashed and the firm’s funds would be gone.

Followup Attempt to Scam a CPA Firm

The FBI became aware of this scam and began an investigation. It also published information on its website to alert the public. Thereafter, we didn’t hear much of this particular scam, and it may be that the perpetrators decided to lie low in light of the unwanted attention. Well, they’re back, and this time they have targeted a fairly large CPA firm. And, the script is virtually identical to the one that had arisen at the beginning of the decade.

The client purported to be a Chinese company seeking to acquire a real, incorporated U.S. company, and the CPA firm was asked, through an electronic message through the firm’s website, to assist in the due diligence process. The firm passed the prospect through its engagement risk assessment process and it did not note any red flags. That changed, however, when the client told the engagement partner to expect a check from the target in payment of an outstanding debt in advance of the acquisition. As before, the client asked the partner to deposit the check in its client funds account and immediately write a check to a third party located in Canada after deducting the firm’s fee.

the client asked the partner to deposit the check in its client funds account and immediately write a check to a third party located in Canada after deducting the firm’s fee

It was at that point that the partner saw a red flag. Not having a history with this client, and not knowing either the target company or the third party, he was not interested in having his firm act as an escrow, and was suspicious that this additional, unanticipated service was being thrust upon him. His suspicion and skepticism led him to conduct some on-line research and eventually to the FBI’s website, where he found a discussion of the law-firm scam outlined above. Accordingly, he reported the matter to the FBI and informed the client that he would not deposit the check and would be disengaging from the overall engagement. The check was already en route to the firm, however, and has since been received in the amount of more than $300,000. The FBI has thus far not contacted the firm in response to its report.

When the partner called me this week on the Hotline, and after he described this factual background, we discussed the facts, the best approach to disengagement and what to do with the check. We both thought that retaining the check was advisable, and that the FBI would likely find the check to be a useful piece of evidence if it chose to follow up on the firm’s report. But my overriding message to the partner was that he and his firm had done everything right in the handling of this matter. This was a textbook example of how closely managing a new client relationship and exercising a healthy level of skepticism allows a CPA firm to manage its risk exposure effectively. By recognizing that the new engagement had turned in an undesirable and suspicious direction, and taking action immediately to follow up on his instincts, the partner saved his firm from suffering a very large loss and becoming the latest victim in this resurgent scam.

So, be on the alert, spread the word, and be sure not to let your understandable desire to bring in and maintain lucrative engagements cloud your ability to act skeptically and instinctively in the face of suspicious circumstances.

Be on alert, spread the word.. don’t let your desire to bring in new business cloud your ability to act skeptically in the face of suspicious circumstances

Under the CPA Gold™ Program you are fortunate to have the benefit of access to counsel through the subpoena coverage when subpoenas, summonses and court orders present complications.

© May 2015, PICARDI LLC

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