Ep. 87: Jason Pierce - Where'd the money go? Auditing, Forensic Accounting, and Business Valuation
Jason Pierce, CPA, CMA, CFM, CVA, MAFF is a partner with the firm Edelstein & Company LLP in Boston. Prior to moving to Massachusetts, he was a partner at an Alaskan CPA firm and a valuation manager for an RSM McGladrey network firm. Jason specializes in financial forensics and business valuations for dispute and transaction-related engagements. In this episode of Count Me In, he talks about how he got into this specialization and how all his accounting skills have been transferable. He also explains the importance of data and data analytics when it comes to completing his assignments. Jason is a lead instructor for NACVA’s Master Analyst in Financial Forensics (MAFF) and a regular speaker at other professional organizations. Jason is an active member of the Massachusetts Society of CPA’s (Business Valuation Committee) and the Boston Chapter of the Institute of Management Accountants (Vice President - Education). Download and listen now to hear an interesting and engaging conversation!
Contact Jason Pierce: https://www.linkedin.com/in/jasonrpierce/
About Jason Pierce: https://edelsteincpa.com/our-team/jason-r-pierce/
Forensic Accounting Video, "Does my balance sheet balance?": https://edelsteincpa.com/does-my-balance-sheet-balance/
FULL EPISODE TRANSCRIPT
Adam: (00:00)
Welcome back to episode 87 of Count Me In, IMA's podcast about all things affecting the accounting and finance world. This is your host Adam Larson, and I'm excited to introduce you to our featured guest, Jason Pierce. Jason is a partner with the firm Edelstein and Company in Boston, Massachusetts, where he specializes in financial forensics and business valuations. In this episode, he talks with my co-host Mitch, about how a background in audit lends itself nicely to forensic accounting and business valuations. He also explains how the emergence of data and data analytics has played a major role in his job today. To hear more about fraud forensics and financial valuations, keep listening for upcoming conversation.
Mitch: (00:45)
So, Jason, I know you have a very interesting background and I'd like to start this conversation with you just kind of explaining how you started off in your accounting career.
Jason: (01:01)
Yeah, thanks Mitchell. So I'm a military brat, which means we bounced around the country, from place to place, which I also think kind of helps with fill in with this, forensic accounting stuff which we'll talk about in a little bit just from looking at things as an outsider, but where we landed when I graduated from high school and college was an in Tennessee. And so after I graduated, I was looking at, at the time, going through another year of school due to the 150 hours necessary to get my CPA. But meanwhile, my dad had shipped off to Alaska and I would go visit in the summers and see how awesome the summers were up there. And it just kind of drew me up to that place. Those of you who have been there, know exactly what I'm talking about. So after, after graduation, then I moved up to Alaska, started working at a small CPA firm up there, and I did specialize in auditing for about 10 years before I jumped into this forensic accounting and business valuation area.
Mitch: (02:10)
So how exactly does auditing turn into forensic accounting and your business valuation?
Jason: (02:16)
Yeah, for me, it was, it was overtime, you know, so if somebody would have asked me in college, like what would I be doing today? You know, forensic, accounting side of things. I wouldn't even have known what that was. So, so just for the listeners, let's defined forensic accounting. The easy definition of that is really the art and science of investigating people and money. Or I think a lot of the misconception is, is just kind of chasing the money. But once you figure out the people's side, then the money side becomes easier to figure out. So there is a relationship between the two. But so how it happened for me was, as I said, being a staff auditor in Alaska meant a lot of trips out to the rural communities, which we call the Bush, right, where there's no road system and, but I'd be out there and every now and then there would be a situation where the records are gone, the former managers are gone or that the city administrator, what have you and so those audit then turned into a forensic investigation. And, sometimes that meant just kind of figuring out what the heck happened. And it also, sometimes it meant like people made off with some money. And so we had to just kind of figure out, what we call like pick and shovel sort of methodology is understanding what happened and when, and how that translates to the financial statements at the end of the day.
Mitch: (03:48)
So, with that in mind, you know, can you kind of tell us what it means to have a forensic mindset and how you were able to kind of apply some of, you know, your auditing and accounting background into what you were doing with forensics?
Jason: (04:00)
Yeah. You know, it's interesting with the, with the forensic mindset compared to what one would traditionally think of as an auditor, that in an audit you're looking for matching. So like uniformity, consistency, you know, does, does the check or purchase order or invoice agree from the date, the payee or the vendor, the amount and the expense or whatever account code do all those match with what's going through the general ledger. And so on the surface, you have this forensic or the audit mindset where you're digging through the general ledger, making sure that the financial statements agree in all material respects and all that good stuff, but what the difference is from a forensic side of things is you're looking for differences. In other words, whereas on one hand, we're looking for that uniformity where on a forensic side, we're looking for, let's say there's a $2,000 dual signing check limit where in other words, if there's two check issued for more than say $2,000, it requires dual check signers, but lo and behold, there's a lot of checks for $1900. In other words, if we're looking at things where we have the ability to look to see if is there round numbers, is there what we call like, there's a technique called Benford's law, where you could look to see from the placement of the digits in whatever sort of metric you're looking at, there should be some uniformity to it. And without getting into that there's ways where you can test from a risk based approach to identify like the nice round numbers, or there's a lot of checks that start with say threes and that's disproportionate to what would be expected. So there's ways to look things from a forensic perspective, that are different from say a traditional audit mindset where you're just grabbing 40 to 60 cash disbursements and kind of checking those against the general ledger.
Mitch: (06:16)
So now you have these two different mindsets and you've got experience with both, but today I know you do a lot of work on business valuation. So how do auditing and forensic accounting mesh and ultimately allow you to come up with these business valuations.
Jason: (06:34)
Yea well, surprisingly or not surprisingly, there's a lot of accountants that are in this field. And I think primarily is because we know how things flow through the general ledger. We're also detail oriented folks, and I think that's a key element. I'll come back to that. We know where to go on the tax returns for, to find information, or what's missing from a tax return oftentimes. And really it's back to that, getting the story behind the numbers, right? We want to be able to take a situation where we're analyzing a business and see where it's been, but where the business valuation kicks in. It's really, what is the, what's the worth going forward? So we're where it's been, it's important to understand the risk and, you know, we could do some diagnostics from the financial statement analysis aspect, but the business valuation side of things, it's really like the present value of what the business is going to do. And so when we look to see, and that's where the forensic kind of overlays and with this, the valuation analysis is because we are looking at, sometimes individual transactions, but sometimes it is just uniformity from year to year. And let's say like the marketing expense was, let's call it 1% of revenue for the first four years, and then in the last two years, it's been three to 5%. So we kind of wonder what's what's in that is, is that really just an investment in the business that we could use to justify why we're going to grow revenues? Or is it because there's, there's a brand new luxury vehicle that's getting run through the, the general ledger or some, some trips to Vegas pre COVID, what have you that don't need to be in there? And so from, from a valuation side, we would adjust for those, those sort of transactions. But yeah, from a transition, from an accounting based perspective to forensic based analysis and business valuation, call it forecasting, there is a lot of overlap, but where I think I would caution listeners, is to have a solid understanding of finance rather than just kind of assume that we can do a present value formula in an Excel and think that we can just kind of run some of this stuff, because the way that I know that I'm improving is to look to see how my previous valuation reports look. And I can tell you with certainty because it's been long enough from statute of limitations that these things don't matter anymore. But my first business valuations were just that, where I thought I knew what I was doing, but when you look at them today, it's like, wow, there was, there's, there's a lot more nuance.
Mitch: (09:25)
So you talked about diagnostics, you talked a little bit about analysis, you know, my next question deals with those detailed analyses, some of the nuance that you were talking about, and how do you go about identifying some of that, you know, particularly in your perspective, I'd like you to share, what role does data analytics play in your business valuation today? And does it tie into forensic accounting even in taking a step back further?
Jason: (09:49)
Oh, you bet. So let's, let's take a situation where most of the, the activities that we look at, you know, whether we're dumping things out of the general ledger into Excel, or we just are doing our own calculations in Excel, most things can be done in that or, I don't want to just limit it to Excel, but, you know, spreadsheet type activity, but what happens if you have millions of transactions, you know, or you're looking for something specific where you have two different databases, where in those situations we rely on that, those data analytics, software. Think like IDEA or ACL, if that's a familiar term for folks. Where, as an example, we had a food delivery business case, with, with 12 million transactions, we had to do some analytics on that. It just wasn't real convenient in Excel. So we put that information into the data analytics software, where you could look to see, like what about entries on weekends? You know, I talked about the Benford's law. That's, that's certainly part of that analysis. You can, you can look to see is, you know, compared the vendor database to the employee database and see if there's some commonalities between either phone numbers or addresses, you know, things like that, that you just can't do with the day to day sort of spreadsheet analysis. So, the data analytics is a big piece of this, as I was saying, like the important characteristics of a forensic accountant, is that data analytics side of things. But there is, for those of you who are interested in it, there is a course offered by the IMA that, you could get 21 hours of CPE and it's literally called Data Analytics and Visualization it's put on by the University of Illinois and it gets, gets into some Excel stuff, but it also gets into Tableau, and some other areas of that, your average say CFO or controller might not be familiar with either because of their job duties or, you know, just without having the need to, perform those types of activities. But yeah, that's a great course. I'm halfway through it right now.
Mitch: (12:08)
So with these analytics and, you know, the different mindsets that you put in place on the day to day with the different clients or companies you're working with, what are some of the warning signs of fraudulent numbers? Like what are some of the things that really stick out to you and make it obvious that you need to dig into these numbers a little bit more?
Jason: (12:25)
Yeah, well, you know, what's most common on my side cause I mean, I'm not in industry right now. I'm working at a CPA firm, is where people will come to me and say, you know, Jason, I don't know what's wrong. I'm bouncing a lot of checks. Meanwhile, I think I'm making money. So like, that's very common other activities where this comes into play. It's, the mindset that having the ability to trust people, but verify. And if you think of that, I don't want to keep going back or go to the fraud triangle, but it is appropriate. So for those of you who don't know, that's where the opportunity, the pressure and rationalization meet to where a fraudster will then, you're more likely than not to have some, some fraud occur in your organization. So we can't do anything about the pressure or the rationalization cause that's to the individual, but we can do a lot for the opportunity and minimize that. And if even if people think that you're watching, then they're less likely to do so. And if you haven't seen it, there is an article in the Strategic Finance publication by the IMA last month called Fighting Fraud in the Workplace. It gets into some of the areas that one can do to strengthen up the internal controls or analysis of transactions or surprise audits. You know, those types of things that, while we trust our employees and we want to make sure that they learn and grow, we also want to let them know that somebody is watching.
Mitch: (14:01)
I think a good way to really wrap it up for this conversation is, you know, do you have any, notable cases or anything that really highlights something that was most interesting to you through your career? Whether it was, you know, early on with the audits or the forensic trails, you know, what is it about this that's so interesting and anything specific you can share with our listeners, that maybe they can apply or pursue?
Jason: (14:25)
You know, if we think about what are the ways that without talking just litigation is, is a situation that I've come across regularly, which is more the use of multiple entities to basically have a workaround from the general ledger. We see that with the Enron, companies with the SPE's, right? So one of the things I see is say where you have a business owner that has a related entity, whether it's the real estate or just, you know, like a subcontractor kind of management type entity, where they have the ability to kind of shuffle costs, or fees around, and if we don't have the ability to look to see what's on the other side of that, then we're at a disadvantage. So I would say to be cautious as I'm putting myself as is a user of one of us as a listener of this podcast, like a CFO controller type person that we would want to have the, say the data analytics capability, where we could do that merging of databases. You know, it's easy to say, right? Everybody's this is all on our free time. But having the ability to think critically of, you know, say shareholder loan accounts or due to due from accounts or, you know, management fees with this related company or rental expense. So, there's a lot of areas, a lot of accounts that have the potential for abuse, even things like employee expense reimbursements, that data analytics works well with, expense reimbursements. And again, if people think that their expense reimbursements are getting looked at, they're less likely to try to push things through the system, when they know somebody is going to be looking at it. So, yeah, I think some of the lessons that I've learned from like the litigation side and quite frankly, like the criminal cases, I've had to, tend to fall into some of those accounts where, you know, it's absent just straight cash, or it's not going to hit the books anyway. But if, if we're just thinking of, you know, there is a transaction that has a debit and a credit, and we see that there's, let's call it an expense, like the debit side of things that's floating through the general ledger, where could that credit go? I mean, it, it could go in that shareholder loan account. It could be from, you know, shareholder contributions. It could be in that due to due from account. There's lots of ways that this thing can go. And quite frankly, I still get out the T accounts and just kind of walk through like, well, wait, how does this even make sense?
Closing: (17:22)
This has been Count Me In IMA's podcast, providing you with the latest perspectives of thought leaders from the accounting and finance profession, if you like, what you heard, and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.
About Jason Pierce: https://edelsteincpa.com/our-team/jason-r-pierce/
Forensic Accounting Video, "Does my balance sheet balance?": https://edelsteincpa.com/does-my-balance-sheet-balance/
FULL EPISODE TRANSCRIPT
Adam: (00:00)
Welcome back to episode 87 of Count Me In, IMA's podcast about all things affecting the accounting and finance world. This is your host Adam Larson, and I'm excited to introduce you to our featured guest, Jason Pierce. Jason is a partner with the firm Edelstein and Company in Boston, Massachusetts, where he specializes in financial forensics and business valuations. In this episode, he talks with my co-host Mitch, about how a background in audit lends itself nicely to forensic accounting and business valuations. He also explains how the emergence of data and data analytics has played a major role in his job today. To hear more about fraud forensics and financial valuations, keep listening for upcoming conversation.
Mitch: (00:45)
So, Jason, I know you have a very interesting background and I'd like to start this conversation with you just kind of explaining how you started off in your accounting career.
Jason: (01:01)
Yeah, thanks Mitchell. So I'm a military brat, which means we bounced around the country, from place to place, which I also think kind of helps with fill in with this, forensic accounting stuff which we'll talk about in a little bit just from looking at things as an outsider, but where we landed when I graduated from high school and college was an in Tennessee. And so after I graduated, I was looking at, at the time, going through another year of school due to the 150 hours necessary to get my CPA. But meanwhile, my dad had shipped off to Alaska and I would go visit in the summers and see how awesome the summers were up there. And it just kind of drew me up to that place. Those of you who have been there, know exactly what I'm talking about. So after, after graduation, then I moved up to Alaska, started working at a small CPA firm up there, and I did specialize in auditing for about 10 years before I jumped into this forensic accounting and business valuation area.
Mitch: (02:10)
So how exactly does auditing turn into forensic accounting and your business valuation?
Jason: (02:16)
Yeah, for me, it was, it was overtime, you know, so if somebody would have asked me in college, like what would I be doing today? You know, forensic, accounting side of things. I wouldn't even have known what that was. So, so just for the listeners, let's defined forensic accounting. The easy definition of that is really the art and science of investigating people and money. Or I think a lot of the misconception is, is just kind of chasing the money. But once you figure out the people's side, then the money side becomes easier to figure out. So there is a relationship between the two. But so how it happened for me was, as I said, being a staff auditor in Alaska meant a lot of trips out to the rural communities, which we call the Bush, right, where there's no road system and, but I'd be out there and every now and then there would be a situation where the records are gone, the former managers are gone or that the city administrator, what have you and so those audit then turned into a forensic investigation. And, sometimes that meant just kind of figuring out what the heck happened. And it also, sometimes it meant like people made off with some money. And so we had to just kind of figure out, what we call like pick and shovel sort of methodology is understanding what happened and when, and how that translates to the financial statements at the end of the day.
Mitch: (03:48)
So, with that in mind, you know, can you kind of tell us what it means to have a forensic mindset and how you were able to kind of apply some of, you know, your auditing and accounting background into what you were doing with forensics?
Jason: (04:00)
Yeah. You know, it's interesting with the, with the forensic mindset compared to what one would traditionally think of as an auditor, that in an audit you're looking for matching. So like uniformity, consistency, you know, does, does the check or purchase order or invoice agree from the date, the payee or the vendor, the amount and the expense or whatever account code do all those match with what's going through the general ledger. And so on the surface, you have this forensic or the audit mindset where you're digging through the general ledger, making sure that the financial statements agree in all material respects and all that good stuff, but what the difference is from a forensic side of things is you're looking for differences. In other words, whereas on one hand, we're looking for that uniformity where on a forensic side, we're looking for, let's say there's a $2,000 dual signing check limit where in other words, if there's two check issued for more than say $2,000, it requires dual check signers, but lo and behold, there's a lot of checks for $1900. In other words, if we're looking at things where we have the ability to look to see if is there round numbers, is there what we call like, there's a technique called Benford's law, where you could look to see from the placement of the digits in whatever sort of metric you're looking at, there should be some uniformity to it. And without getting into that there's ways where you can test from a risk based approach to identify like the nice round numbers, or there's a lot of checks that start with say threes and that's disproportionate to what would be expected. So there's ways to look things from a forensic perspective, that are different from say a traditional audit mindset where you're just grabbing 40 to 60 cash disbursements and kind of checking those against the general ledger.
Mitch: (06:16)
So now you have these two different mindsets and you've got experience with both, but today I know you do a lot of work on business valuation. So how do auditing and forensic accounting mesh and ultimately allow you to come up with these business valuations.
Jason: (06:34)
Yea well, surprisingly or not surprisingly, there's a lot of accountants that are in this field. And I think primarily is because we know how things flow through the general ledger. We're also detail oriented folks, and I think that's a key element. I'll come back to that. We know where to go on the tax returns for, to find information, or what's missing from a tax return oftentimes. And really it's back to that, getting the story behind the numbers, right? We want to be able to take a situation where we're analyzing a business and see where it's been, but where the business valuation kicks in. It's really, what is the, what's the worth going forward? So we're where it's been, it's important to understand the risk and, you know, we could do some diagnostics from the financial statement analysis aspect, but the business valuation side of things, it's really like the present value of what the business is going to do. And so when we look to see, and that's where the forensic kind of overlays and with this, the valuation analysis is because we are looking at, sometimes individual transactions, but sometimes it is just uniformity from year to year. And let's say like the marketing expense was, let's call it 1% of revenue for the first four years, and then in the last two years, it's been three to 5%. So we kind of wonder what's what's in that is, is that really just an investment in the business that we could use to justify why we're going to grow revenues? Or is it because there's, there's a brand new luxury vehicle that's getting run through the, the general ledger or some, some trips to Vegas pre COVID, what have you that don't need to be in there? And so from, from a valuation side, we would adjust for those, those sort of transactions. But yeah, from a transition, from an accounting based perspective to forensic based analysis and business valuation, call it forecasting, there is a lot of overlap, but where I think I would caution listeners, is to have a solid understanding of finance rather than just kind of assume that we can do a present value formula in an Excel and think that we can just kind of run some of this stuff, because the way that I know that I'm improving is to look to see how my previous valuation reports look. And I can tell you with certainty because it's been long enough from statute of limitations that these things don't matter anymore. But my first business valuations were just that, where I thought I knew what I was doing, but when you look at them today, it's like, wow, there was, there's, there's a lot more nuance.
Mitch: (09:25)
So you talked about diagnostics, you talked a little bit about analysis, you know, my next question deals with those detailed analyses, some of the nuance that you were talking about, and how do you go about identifying some of that, you know, particularly in your perspective, I'd like you to share, what role does data analytics play in your business valuation today? And does it tie into forensic accounting even in taking a step back further?
Jason: (09:49)
Oh, you bet. So let's, let's take a situation where most of the, the activities that we look at, you know, whether we're dumping things out of the general ledger into Excel, or we just are doing our own calculations in Excel, most things can be done in that or, I don't want to just limit it to Excel, but, you know, spreadsheet type activity, but what happens if you have millions of transactions, you know, or you're looking for something specific where you have two different databases, where in those situations we rely on that, those data analytics, software. Think like IDEA or ACL, if that's a familiar term for folks. Where, as an example, we had a food delivery business case, with, with 12 million transactions, we had to do some analytics on that. It just wasn't real convenient in Excel. So we put that information into the data analytics software, where you could look to see, like what about entries on weekends? You know, I talked about the Benford's law. That's, that's certainly part of that analysis. You can, you can look to see is, you know, compared the vendor database to the employee database and see if there's some commonalities between either phone numbers or addresses, you know, things like that, that you just can't do with the day to day sort of spreadsheet analysis. So, the data analytics is a big piece of this, as I was saying, like the important characteristics of a forensic accountant, is that data analytics side of things. But there is, for those of you who are interested in it, there is a course offered by the IMA that, you could get 21 hours of CPE and it's literally called Data Analytics and Visualization it's put on by the University of Illinois and it gets, gets into some Excel stuff, but it also gets into Tableau, and some other areas of that, your average say CFO or controller might not be familiar with either because of their job duties or, you know, just without having the need to, perform those types of activities. But yeah, that's a great course. I'm halfway through it right now.
Mitch: (12:08)
So with these analytics and, you know, the different mindsets that you put in place on the day to day with the different clients or companies you're working with, what are some of the warning signs of fraudulent numbers? Like what are some of the things that really stick out to you and make it obvious that you need to dig into these numbers a little bit more?
Jason: (12:25)
Yeah, well, you know, what's most common on my side cause I mean, I'm not in industry right now. I'm working at a CPA firm, is where people will come to me and say, you know, Jason, I don't know what's wrong. I'm bouncing a lot of checks. Meanwhile, I think I'm making money. So like, that's very common other activities where this comes into play. It's, the mindset that having the ability to trust people, but verify. And if you think of that, I don't want to keep going back or go to the fraud triangle, but it is appropriate. So for those of you who don't know, that's where the opportunity, the pressure and rationalization meet to where a fraudster will then, you're more likely than not to have some, some fraud occur in your organization. So we can't do anything about the pressure or the rationalization cause that's to the individual, but we can do a lot for the opportunity and minimize that. And if even if people think that you're watching, then they're less likely to do so. And if you haven't seen it, there is an article in the Strategic Finance publication by the IMA last month called Fighting Fraud in the Workplace. It gets into some of the areas that one can do to strengthen up the internal controls or analysis of transactions or surprise audits. You know, those types of things that, while we trust our employees and we want to make sure that they learn and grow, we also want to let them know that somebody is watching.
Mitch: (14:01)
I think a good way to really wrap it up for this conversation is, you know, do you have any, notable cases or anything that really highlights something that was most interesting to you through your career? Whether it was, you know, early on with the audits or the forensic trails, you know, what is it about this that's so interesting and anything specific you can share with our listeners, that maybe they can apply or pursue?
Jason: (14:25)
You know, if we think about what are the ways that without talking just litigation is, is a situation that I've come across regularly, which is more the use of multiple entities to basically have a workaround from the general ledger. We see that with the Enron, companies with the SPE's, right? So one of the things I see is say where you have a business owner that has a related entity, whether it's the real estate or just, you know, like a subcontractor kind of management type entity, where they have the ability to kind of shuffle costs, or fees around, and if we don't have the ability to look to see what's on the other side of that, then we're at a disadvantage. So I would say to be cautious as I'm putting myself as is a user of one of us as a listener of this podcast, like a CFO controller type person that we would want to have the, say the data analytics capability, where we could do that merging of databases. You know, it's easy to say, right? Everybody's this is all on our free time. But having the ability to think critically of, you know, say shareholder loan accounts or due to due from accounts or, you know, management fees with this related company or rental expense. So, there's a lot of areas, a lot of accounts that have the potential for abuse, even things like employee expense reimbursements, that data analytics works well with, expense reimbursements. And again, if people think that their expense reimbursements are getting looked at, they're less likely to try to push things through the system, when they know somebody is going to be looking at it. So, yeah, I think some of the lessons that I've learned from like the litigation side and quite frankly, like the criminal cases, I've had to, tend to fall into some of those accounts where, you know, it's absent just straight cash, or it's not going to hit the books anyway. But if, if we're just thinking of, you know, there is a transaction that has a debit and a credit, and we see that there's, let's call it an expense, like the debit side of things that's floating through the general ledger, where could that credit go? I mean, it, it could go in that shareholder loan account. It could be from, you know, shareholder contributions. It could be in that due to due from account. There's lots of ways that this thing can go. And quite frankly, I still get out the T accounts and just kind of walk through like, well, wait, how does this even make sense?
Closing: (17:22)
This has been Count Me In IMA's podcast, providing you with the latest perspectives of thought leaders from the accounting and finance profession, if you like, what you heard, and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.
