P ^ R e g a n reads The Walt

irnal and sees that a major

scandal is brewing at a Fore 500 company, the San Franciscobased accountant reckons "there's
probably a 30 to 50 percent chance
Coming^rom somebody else, that
declaration might sound a trifle boastful. But Regan, who at 61 is president
of the 100-person forensic accounting
firm. Hemming Morse, is just telling
it like it is. Since graduating from the
University of San Francisco in 1968
and taking his first job at Peat Marwick Mitchell where, early in his
career as a certified public accountant,
he examined suspicious dealings of
aviation-and-movie mogul Howard
Hughes Regan has delved into
many of the highest-profile financial
frauds of the past four decades.
In the 1980s, as an independent
auditor, he was called in by several
U.S. regulatory agencies, including
the Resolution Trust Corp., to help
with investigations into the savingsarid-loan scandals. He and his team
pored through the entrails of some
25 expired thrift institutions in Cali-

Adelphia Communications, Parmalat

SpA and, of course, Enron Corp. The
engine driving these and other
world-class frauds over the last two
decades or more, Regan says, has
been the explosive growth of the
global stock exchanges and debt markets in which trillions of dollars are at
stake every day.
"The most common, recurring
issues are the misstatement of a company's financial position," Regan
says. "Typically, what I see the most
is a company claiming revenues that
did not represent a legitimate transaction and did not result in a seller
actually collecting those revenues."
Positive quarterly earnings can
have the immediate effect of sparking
buzz and excitement on Wall Street,
rurming up a company's stock price
and enriching top corporate officials
at public companies, especially
CEOs, who may be lavisly compensated with stock options and grants.
For many leading national attorneys
who specialize in seeking recompense
for aggrieved investors as weli as
bondholders, employees, suppliers,
financiers, creditors and other stake-

Going After the Bad Apples

Forensic accountant
Paul Regan cut his
teeth in a fraud case
against Howard
Hughes, and he's
become a leader in
a specialized area,
mostly attempting
Q
Oi

24

to recover money for

shareholders.

financial executive I december 2007

fornia, Texas, Florida and New York

to reconstruct their often byzantine
dealings.
In the 1990s came the cases of
massive accounting irregularities at
Phar-Mor and MiniScribe (see
"Miniscribe, Maxi-Fraud, page 26), as
well as Xerox Corp. and Sunbeam
Products Inc., both of which he
helped uru-avel for the U.S. Securities
and Exchange Commission and
which brought SEC sanctions against
top accounting firms.
The new millennium has brought
calls from shareholders and their
lawyers for assistance in lawsuits
seeking redress for multibillion-dollar rip-offs and insider trading abuses
in the highly publicized frauds at

holders Regan is the goto guy.

"He is one of the top gurus in the
country," says Houston attorney
Allan Diamond. "I've been relying on
him as an accounting expert for 25
years, particularly in complex financial litigation that involves audit
malfeasance and malpractice."
As a de facto white-collar crime
detective, Regan, who holds a master's degree in accounting and is also
a certified fraud examiner, covers the
waterfront. His areas of investigafive
expertise include mortgage banking,
the steel and automotive industries,
securities trading, highway and power plant construcHon, motion pictures,
airline acquisitions and Insurance,
Bob Ivey, an attorney at the Los

www.f inancialexecuti ves. org

Angeles office of Holland & Knight,

has hired Regan as an investigator,
analyst and expert witness in numerous cases, including a years-long trial
involving the collapse of two shoddily built luxury hotels at the Royal
Palm Resort on Guam in an August
1993 earthquake. "Paul has a variety
of skills," lvey says. "We have often
used him for determining the level of
damages in construction cases."
lvey acknowledges that Regan
displays the "tenacity of a bulldog,"
but says: "That's a common cliche in
the legal profession. I think 'imaginative' is the term I would use to
describe him. He's able to analyze
documents and produce findings ir^
ways that i just wouldn't havi
thought of."
Regan keeps a powerful magnifying glass handy for iine-by-line
perusal of the fine print in the myriad documents bound in fat dossiers
occupying his office bookcases.
"Accounting records form a history
book of a business or a company in
numeric form," he says.
Like a historian (or a coroner), his
work as a forensic accountant usually

commences after the fact. Once on

the scene, he reconstructs events,
gathering and collecting data and
information, making sense of the
facts and, finally, composing a financial narrative. The result is usually a
heavily footnoted report, deposition
or courtroom testimony.
"Every transaction, every expenditure, every asset," he says, in what
almost sounds like a mantra, "every
telephone call, every lunch reimbursement, every piece of travel,
every rental car receipt, every widget
sold is recorded somewhere and
organized in a set of books and
records. And, if you know how to
obtain them, you can analyze and
evaluate the information and deter-

www, finandalexecutives.org

mine what's at the heart of a controversy."

Consider the case of the collapsed
Guam hotels. While contractors were
"over budget," Regan says, in buying
most of the hotels' construction
materials, a painstaking review of
cost records indicated that they were
under-budget for labor costs and
steel rods. That meant, Regan testified, that only about half the reinforcing steel necessary to buttress the cast
concrete was actually bought.
Regan's testimony, along with the
testimony of civil engineers, photographs and other evidence, helped
the hotels' owners win a $150 million
judgment against contractors.
Attorneys also realize that

accountants can play a key role in

"data analysis" using the services
of people like Regan to provide statistical proof where only a suspicion
might have existed before. In California, for example, Regan was hired to
gather evidence when 2,402 insurance
adjusters contended that their
employer. Farmers Insurance Group,
routinely required overtime while
denying them the extra payments.
By deposing 90 workers, he was
able to calculate that, on average,
employees worked nine extra hours
of unpaid overtime a week from
1993-2001, resulting in a judgment
of $90 million, plus some $30 million in interest.
Finding skilled people wilting to

u-

december 2007 I financial executive

25

MiniScribe, Maxt-fraud

f all the rip-offs that Paul Regan has investigated in

nearly four decades as a forensic accountant, the fraud
at MiniScribe Corp., he says, stands out as perhaps the
cleverest work of financial fiction he ever encountered.
Once a darling of the Nasdaq market, Longmont, Coio.based MiniScribe was perceived as an up-and-coming supplier of hard-disk drives to the computer industry. MiniScribe's chief executive a man with the improbably Dickensian name of Q.T. Wiles was hailed in the press as a
turnaround expert. He boldly asserted to shareholders in
the 1987 annual report: "We achieved the best results in
the company's history and now have 10 consecutive quarters of increased revenues and earnings."
But, it turned out that now-defunct MiniScribe, which
claimed pre-tax profits of $33 million in 1987, a 44 percent
increase over 1986, produced those glowing financial
results almost entirely through creative writing.
MiniScribe's sleight-of-hand included a dubious accounting gimmick known as "bill and hold." Using this stratagem, the company booked sales when its product was
shipped to the warehouse, rather than when it was actually
sold. But the company went further still, concocting an
elaborately criminal scheme that involved stocking warehouses with phony inventory.
"The company staged a big picnic, complete with a softball game, on the last Saturday of the fiscal year," Regan
recalls of the scam, which he investigated on behalf of
attorneys for bond underwriters who were suing the external auditors. "And, afterwards," he adds, "the employees

work in forensic accounting is no

simple undertaking, asserts Bill
Ueitzen, who heads a 30-person
forensic accounting firm in Sacramento and has v^'orked both with
and against Regan in legal disputes.
He looks for "intuitiveness, presentation skills and integrity" all qualities that Regan has, in Ueltzen's view.
He adds: "A forensic accountant has
to be thick-skinned, and most
accountants don't like sitting in front
of a jury and being cross-examined."
Regan, who is soft-spoken and
sturdily built he plays golf to an
11-handicap and works out several
days a week on a stationary bicycle
and Bowflex machine adds that
good health and the willingness to
work long hours are probably the
chief qualities required In a forensic
accountant.
Regan also asserts that "a sense of
outrage" is important. "It pushes you
to keep digging and to push yourself," he says. "I don't like to see
someone use power to mistreat peo-

26

financial executive december 2007

packed up $20,000 worth of bricks and put them on pallets

inside common carrier trucks and sealed the doors. Then
they hauled the disguised bricks away in the trucks."
As Regan tells it, employees at those receiving companies participated inthecharade by refusing to accept the
shipments. "So, they brought the disguised bricks back to
the warehouse and recorded them as part of $15 million in
returned inventory."
Thanks in part to Regan's investigative work, the plaintiffs won a $550 million judgment from a Texas jury against
the company's auditor. Coopers & Lybrand (now PricewaterhouseCoopers). it was the largest judgment to that
point against an accounting firm. (C&L later paid an undisclosed figure, believed to be about $50 million, according
to The Wall Street Journai.)
Wiles and the company's chief financial officer both
went to prison for fraud and insider trading.
"I can't fault for them for not detecting the bricks,"
Regan says of the auditors, "but if they had done the audit
in accordance with generally accepted accounting principles, they would have said, 'Holy Toledo! We can't give
these guys a clean bill of health.'"
As is often the case, Regan says, it took a tip from a disgruntled employee to uncover the scheme of the disguised
bricks. Although he does not find dishonesty especiaiiy
charming, Regan nonetheless marvels at the deviousness of it
all. "I thought it was quite ingenious, and very imaginative,"

ple. I don't like bullies." He's taken

that philosophy to public service, as a
former mayor and now city council
member of suburban Hillsborough,
and a past president of the Caiifomia
Society of CPAs.
Regan exhibited such inclinations
early on. At PeatMarwick, while
reviewing documents of Howard
Hughes's takeover of Air West,
renamed Hughes Airwest (later to
become part of General Motors), he
discovered a stunning number of
write-downs in property values,
Says Regan; "[Hughes] had identified a number of assets that he didn't
want to pay for and instructed his
accountants to write them off. They
also calculated in things like contributions to a retirement plan, but they
were not in accordance of GAAP" (generally accepted accounting principles).
By the time he helped attorneys
for Airwest's shareholders win a $72
million judgment against Hughes in
1976, Regan and another like-minded accountant had left Peat Marwick

Paul Sweeriey

(a forerunner of KPMG), ventured

on their own for a couple of years
and merged with Hemming Morse
in 1975. The Hughes case remained
with them. "The people at Peat Marwick weren't happy with forensic
accounting," Regan says. "They
thought it was risky stuff that it
might lead to the firm being sued."
In addition, he says, the national
firm was worried that ferreting out
fraud would lead to controversies
involving fellow accountants in the
Big Eight (now shrunk to the "Big
Four.") Indeed, Regan has spent
much of his career crossing legal
swords with the fraternity of giant
accounting firms.
Many of his investigations have
resulted in outsized judgments
against them. For example, Regan aided the British government in tracking
down the disappearance of tens of
millions of dollars in economic development funds invested with Jolin Z.
DeLorean, the late maverick automaker. In 1998, 16 years after DeLorean's

wwvi'.f inancialexecutives.org

Northern Ireland car plant went bankrupt, a Manhattan jury found in favor
of the U.K. plaintiffs, assessing a $110
million judgment against accounting
firm Arthur Andersen.
In the cases of lawsuits alleging
fraud at both disk-drive supplier
MiniScribe and discoLuit drug concern
Phar-Mor, juries relied on Regan's testimony to find Coopers & Lybrand
(now PricewaterhouseCoopers) liable
for failing to uncover massive fraud.
For the SEC, he testified against
accounting firm KPMG and several of
its partners over their role as external
auditors that resulted in Xerox Corp.'s
revenue restatement of roughly $6 billion for the years 1997-2001.
A number of patterns continually
recur in the cases of corporate
wrongdoing, making good corporate
governance a key antidote. Behind
the scams involving massive
accounting improprieties, for example, there frequently lies an autocratic, over-compensated CEO, an ineffective board, a weak audit committee and external auditors angling for
lucrative consulting contracts.
"Fear and greed are huge motivating factors," Regan says. "I mean,
how would you like to work for a guy
nicknamed 'Chainsaw Al?'", referring
to former Sunbeam CEO Albert Dunlap, a notorious corporate hatchet
man. During his tenure at Sunbeam,
the company claimed revenues
earned on contingent sales, accelerated sales from later periods into the
present quarter and used improper
"bill and hold" transactions.
Duniap, whose handiwork Regan
investigated for the SEC, also intimidated his external auditors by threatening to switch to a rival firm for
auditing and consulting services.
ln the post-Enron environment
and in the wake of the SarbanesOxley Act, Regan is increasingly
sought after by companies looking
for help in fraud-prevention and
improved corporate governance.
Regan recommends that companies
institute an ethics policy while adopting a corporate culture in which
employees are treated fairly.
The CEO and top corporate offi-

www.financialexecutives.org

cers should not just adhere to it, but

set a good example, he argues. "I
believe in the 'tone at the top.' If a
CEO is bent on committing fraud, it's
hard to stop it."
An independent board of directors
is also key to imposing checks and
balances on questionable or possibly
illicit practices. Since frauds can arise
from any area in a company even
the mailroom Regan urges background checks to keep "fraudsters"
from gaining a foothold. Because
fraud and the attendant cover-up are
often elaborate, it's also important for
the audit committee to have members
who are financially sophisticated.
And, since a complex financial
fraud usually requires the connivance of skilled participants, Regan
is a big believer in external hotlines
for whistleblowers. Data compiled by
the Austin, Texas-based Association
of Certified Fraud Examiners (ACFE)
bears out his admonition.
Tips Are Top Fraud Antidote

According to the group's latest survey, tips are the No. 1 reason why
fraud is uncovered at public companies 40.2 percent, compared to 26.9
percent from internal audits and 22
percent from internal controls.
Losses at all organizations surveyed (governmental, private and
public companies) that had hotlines
suffered less in fraud losses a
median of $120,000 compared
with $218,000 at those without such a
mechanism. However, only 45.2 percent of the 1,050 organizations surveyed by ACFE reported having a
hotline for tips, "It should operate
l'^/7," Regan says of a telephone hotline, "and it should be both anonymous and multi-lingual,"
As frauds have gotten more intricate and more costly in the computer
age, forensic accounting is gaining
greater appreciation. Regan, who is
on a committee at the American Institute of Certified Public Accountants
that is on the verge of creating a certification procedure for forensic
accountants, expects at least 3,500
practitioners, and perhaps 5,000, to
qualify if that credential is adopted.

But as good as business is these

days his firm's billings are at $20
million today, up from $6.5 million
less than a decade ago Regan fears
that a looming U.S. Supreme Court
decision could provide a safe harbor
for those who aid and abet white-collar fraud. Because the high court consented to hear the Stoneridge case, he
warns, it's possible that banks, consultants and accounting firms that
participated in or were negligent in a
fraud could escape punishment.
Specifically, the high court will
decide in Stoneridge Investment Partners V. Scientific Atlanta whether
financial advisers may be liable for
aiding and abetting fraud or
whether liability arises only if they
actively participate in it.

In many cases, including at Enron,

banks and consultants had conceived
fraudulent schemes and sold the
ideas to companies. In some
instances, they were culpable in
deploying their professional expertise
to help companies carry out the fraud.
If the Stoneridge case is decided in the
defendants' favor, "all you would
have to do is outsource your fraud,"
Regan says. "We'd be letting the guys
driving the getaway car go free."
PAUL SWEENEY (easysioeen@aol.com) is a

freelance writer based in Austin, Texas, and

a frequent contributor to Financial Executive.
TAKEAWAYS
Former public accountant Paul Regan
has been involved in cases involving many
of the most prominent financial frauds of
the past four decades,
Regan says that what he sees the
most is a company claiming revenues that
did not represent a legitimate transaaion
and did not result in a seller actually collecting those revenues.
Globalization and the vast expansion
of stock markets and company valuations, and their related stock options, are
largely responsible for the surge in financial fraud, he says,
A foremost way of detecting fraud is
to have whistleblower hotlines, manned
around the clock and in different languages. Tips have been shown to be the
most effeaive means of alerting companies to fraudulent activities.

december 2007 financial executive

27