By ALLISSA KLINE
akline@bizjournals.com | 716-541-1612

Forensic accountants uncover a lot of sneaky people.

Just ask Lou Cercone Jr.

As managing director of Brisbane Consulting Group, a forensic accounting division of Lumsden & McCormick LLP, he spends his days unraveling the lies of small-business owners suspected of hiding income and assets. He often works in the divorce arena, hired by attorneys to place values on small businesses and investigate unreported income. His findings - key to determining child- and spousal-support payments - often mean he must testify in the courtroom.

"We'll look at personal income tax returns that show $50,000 in total income, and we'll do a lifestyle analysis that shows the spending of $100,000 in income," Cercone said. "That raises an eyebrow."

Forensic accounting is a hot niche in the general accounting field. Its popularity rose in the wake of the 2001 Enron scandal and continued to gain speed during the recent economic downturn. Accounting firms in Western New York with forensic accounting divisions reported a spike in business as more fraud-related accounting schemes surfaced.

A 2010 report compiled by the Association of Certified Fraud Examiners indicates occupational fraud is on the rise, particularly among small businesses that don't have enough staff on hand to segregate financial duties. The association surveyed fraud examiners who investigated 1,843 cases of occupational fraud between January 2008 and December 2009. It found that the typical organization loses 5 percent of annual revenues to fraud and the median loss caused by fraud in the workplace totaled $160,000.

One of the more creative cases for Cercone involved a junkyard where a large number of cash transactions took place. Forensic accountants discovered the owner, who was in the middle of a divorce, was altering receipts, paying customers one amount and keeping the difference for himself. An employee provided investigators with 50 or so of the altered receipts.

"We had him red-handed," Cercone said. "The whole point is that you cannot value a closely held business without knowing how much profit that business generates. You have to know the true economic income of the business."

Most fraud cases are related to asset misappropriation, according to forensic accountant Heidi Caton of The Bonadio Group. She sees a lot of asset misappropriation when she's called in to help private companies. She used to work on one or two cases a year but has conducted four investigations in the past 12 months.

"It's interesting work," Caton said. "You have to maintain professional skepticism. When you start finding stuff that doesn't look right, you have to run through all these scenarios and come up with a hypothesis and then prove it."

Tom Grogan, a CPA who was certified as a fraud examiner in 2008, said occupational fraud seems to be happening more and more, possibly related to the lackluster economy. He handles corporate fraud, primarily small businesses without controls in place to protect themselves from stealing.

"In the past, when I was first getting into this, we'd have clients who'd say they have trusted employees and so we thought that person could be trusted," said Grogan, a partner at Brock Schechter & Polakoff LLP. "Now, the first thing we think when clients say they have a trusted employee is, ‘Hmmm, there's a possibility that person could be stealing.' We have a totally different attitude now."

At least one local college is responding to the rising awareness of forensic accounting in the form of a master's degree in the field. Canisius College has so far enrolled 10 students in the new program, said Patricia Johnson, assistant professor of accounting, who designed the program.

"It's not exactly ‘CSI'-type accounting, but students are intrigued by the stories and the ability to go out and solve the problem," Johnson said. "Many are deciding it's something they want to pursue."

Most agree the field will continue to expand, even when the economy stabilizes. CPAs say companies should think about putting certain checks and balances in place to prevent one person from handling all financial matters.

"A lot of business owners are good at one thing and that's whatever it is they do. So they may say they'll go make money and let someone else handle the financial aspect of it," Grogan said. "Unfortunately, that leaves them exposed to possible fraud. But if I can help them get the controls in place so that people don't steal from them, that's an advantage for my clients."