May 2019 JD Supra
jd supra logo

Varsity Blues, the “Charity” and how a Forensic Accountant can be a Silver Bullet! was published by JD Supra on 5/29/19.

The forensic accounting skillset of FBI Special Agent, Mrs. Laura Smith, is receiving a lot of credit for her work in the largest college scandal in 

the U.S; the Varsity Blues Operation.     

In the Varsity Blues Operation, Special Agent Smith stated that she interviewed witnesses, and reviewed documents that included bank records, flight records, e-mails, telephone toll records, cell site data and other materials obtained through grand jury subpoenas and search warrants—as well as Court-authorized Title III wiretap recordings, consensual recordings made by a cooperating witness, and information provided by other law enforcement agents.

As a forensic accountant, Mrs. Smith was able to interpret, summarize and present complex financial and business-related issues in an understandable supportable manner.  

Forensic Accounting gets a lot of credit when there is a financial scandal

From Madoff to Lehman, forensic accountants have been the “specialists” that integrate accounting, auditing and investigation.  The merging of these skills under the forensic hat means that the results are suitable for the courts for discussion, debate and dispute resolution.  A forensic accountant is trained to “look beyond the numbers” and should be engaged as early as possible in order to achieve ultimate results.  A forensic accountant can assist with the identification of additional areas of damages, settlement negotiations, preliminary assessment of the amount of the damages, and the information for discovery.  Forensic Accountants ought to:  

  • Be VERY analytical and detail oriented
  • Be able to effectively communicate and simplify the information reported
  • Have that “investigative intuitiveness”
  • Have the credentials

The Varsity Blues Forensic Investigation lead to Probable Cause to believe that a crime had been committed  

 According to the criminal complaint, the investigation lead to probable cause that the Defendants in the Varsity Blues Operation conspired:

  1. to bribe college entrance exam administrators to facilitate cheating on college entrance exams; 
  2. to bribe varsity coaches and administrators at elite universities to designate certain applicants as recruited athletes or as other favored candidates, thereby facilitating the applicants’ admission to those universities; and 
  3. to use the façade of a charitable organization to conceal the nature and source of the bribe payments.

The legitimate Charity that was used as a “Front”

IRS continues to remind Taxpayers to remain vigilant about  aggressive Tax Scams published in the yearly Dirty Dozen List.  Consistently over the past six years, “Fake Charities” have made the List.  The “Fake Charity” scam presented by the IRS addresses scams masquerading as charitable organizations that use a tax deduction as bait.  In this scenario, the taxpayers are “Victims” because they are making donations to an ineligible charity.

 In the Varsity Blues Operations case, the Charity – The Key Worldwide Foundation (KWF) – (a non-profit corporation based in Newport Beach, California) – was an IRS approved exempt organization under Section 501(c)(3) of the Internal Revenue Code.  This means that the charity (KWF) is exempt from paying federal income tax, and that individuals who contribute to KWF may deduct those contributions from their taxable income.  In fact, KWF can be found on the IRS search tool for legitimate charities.    According to KWF IRS Form 990 (Return of Organization Exempt From Income Tax), KWF described its mission as “to provide education that would normally be unattainable to underprivileged students”.  KWF was receiving bribery funds and in turn was disbursing funds to pay off the bribes. The bribe payments “funneled” through the accounts of KWF were disguised as “donations”.  Concealing the nature and source of the bribe payments via a “legitimate” charity and utilizing a charity as a conduit for bribery payments is something that a Forensic Accountant is trained to discover.

Don’t be a Victim of your Own Making

The current environment of increasing change, economic pressures, globalization, technology, corporate governance, compliance, greed and the complexity of financial transactions are driving forces behind the demand for Forensic Accountants.    

An experienced Forensic Accountant is a specialist.  Whether a Forensic Accountant is called to investigate fraud, theft, misappropriation, financial fraud, embezzlement or provide litigation support for attorneys, the Accountant will help solve the puzzle. Forensic Accountants can also improve risk management and internal control frameworks. In the Varsity Blues Operations case, the Forensic Accountant turned out to be the FBI’s Silver Bullet.