Fear the Auditors

by David Deutsch

In my last article, I broadly described what to expect if you get a visit from the Office of the Inspector General or local and state auditors. I tried to convey that if you are honest with the auditors you should be just fine.

While that remains true, there is still good reason to fear auditors. What follows is an example of what happens when audits go very, very wrong—at least for auditees. Cases like this are somewhat scarce, not because there is little government corruption, but rather because there are so few whistle blowers willing to risk their careers by exposing it. (Note: I changed the names, cities and technologies, since the work is still ongoing).

Some time ago, our office got a call on our “hotline”—the e-mail and phone system where whistleblowers can expose corruption cases anonymously—about a small transit project in a town a few hours outside a major city. This company, which I will call Z Enterprises, and its CEO Mr. Z, secured several million dollars in Federal matching funds to revolutionize mass transit systems. Thanks to the whistleblower, my two supervisors and I were sent to Z Enterprises twice. On our first visit I was sympathetic to their cause, as I have always believed that transit projects are generally worthwhile endeavors, and I hoped that Z Corporation was acting in good faith to develop this revolutionary technology. Sadly, it quickly became clear that no such work was going on. We looked through their books and could not even find a consistent set of milestones or budgets. Items were charged to “consultants” with no clear indication of what these consultants did. However, the privately-chartered airplanes, the massages in Italy, and the countless alcoholic beverages that they billed to the government were very clear. In case you were curious, that would be a no-no.

At one point my lead supervisor was looking through some paperwork and got a puzzled look. She squinted, put on her reading glasses and slowly said, “Am I reading this right? Does this say he billed for a ... spanking tour?” And that did it for me. I fell on the floor laughing, not just because she said “spanking tour,” but because it was entirely possible that Mr. Z had billed the U.S. government for a spanking tour. Whatever that was.

After browsing the Web I found that Mr. Z had a business partner, whose father was a noted mobster, shot and killed some years before. After I showed my boss the information and asked for her comment, she said, and I quote, “Don't ask me that without a drink in my hand.” A fraud expert with 20 years of experience was shaken up by that news, a sudden revelation that did not sit well with me. We immediately went back to the hotel and made sure that the front desk did not reveal our identities or room numbers under any circumstances. From that point on, we would travel together in groups. We would be very careful about what we said and where we said it. We were potentially in real danger and were both unarmed and untrained to deal with these circumstances.

After reviewing the books and realizing that Z Enterprises apparently had no accounting infrastructure or billing consistency, we still had to ask them a few questions. Our requests were met with outright hostility, much of which was captured over e-mail. Being hostile to Federal auditors is a bigger no-no than the last, and you will see why shortly.

After documenting all of this and presenting it to our upper management, my middle-level supervisor went back to Z Enterprises, but this time with a Federal search warrant and an undercover Federal agent who was wired to record the conversations. At some point during the inspection, my supervisor “excused himself” to go to the bathroom, and 25 local and Federal officers stormed Z Enterprises to seize all of Mr. Z's equipment and files.  I was named on that warrant as someone who contributed to making the case, but sadly I could not keep a file. Still, it was kinda cool.

Last year, some two and a half years after I left that job, I got a call from a Federal agent working on the case. I was being subpoenaed to testify in front of a Federal grand jury. That was a terrible experience, largely because they were asking the wrong person. I was a relative newbie to the job, where my primary role was to be as a note taker. The day before my testimony, I was subjected to many hours of seriously unpleasant questioning by the agent and the Assistant U.S. Attorney; when I testified, I was calmer and more relaxed. After my testimony, my former supervisors finally convinced the agent that I was not the right person to talk to, and they spoke with my lead supervisor instead. Not long after her testimony, the two primary people at Z Enterprises were indicted on some 40 charges each of a wide variety of crimes, including at least eight counts each related to “obstructing a Federal audit,” meaning my supervisors and me. They each face up to 20 years imprisonment and over $200,000 in fines.

But this is only part of the story. Every project that receives Federal funds is assigned a Federal employee who is supposed to oversee the project. The auditors identified Mr. A as the government oversight contact. Before visiting Z Enterprises, my then-supervisor and I interviewed Mr. A in his office about his role in overseeing Z Enterprises. His responses were perplexing to say the least, shooting down our questions with glib admissions that he was not doing the work he was supposed to be doing. He acknowledged that he never visited Z Enterprises to observe the work, rarely if ever contacted them directly, and only had a vague idea about the milestones and achievements they were supposed to make. Something definitely did not smell right on this end either.

Somehow our Federal agents—the guys and gals with badges, guns and handcuffs—found out about Mr. A. These armed, badged agents remotely accessed his computer and found it filled with pornography and stolen credit card numbers, even Department of Transportation-issued cards that he stole from colleagues. After further investigation, the agents found that Mr. A was stealing credit card numbers and using them to buy prostitutes, under the excuse that “a prominent businessman was going to visit and that he needed VIP treatment.” It turned out Mr. A was the businessman, and the VIP treatment was hookers.

Knowing this, the Federal agents went to his office and had roughly the following conversation:

“Hi, Mr. A, is this your computer?”

“Yes,”

“Where is your other one?”

“It's at home.”

“We'll give you a ride home so we can retrieve that one.”

And you thought you were having a bad day.

Mr. A was later indicted and pleaded guilty to several counts of nasty things, but apparently he was sentenced to house arrest and probation.

Shortly after the search warrant was executed on Z Enterprises, I quit my job and moved to L.A., in part because I was not keen on risking my neck any longer. Between this and being in post-Katrina New Orleans, I had had my fill of being a Federal auditor and risking my life. Being an auditor sounds boring, but there was certainly nothing boring about my job.

So what is the moral of this story? To be honest, I'm not sure. I guess it is just a cautionary tale about what can happen if things get out of control and people end up in serious trouble. Obstructing a Federal audit is a very serious crime; the best advice I can give you if you are audited is to consult with your staff attorneys on how to avoid getting charged. Trust me, taking a couple of hours and discussing it with a lawyer is much better than beating around the bush in a courtroom.

So, yes, my friends, fear the auditors.  Especially if you are outright stealing Federal dollars. And don't obstruct them, no matter what you do. These people are extremely smart and they will get you, especially if you are out-and-out lying.

One more note: To this day I have no idea who blew the whistle on Z Enterprises. So if you are reluctant to call out corruption because you fear reprisal, I believe that, if you are careful to conceal your identity, you shouldn't have to fear retribution.

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