January 1999 Issue Public Records Information and the CPA By Gary M. Arrick, CPA, CFE, and Mitchell Chosak, CPA Public records information can help CPAs perform a variety of services including fraud audits, litigation consulting, business valuations, and vendor and employee screening, among others. At the October meeting of the NYSSCPA Litigation Support Committee, chaired by Robert L. Goecks, the fraud subcommittee provided helpful tips on using public records information databases. This article summarizes the subcommittee's presentation. If used appropriately, the document gathering process is fast and inexpensive, and it can provide tremendous insight into the criminal and civil backgrounds of individuals and businesses with which CPAs or their clients are considering entering into business relationships. Public records database service providers including CDB Infotek, Information America, Lexis-Nexis, DBT AutoTrak, and others offer various capabilities and pricing options. Although CPAs can access much of the same data free of charge through government, private, and academic sources on the Internet, these service providers often can streamline and coordinate the information gathering process at a reasonable cost. Information available includes credit bureau headers for individuals; corporate ownership and doing business as (d/b/a) names; business credit reports (e.g., Dun & Bradstreet, Standard & Poor's); real property ownership and tax records; Uniform Commercial Code filings; judgments; dockets; federal and state tax and other liens; bankruptcies, litigation; relevant news stories; criminal records; Occupational Safety and Health Agency reports; vehicle registration such as automotive, boat, and airplane ownership and licenses; and more. Information obtained through public records databases may contain errors and omissions and individuals and businesses should use it responsibly. Where appropriate, CPAs should confirm results with official sources and allow affected parties the opportunity to refute findings. To obtain personal credit history reports and some other information, CPAs must obtain a release from the subject of the investigation and should consult legal counsel as appropriate. The Masked Intermediary The following case history illustrates public records' usefulness: AB Co. is a recently acquired subsidiary. Prior to the acquisition, AB Co. was wholly owned by Mr. Smith and enjoyed high profit margins. Smith then stayed on under contract to run AB Co. as a subsidiary of XYZ International. AB Co.'s profit margins subsequently deteriorated and XYZ International engaged an investigative accounting team to uncover the cause. The accountants directed one area of the investigation towards Smith, who was solely responsible for all of AB Co.'s sales, purchasing, and management. A public records search identified Smith's ownership of several undisclosed operating companies with the same registered address as AB Co. Further investigation revealed that Smith had used his other companies as vendors to AB Co., unnecessarily increasing sales costs by 30 percent. He would then sell AB Co.'s products to another controlled company at a lower, and sell them at a higher price to the ultimate customer. Therefore, through his other companies, Smith effectively raised product costs, cut sales prices, and took profits from XYZ International in all aspects of AB Co.'s transactions. The search also uncovered several prior civil litigation matters involving Smith and his companies as defendants. Persons identified in public records helped determine the way Smith coordinated transactions between AB Co. and his other companies, and where the investigative team should look for relevant documentation. As a result, XYZ International gained significantly in its subsequent negotiations with Smith. (Note: XYZ International would have benefited earlier with a preacquisition public records search.) Living the High Life Performing public records searches also can provide information on employees suspected of asset misappropriation or receiving kickbacks or bribes. There are many behavioral red flags in such individuals that can cause an employer to take notice, and these suspicions may be confirmed through public records. A significant increase in one's income level typically will cause an upward change in that person's lifestyle. Such individuals may purchase high-priced autos or real estate, have extramarital affairs, be overly generous with coworkers, or may develop a sudden interest in the stock market. Public records searches provide an unintrusive method of identifying real estate, auto, boat, and aircraft purchases, judgment, docket, lien, bankruptcy, and litigation filings, and exposing financial links to other persons. In conclusion, public records databases can provide revealing and useful information for CPAs to prevent loss to their clients or their own practices. Used responsibly, including appropriately confirming certain data obtained in a search, this additional resource is an effective and impressive addition to the accounting professional's toolkit. * Gary M. Arrick is a member of the Society's Litigation Support Committee and a senior manager at PriceWaterhouseCoopers LLP. Mitchell Chosak, also a committee member, is a special assignment sergeant with the New York Police Department's Internal Affairs Bureau.

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