Public protector: integrity defines extraordinary forensic CPA

California CPA, August, 2004 by Jerry Ascierto

If, for a single day, fate would allow each of us to appear as our alter egos, Paul Regan undoubtedly would fly into Hemming Morse's San Francisco offices as an evidence-wielding caped crusader. Just ask John DeLorean and Michael Milken--two of the many corporate scoundrels Regan has helped to bring to justice with his pioneering work in forensic accounting.

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Regan, president and chairman of Hemming Morse, Inc., brings the same energy, determination and integrity to his term as CalCPA chair that he brings daily to the office as he heads one of the nation's top forensic accounting practices.

ALL ABOUT TRUST

Reflecting on the lingering fallout from the rash of high-profile corporate scandals, Regan--who has been named an expert witness in the case against Enron--has emerged with a clear mission: "We must focus on the restoration of the CPA brand, because 99.9 percent of the people in our profession have integrity, are competent, independent, objective and protect the public."

Regan wants to reinforce this point to Californians through CalCPA's continuing image advertising campaigns and public outreach efforts.

He'd also like to see additional corporate reforms focused on scrutinizing those who "cook the books."

In an ideal world, Regan says, CPAs with active licenses would be the primary preparers of financial statements for public companies and perhaps a few other types of entities, like large nonprofits. He believes that financial statements prepared by those without the skills of an active CPA are at increased risk of containing misstatement.

Currently, "Regulatory focus has been on auditors, but auditors don't prepare the financial statements," Regan says. "The people cooking the books are not being held under the microscope or under the scrutiny of licensing authorities."

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But those crooks are often held under Regan's microscope.

BLAZING A TRAIL

Regan's pioneering work in forensic accounting began in 1970 when, a tender two years into his career at Peat Marwick, he was given a leadership role in auditing for the firm's San Francisco office. There, an audit of the commercial airlines Airwest--on the eve of its acquisition by Howard Hughes' Summa Corporation--became an engagement he calls "one of the largest influences on my career."

Regan noticed Airwest had made some unusual accounting entries that reduced the purchase price received by the shareholders. He pointed out the discrepancies to the shareholder's council and, for the next seven years, Regan worked on the resulting securities litigation case and was introduced to forensic accounting.

It opened the door to many future engagements. "I met many other attorneys through the Airwest case and later started working with those law firms on other cases," he says.

In 1973, Regan was promoted to Peat Marwick's management group, along with colleague John Skelton, but the two quickly saw an opportunity in forensic accounting.

"I looked around at that time and there were no firms that I knew of doing this kind of work," Regan says. "So John and I decided to try our hand at running our own company. We wanted to control our own destiny."

In September 1973, Regan & Skelton opened its doors. Since there were so few firms doing forensic accounting--and through the contacts Regan made from the Airwest case--the work piled up. So, in 1975, in need of office space and staff, Regan & Skelton merged with Hemming Morse, which at the time totaled only 13 employees. The rest, as they say, is history.

By 1996, Hemming Morse had 130 employees. Since its revenues were evenly split between forensic accounting and audit and tax work--and with little synergy between the two divisions--the firm spun-off its tax practice and a portion of its audit and accounting practice into San Francisco-based Burr, Pilger & Mayer LLP and San Mateo-based Harp, Harb, Levy & Weiland LLP.

BRINGING THEM TO JUSTICE

Regan has used his forensic accounting expertise to help the FBI, SEC, Federal Deposit Insurance Corp. and the U.S. Department of Justice, as well as various states' attorneys general, the British government and scores of large public companies.

He was involved with the British government's fraud investigation of John DeLorean and has helped various U.S. agencies investigate the Drexel Burnham junk bond scandals, as well as the savings and loan scandals of the late 1980s.

Some of the cases Regan has been involved with could serve as fodder for a "Law & Order" episode--every bit as dramatic and implausible. Take, for example, the case of MiniScribe, a maker of computer disk drives.

Since its disk drives were about the size and weight of a brick--and with no hope of meeting Wall Street's earnings expectations--MiniScribe held a mock company picnic at its warehouse, where employees packaged thousands of bricks, disguised as disk drives, and made it seem as though it they had been shipped to customers.

The bricks were then hidden on a ranch (owned by the controller's uncle), and brought back to the warehouse a few days later. The company then reversed the recorded revenue and receivables (it did not want the outside auditor to confirm these sales) as of year end.