Oh My Fraud

Blake: If you’d like to earn CPE credit for listening to this episode, visit EarmarkCPE.com, download the app, take a short quiz, and get your CPE certificate. Continuing education has never been so easy. And now, onto the episode.

Greg: Hello and welcome to another episode of Oh My Fraud, a true crime podcast where our criminals will eat time, but they probably won't eat your liver with fava beans, and a nice chianti. Hello, welcome, I'm Greg Kyte.

Caleb: And I'm Caleb Newquist, an erstwhile eater of time.

Greg: You know what, Caleb, when I was billing my time, I don't believe I ever ate any time. I was very- for the one year-

Caleb: Oh, come on. Come on, Greg.

Greg: No, no, no. For the one- no, and that-

Caleb: No one listening- no one listening who is an accountant believes you right now. You just need to put- if you want to get out of a hole, Greg, you gotta put down the shovel. That's all I’m saying.

Greg: No. No, no, no. No, no, no. I'm absolutely for real on that. I was at a firm where I billed my time for exactly one year. And if I had- if I had known that that was an option- like, I was just too dumb to realize that was something you could do. And so, instead of that, they were just always very upset with my billable- what my utilization rate, so.

Caleb: So, yeah. So, you didn't actually, you know, develop an eating disorder-

Greg: Of time.

Caleb: -of time. They kind of just berated you. They bulli- you were bullied.

Greg: And none of my- you know, it's a funny thing in an accounting firm. I had a mentor, but they never said, “Hey, listen. So, if you're spending too much time on a tax return, just say that you spent less time on it.” Nobody had that heart to heart with me, and I was too naive to realize that that was the thing.

Anyways, Caleb, you- so, as you said, you were an erst- you are an erstwhile CPA.

Caleb: Correct.

Greg: And for dumdums like me- ‘cause you said that a lot when we've done our webinars together, and I had you define, what does erstwhile mean? Will you do that for our listeners today?

Caleb: Yes. It just means former.

Greg: Yeah. So, maybe you should just say-

Caleb: Formerly.

Greg: -maybe just say former CPA in the future, you fucking hig head. But

Caleb: I'll consider it. For you, Greg, I will consider.

Greg: Thanks.

Caleb: I will consider it.

Greg: Right on. Okay. So, where and when did you get your Accounting Degree?

Caleb: I have two degrees. My Bachelor's, I got in Nebraska in 2002, and I got my Master's of Science and Accounting in 2003.

Greg: Nice. Was it- was that also in Nebraska?

Caleb: Oh, I'm sorry. Yeah, that was in Colorado.

Greg: In Colorado.

Caleb: Colorado State.

Greg: Colorado State, and then the other one was at University of Nebraska?

Caleb: Nebraska Kearney, yes.

Greg: University of Nebraska at Kearney. No one knows what that means ‘cause no one's ever been to Nebraska.

Caleb: Most people.

Greg: And so, I got my- well, actually, to give my full uh curriculum vitae, I have a Bachelor of Arts in Mathematics because as everyone knows, mathematics is not a science, it's an art. You just feel your way through that. I feel like X equals 2.5. And then-

Caleb: Is that a math joke? Is that a math joke?

Greg: No, that's just- that's a joke for everybody. Then I- and then I got a- I was a teacher. I used to be a junior high math teacher for about 10 years, and I hated it. So, I went back to school, I got my Bachelor of Science in Accounting and then I got my- I got an MBA with an Accounting emphasis. So, I got my Bachelor's in Accounting from Utah Valley State College, and I got my MBA from Utah State University.

But here's one thing I remember from all of my accounting classes, whether it was undergraduate or graduate classes. Any of the classes that I took when they covered fraud, especially like early ones, we'd get into the section about fraud and they would start explaining some type of fraud scheme, and I'd be like, “Oh my God, that is a brilliant way to steal money.

I would have never thought to steal money in that way, but now I know that it's possible to steal money.” I felt like we were being trained to be able to commit fraud. Did you ever have any experience along that same line?

Caleb: No.

Greg: No.

Caleb: I was trying to think about- no, not really. I mean, I was trying to- I was trying to remember, like certainly, not from college classes. I just feel like whenever fraud came up, I don't know why, but I feel like kiting schemes were very played up. They had kind of this oversized importance in my college, whenever fraud came up, for some reason. The fact that it looms so large in my memory is weird. I don't know why. Anyway.

Greg: But here's the thing. So, I've always thought it's weird that we, as CPAs, have been- like, literally, we've been trained how to detect fraud, but the only way you can be trained on how to detect it is you are also trained on how it's perpetrated. So, therefore, you're trained- we are expertly trained in fraud. And it's even funny, like one of the internal controls that companies could and should use is fraud training.

Which doesn't mean, “Hey, we're going to teach you how to steal money from our company.” What it more means is it means like, “Here's the things if you didn't realize it, this is fraud.” Like, you know? And I think that more comes into play with things like corruption sort of schemes where it's like, “Yeah, you can't take a- you can't take a trip to Tahiti from our vendor because then you're going to be obligated to that vendor even if they have crappy products or higher prices.”

So, stuff like that is important for trudging, but we've literally had fraud training where we are taught how to commit these frauds, and we're in this position of trust, as accountants, where we really can get in and steal a lot of stuff. But you rarely ever steal- hear stories about accountants who have committed frauds. Especially like embezzlement kind of frauds. Obviously, you know, we know Arthur Andersen was involved in the Enron scandal but they didn't perpetrate it, they just overlooked it. But in terms of-

Caleb: I don't know, Greg. I don't know, Greg. I think I spent at least a third of my time at Going Concern writing about accountants perpetrating frauds.

Greg: Perpetrating frauds?

Caleb: Perpetrating frauds.

Greg: Name some for me.

Caleb: What? What do you want me to do? Dig them out of the archives? Like, I mean, it's not in the- it's not within the scope of this podcast, but I would be happy to dig. I’d be happy.

Greg: Right. I didn't give you that- I didn't give you that homework for today's topic.

Caleb: No, I didn't. That was not my homework for this podcast.

Greg: Right. Right.

Caleb: But I mean, there's countless stories of accountants that were ripping off- they were either ripping off clients or they're- I mean, we're going to get today's example, but like, look, if you need some- if you need some accountant fraud stories, let me just dig- go through some Going Concern archives and I’ll be glad to send you some.

Greg: Okay. Cool. Why- well, I love that and I really-

Caleb: I didn't mean to blow- I didn't mean to blow up your whole theory.

Greg: No, and I didn't get defensive at all when you brought that up because that's my whole- like, that's my whole like, angle for this entire podcast, is, “Oh my gosh, accountants don't ever commit fraud.” And you're like, “All the time.” It's like, “Well, that's our episode of Oh My Fraud. We'll see you next time. Enjoy not getting any CPE for this one because Caleb just shot me in the back.”

Caleb: Caleb debunked Greg and we don’t have a podcast now.

Greg: Right. But you didn't, and we're still friends at least.

Caleb: You’re right. We’ll carry on. We’re going to carry on.

Greg: Yeah. Right.

Caleb: With our friendship and this podcast.

Greg: Okay, So, here's the thing. One way or another, regardless of how frequent it is that CPAs commit fraud ‘cause they- it's rare in my world, and doing all the fraud teaching that I've done, the big cases are never about CPAs. You know, they're colluding at best. I haven't seen a lot.

So, on today's podcast, regardless of your beliefs, we're not just going to look at a CPA who stole like a shit ton of money. We're going to look at a managing partner of a CPA firm who stole a shit ton of money, and even better, this guy was a certified fraud examiner.

Caleb: So, Greg, this is an interesting story. A managing partner of a CPA firm who perpetrated a fraud against his own firm. This is good. We don't hear about- you are right about this. This is- I think this is a pretty unique case. So, set the stage-

Greg: Well, good. Good. Thanks for being on my side.

Caleb: I've come around to it, okay? All right. So, anyway, set us up. Like, give us the lay of the land on this particular fraud.

Greg: Okay. So, first off, this fraud was perpetrated in the land of Hawaii. So, in Hawaii, there was a gentleman named Patrick Oki, who was the managing partner of a firm called PKF Pacific Hawaii, LLP. And PFK- interestingly enough, PFK had been listed as one of the best places to work, probably because if you work there, you can steal a bunch of money from the firm. It's a perk that they-

Caleb: It's a rare perk. It’s a rare perk.

Greg: Yeah.

Caleb: So, Greg, what else do we know about- what do we know- what else do we know about Patrick Oki?

Greg: Surprisingly little, Caleb.

Caleb: Oh. Okay.

Greg: Yeah. Which again- and we're going to get to this ‘cause I think there's reasons why we know surprisingly little about this guy. The few things that we know about him just personally, is that he was the- it's all about his college stuff. He was the president of the University of Hawaii Alumni Association. He- just today, like shortly before we got on to record this podcast, I went on LinkedIn just to see if he happened to have a LinkedIn profile that still is up.

And he does. And here's the one fact about Patrick Oki that I found on his LinkedIn profile, is that he was on the marching band at the University of Hawaii because you can never trust a floutist.

Caleb: Oh, he played the flute, huh?

Greg: No, I didn't say what he played. I'm just- I'm connecting some dots that I don't really know. So, this- well, but it does definitely- if you're a CPA and you're in the marching band, you're doubling down on your nerd cred in two very distinct nerd areas. And the interesting thing is, those two nerds areas both help establish more of your- of like a sense of credibility. Because really, I wouldn't- if someone was like part of a marching band, for some reason, I go, “This guy's good. He's not going to steal anything.”

I don't know why, that's just my take on the marching band. Volunteerism, being a president- a volunteer president for an alumni association, that also, is something that create- any volunteerism that you do is going to create an appearance of trustworthiness. And we've looked at that in the past with the mutual benefits company. They- similar to it. They donated a bunch of money to charity. And when you do that, also helps build this appearance of trustworthiness.

Caleb: Yeah. And who would volunteer for that job? No, thanks.

Greg: Yeah. He must have had a lot of rainbow warrior pride is what.

Caleb: Did he have to like send out all the letters? I mean, I don't know.

Greg: Oh gosh, I hope not.

Caleb: I don’t wanna do that. what should we talk about?

Greg: Yeah. It sounds pretty miserable. So, yeah.

Caleb: So, Greg, should we get into the fraud? I'm curious.

Greg: Yes, yeah.

Caleb: Well, I know what happened but I know our rabid listeners are- they're wrapped with attention right now, so.

Greg: Yes. Yeah. So, here's what he did. To steal- he stole- I mean, just not to bury any leads here, the guy stole $440,000 from his firm, from PKF Hawaii, Pacific Hawaii, he stole the money from his own firm through a false reimbursement claims scheme. So, he claimed to personally incur a bunch of expenses that he said were related to client work, but they weren't really.

They were just false- all of it was fake. He was just saying he spent the money on this client work. He'd get the money, and then he'd use- you know, with the reimbursed money, he'd do whatever he wanted to do with it. And he did it- this is pretty impressive. He started doing it in 2011. This is according to the official records.

So, that's at least the first time they can identify a time that he did it, was in 2011, and then he was discovered in 2014. So, the guy, at most- so, if he started it on January 1st of 2011 and got caught on December 31st of 2014, that would be exactly four years that he stole $440,000. Likely, it was closer to three years that this went on.

So, he was stealing, you know, about $150,000 a year from his firm through a false reimbursement claims, which to me, that's a whole lot of photocopies you're making. That's a whole lot of postage that you're paying out of your own pocket for the firm.

Caleb: Yeah. I mean, it sounds to me is like, if you're the managing partner, I mean, you're probably a pretty busy person, right? And as we've kind of established, keeping frauds going is kind of a full-time job. So, if this guy was busy being the managing partner of a firm during this time, and then he was also carrying on, you know, creating fictitious people, companies, contracts, forms, invoices and all this stuff, to the extent that it fools his partners- ‘cause you assume these other partners are- you know, they're relatively bright folk, I imagine. That he probably had to work pretty hard to fool them, I mean, that sounds exhausting, you know?

Greg: Right. Another exhausting fraud scheme.

Caleb: Another exhausting fraud scheme.

Greg: Totally. Totally. ‘Cause that- so, again, in the research, you enumerated a lot of it. He created fictitious people, fictitious companies. Which again, on that, that might be easy to do. You just put- you make up a name and you throw it on an invoice. He made up a fictitious-

Caleb: And if you're the managing partner, who's- like, is anyone in your firm is- who's checking your work?

Greg: But maybe there- that's the whole thing. Maybe they're not. Listen, here's a crazy personal story that I think really- this might be an overshare but let me get into it anyways, Caleb.

Caleb: Yeah, get into it.

Greg: So, I'm a divorced man. And when my- as my marriage crumbled before me, one of the things that came up was that- this was- yeah, my ex, right at the goal line, we were ready to get married, she was like, “Hey.” We had given up, and then a week later, she's like, “Wait a second. There's some stuff that we need to talk about because I- you know, ‘cause I just didn't- I didn't bring it up.”

And she's like, “One of the things I didn't tell you is I started our marriage with $10,000 of debt that I had through a debt- that I put in a debt reconsolidation company. And I never told you about it, and I paid it off by getting extra cash every time I went to- like, getting cash back every time I went to the grocery store.” And so, $40 at a time paid off $10,000 worth of debt over who knows how many years of our marriage.

And I'm a CPA and I had no damn clue she was doing it because guess what, I wasn't checking her receipts. I was going, “She spent the money at the grocery store. It must must've been on groceries.” I got to assume it was the same thing for these partners that go, “This is our managing partner. He's cool. We're not going to spend a bunch of time- a bunch of non-billable time checking his receipts.”

Caleb: Right. So, he must have been doing a good enough job as a managing partner that his fellow partner’s like, “Yeah. Patrick's on top of this.” Yeah. Like, they had no reason to suspect him whatsoever, if I understand it.

Greg: I see. And that, again, in terms of trying to fill in the details that we don't have access to- ‘cause again, he's stealing $150,000 a year, between $100,000 and $150,000- well, I guess between $110,000 and $150,000 a year from his company through reimbursement. I would assume that that stuff would be made public and that-

Caleb: Yeah. The partners could see that. They-

Greg: Yeah. And again, he's- and he's doing all this- you know, he's creating- he's even creating contracts and IRS forms, which I assume is maybe 1099s. Invoices- he created fake websites and fake email addresses. That's a lot of work this guy's going to.

Caleb: A lot of work.

Greg: So, I think his hard work to steal his $140,000 was in an attempt to show his partners, “No, this is legit,” but as a partner, I'd still go, “But is it?” That's- even if it's legit expenses, you're maybe- you maybe need to reign that in, is a great idea.

Caleb: Yeah. I mean, possibly, it could. You know, depending on the scale of the firm and like what kind of business they do, it could be unreasonable, right?

Greg: Yeah. Yeah.

Caleb: I mean that's what you're saying.

Greg: Yeah, that's true. And I guess that's something that I don't- I've never had a job where I have an expense account.

Caleb: Yeah, me neither.

Greg: That's never- so, I don't- maybe $150,000 a year in reimbursements is normal for some people in some firms.

Caleb: I'm sure it probably is but I mean, I don't know.

Greg: And if- and the other thing is, if he's a managing partner, probably a lot of his duties are- is to go get new clients. So, maybe a lot of it was like, fake reimbursements for going out. That would be- if I was in his shoes, and if I was responsible for bringing in new clients, I would make a ton of reimbursements for taking clients out to high-end restaurants where we’d spent a lot on booze and then go, “Sorry guys. They decided to go with Bailey Hawaii instead of us. Dang it, we were so close. But I got another- I got another dinner tonight, and I'm going to spend another $2,000 on it, and maybe we'll get these guys. So, Kobe burger.”

Caleb: I had another Kobe burger.

Greg: Exactly. Exactly. So, yeah. So, it's hard to know. But in some of the research that I looked into, there was a quote from one of his former partners that he defrauded, where they said when they would confront him about the fraud, which I don't know if that was like, “We found these suspicious things, what's going on?” It said that he would turn it around on them to eventually go with, “I think you're stealing from the company. Hey. Hey. That's- don't tell me that I'm stealing from you. You're the one stealing from me.” So-

Caleb: I know you are, but what am I? I know you are, but what am I? I know you are, but what am I?

Greg: Yeah. It’s a good defense. Good defense, Pat Oki.

Caleb: I want to come back to something that is kind of important, I think. And the fact that Patrick Oki was a certified fraud examiner.

Greg: Yes.

Caleb: So, this guy, obviously- well, not obviously, but again, we have to kind of put this together. He was at least to a- in the sense that he did the work to get a certification, I don't- we don't know anything about the work that he normally did, but you have to assume that he did things that were forensic in nature and investigated frauds, and stuff like that.

He was in- as you've pointed out earlier- he wasn't a good position to perpetrate something about as well as a person could. And if his partners- ‘cause we don't know much about his partners either, do we?

Greg: We don’t.

Caleb: Yeah. And so like, if they're- I mean, they- he may have just looked at the situation and said- well, you know, before I speculate, let's get into the motive for a little bit because there seems to be- there seems- that's something that we kind of have a sense of, is the motive. Like, why- I mean, he's the managing partner. He's making a good living. Like, he's living in Hawaii. Why does dude need another $110,000 to $150,000 a year?

Greg: Well, maybe you have information that I don't. The only thing I have that points to a motive is that he was living a lifestyle far above what would be expected, even for someone who's a managing partner of a big firm in Hawaii, that it's even with that, he- but that was the extent of the description. They weren't like, “Oh, he had a different Rolex for every day of the month. And he had spinning rims on his cars that matched the Rolex of the day of the month that he would wear.”

They didn't say anything like that, but what are you what do you have for motivation, other than just greed?

Caleb: Well, no, no, no. Maybe I over- maybe I oversold it a little bit, but I thought his defense was that he was entitled to the reimbursements, right? Yeah.

Greg: Yeah. So, the rationalization. And- but that's the thing. I don't think that that was- I don't think that was a legitimate rationalization. I think that that was- okay. So, for those of you who didn't do all the research Caleb and I did, this Patrick Oki is on the stand in court in Hawaii, which by the way, just a quick observation about that, Caleb. When I saw some of the videos of his testimony, did you notice that there was an alarming number of people in a formal setting of a courtroom hearing that were wearing Hawaiian shirts? Did you notice this?

Caleb: I did. And it seemed pretty on brand for Hawaii even in a court- even in the court of law.

Greg: Yeah. See, I don't know. For me, I'm like going, “Wait, is that okay? Can you- in that state?” It's like you could- in Hawaii, I guess it was.

Caleb: Wait, was the judge wearing a Hawaiian robe? Because I mean, if he was wearing a Hawaiian robe, then we know it's fine.

Greg: A Hawaiian robe. I don't know if it was HD enough to catch the pattern on the judge's robe, but I was like going, “It must be okay to wear a Hawaiian shirt to court, as long as it's your good Hawaiian shirt.” Then that's the best I can-

But also, going back to what we said before, Hawaii is a goddamn paradise if you can- for so many reasons. Not just the beauty of nature, but also the fact that you can wear a Hawaiian shirt when you're going to jail in court.

Caleb: You’d be totally chill in a court of law when you're probably looking at hard time. That’s why we’re comfortable. That’s why we’re comfortable.

Greg: Yeah. I'm going to jail for 20 years. Cool. But we're all wearing these shirts, right? So, yeah.

Caleb: Let's be comfortable. Let’s be comfortable.

Greg: So, in hindsight, I think his defense of what he did- ‘cause he definitely took $440,000 that he was not entitled to from the firm. But what he was trying to say in court is he says, “No, wait, I'm an owner of this company. So, I didn't steal money, I was just taking money from me out of the firm.” And that- so- and it's like, “You can't steal from yourself so you can't prosecute me. So, therefore, I'm innocent. Right, judge? See you later. I'm going to take my flip flops- my good flip flops that I'm wearing. I'm going to get-” you can't moonwalk in flip-flops but he’s going to moonwalk out of there. So, maybe he was wearing real shoes, I don’t know.

Caleb: I mean, it kind of sounds like a legal theory that would come from Lionel Hutz, I gotta be honest, you know what I mean? It's just one of those things where you're like, “That's not right.

Greg: No.

Caleb: You can say that, but that's not right.”

Greg: Not at all. And so, with that, though, let's talk about that. So, with his sentence, he was sentenced to 20 years in prison. He was- for the crimes of theft, money laundering, and computer crimes, and forgery. So, those were the ones that he did. Theft, money laundering-

Caleb: Yeah. ‘Cause he forged the signatures of these fictitious people that he created.

Greg: Right. Which breaks my brain, because how can you forge a signature that doesn’t exist? It's like somebody’s going, “This is not the signature of Harry Potter. I have read Magical Beasts and Where They Come From, and this is not Harry Potter's signature, damnit.” So, yeah, I don't know how you forge a fake person’s signature, but that's how good he was at crime, is he did it, even though it's impossible. But yeah. So, he was 20 years for that.

Caleb: Whew. 20 years.

Greg: He was- and he was ordered- 20 years, and he was ordered to pay the $440,000 in restitution. But his argument held at least a little bit of weight because he- there weren't a ton of partners, from what I gathered, in this firm. And so, if he stole- let's say there was a total of five partners in this firm, and he stole $440,000 from the firm, that means that he actually stole four fifths of $440,000 because the one fifth would actually belong to him. So, he's kind of right in that he was- some of the money he stole was money he stole from himself, but it was a small fraction or at least a fraction.

Caleb: Right. Four fifths of it is still fraud. 80% of it is still fraud.

Greg: Right. Exactly. So, it's like, you still stole money from other people. And then- and the way my brain started to go, it's like, “Well, wait a second. Well, maybe they could go back and say, “Well, all that $440,000 should just be taken against his equity in the firm. And then it's not stealing,”” but that's not true because that's not how it was booked. Because it was booked as it was coming out of the whole firm.

So, yeah, in hindsight, maybe you could have done some journal entries to make it so, okay, the money you stole was just your money- and maybe that's part of the logic of what he was trying to get to, is it's like, “I had more than $440,000 of equity in the firm, so just take it all against me and we're good. Right, guys? We're cool then, right? We can just go back to working together, no big deal.”

Caleb: We still got a business, right? Right?

Greg: We’re cool. We’re cool.

Caleb: But even though- but like, I don't- you listed off the crimes that he was charged with or convicted of? Maybe I didn't catch that.

Greg: Convicted of. Those are what he’s convicted of.

Caleb: Boy. Okay.

Greg: Yeah. But even the stuff like- but even the creation of like- I mean, if he forged- if he created fake IRS forms, that is definitely a crime that you're not going to get out of, right?

Caleb: Right. Yeah. And so, he- I'm no lawyer, obviously, but like, he can claim all day that he's like, “Oh, this is going against my partnership basis, da da da.” He can argue that all day until he's blue in the face, but the fact of the matter is he created false and misleading documents including federal forms. And there's no way to explain that away, as far as I can tell.

Greg: Right. Right. Exactly. And I mean, we have never yet touched on the concept of scienter in this podcast yet, but that's one of the things if you're going to be convicted of fraud, they must prove scienter, which is one of the core beliefs of Scientology. That's where it gets its name, where there must be fraudulent intent because the church of Scientology was built on fraudulent intent. Were you aware of that, as the root of that word?

Caleb: I believe I was, and false.

Greg: Yeah, no. I pulled that out of my butt.

Caleb: Oh really? Okay. ‘Cause I was hoping- you know, I'm looking forward to the hate mail that's going to come from that. And potentially, a cease-and-desist letter from the church of Scientology.

Greg: That would be- man, I can't wait for our first cease and desist letter.

Caleb: I’m excited. So, Greg, how did this whole thing wrap up? I know there's like- was there anything- so, did- were the partners made whole anyway? Did they just get vengeance in the court of court of law? Like, how did this whole tie- how did this whole thing tie up?

Greg: So, the media seemed to get bored with this case after he was sentenced because yeah, he was ordered to pay the $440,000 back but they delayed the reimbursement demand until they could figure out who the money was supposed to go to because of the complexities that we just said. Part, he was stealing from himself.

But four former partners requested that the judge just give the money back to the firm so the firm could distribute all of the money to the partners who were not Oki. Basically, he was saying, this guy, that's part of his punishment, is he just has to pay all the money back and he doesn't get any of it distributed out to himself as a partner of the firm.

The firm was then dissolved because- I got to assume it's similar, again, at least in the same ballpark as like an Arthur Andersen, when a scandal like that happens none of your clients are going to have any faith in your firm anymore. If the managing partner stole money from the firm, probably every client is going, “So, how much money did he steal from me?”

And so, with that, yeah, they shut down PFK Pacific Hawaii and in its place, there was a new firm called Spire Hawaii LLP that basically, was the old firm just with a new name and a new EIN. And that's how they went forward there.

Caleb: Everything's better.

Greg: Everything's fine at that point. So, that's it. And he did- he got taken to prison immediately from jail. And according to, again, some of the video that I saw of the penitentiary where he was set, is yes, it is a penitentiary but it is still a penitentiary in Hawaii. And the surroundings were gorgeous. The buildings were like were like World War II bunkers but they were World War II bunkers that were set in the most magical place on earth. So, that’s how it rounded up.

Caleb: Well, that's a silver lining.

Greg: Yeah.

Caleb: All right. Well-

Greg: A silver lining for Patrick Oki.

Caleb: Yeah.

Greg: Oh, one last fun fact. He tried to appeal. He tried- so, like I said, all that went down in 2014. He did try to appeal the sentence, but the Supreme Court of Hawaii denied his appeal in 2020. So, just recently, it just came back up and they said, “Nope.” So, he is still in the Hawaii State Penitentiary for his crimes against his firm.

Caleb: Huh. I wonder if they wear Hawaiian shirts in the prisons.

Greg: Well, you know, I'm going to say yeah, it's still going to be Hawaiian shirts, just with- I mean that style, but they still have the vertical-

Caleb: Yeah. The jumpsuit with the floral patterns.

Greg: Yeah, exactly. And flip flops. I think they have shower shoes there for everybody, so.

Caleb: Yeah, yeah, yeah. Sf course. So, Greg, have we learned anything today? I don't know if we have, but I mean, there's some lessons here. So, what are some lessons that come to mind?

Greg: Well, I think- I mean, the first lesson that I think is clear from this case is just because you're at a CPA firm, don't think that your firm is immune to fraud. People- because I think- and that even goes back to kind of what you said when we got into the case, was that this case is- seems to be unique because it's actually a CPA who's stealing money from the firm, and that's not something that we typically see.

So, the big thing is, don't feel like you have some sort of magic protection around you just because you're a CPA firm. You, just like every- the ACFE, they estimate that every organization loses 5% of their revenue to fraud. And that's every organization, including accounting firms. So, people steal shit and they're going to steal shit even from a CPA firms. So, I think that's one of the biggest lessons that I come away with.

But some of the other stuff that came to my mind really just wraps back around to some of what I feel are the most interesting statistics that we see coming out of the ACFE about frauds. And one of the- the first one that came to mind obviously, because Patrick Oki was the managing partner of the firm, the ACFE reports that- this was from the 2020 Report to the Nations that the ACFE puts out every two years. In that Report to the Nations, they said that 20% of frauds are committed by owners or executives, compared to 41% that were perpetrated by employees, and 35% that were perpetrated by management.

Those numbers don't add up to 100, and that's because they have some other category which I don't even know what you'd be if you weren't an owner and employee or a manager. But apparently, there's some people that fit that. But first off, one of the- the first thing that comes to mind about those stats, Caleb, is the way- and again, it's one of the almost misleading ways that the ACFE presents their data.

Because they go, “Well, it's most likely- if a fraud happened at your company, it's most likely that an employee did it because 41% of the frauds are committed by employees,” right? But I feel like it's flipped around because 20 percent- if you look at the- all the people at your firm or in any given company, 20% of the people are not owners or executives. It’s probably like 1% or less that are owners or executives. So, that 1% of people's committing 20% of the frauds. That's huge. That's way disproportionate.

Caleb: Yeah, I agree.

Greg: Yeah. So, that's one of the things that I think, like I said, is not- and it's not- obviously, it's not like the ACFE’s trying to be misleading, but a lot of these stats, I feel like if you think of them that way or even if you flip them around, you're going to see even a more interesting statistic cousin here. It's actually, “Oh, my God.”

And the same thing. 35% of your company is not management. If 35% of your company is management, your company's going to go broke because you have too many damn managers. So, it's the same thing where manage- compared to the percentage of a typical company that is management, management's doing an outsized percentage of the firm.

Caleb: Yeah. Yeah. Exactly. I mean, and even you take it to the final, you know, the final component, which is you know, if you figure 90% of the people in a company are employees and they're only committing 41% of the frauds, you're- actually, you're like, “Oh, that's actually not very many.”

Greg: Right, right. Exactly.

Caleb: Yeah. So, the 20- I agree with you. The 20% of frauds by the 1 percent, you know, people who occupy 1% of those positions is- that is quite high. That strikes me as quite high.

Greg: And again, it makes sense because if you're an owner or an executive, I mean, kind of like what we saw with Patrick Oki, you're in a position of trust, you're in a position of authority. So, you can get away with this stuff. The other thing that comes up all the time is the higher up you are in a company, the more- you have greater ability to circumvent internal controls so that- you can override the internal controls that are there to prevent people from stealing stuff or from, you know, doing financial statement fraud.

And so, if you can override those controls, obviously, you've got- there's more opportunity for getting- talking fraud triangle stuff. More opportunity for you to do this. But one of the things that I remember thinking about also, when I looked at that statistic, is like, what it means for an owner to commit a fraud because of exactly what Patrick Oki said in court, where it's like, “I was stealing from myself.”

But I think this case very much cleared that. That was a learning thing for me to go, “Oh yeah, of course. An owner, if they're not the sole proprietor, they're not the only owner of the company, if they steal, they're stealing from the other owners.” So, I thought that was a good lesson that came from this case. So, that was one thing.

Caleb: Yeah. Cool. Yeah, what else you got?

Greg: Well, here's where I think it gets- some of this fraud stuff gets nuts for me when you start looking at the percentage of cases that were actually referred to law enforcement in somewhere in another- and again, the ACFE reports that 59% of cases get reported to law enforcement. So, only about, you know, three out of five cases end up getting reported to law enforcement.

Which again, is so counterintuitive because if somebody lost tons of- if you had tens of thousands of dollars stolen, why aren't you sending people to jail for that? And so- and with that, so, even with the two thirds of-

Caleb: Well, forget about just going to jail. Just like reporting it to the authorities, like, we're not even talking about like a trial and a verdict or anything. You're just like, that the authorities are even notified.

Greg: Right. And with that, I mean, we see that about one in seven of the cases that are referred to law enforcement, either they were declined prosecution. They're just like, “We're not going to pursue this guy,” or they were prosecuted and then acquitted. So, you've got- so, even of the ones that go to law enforcement, there's a certain percentage that fall through the cracks.

And hopefully, rightly so. Maybe, you know, that that's- those are the people who didn't really do the stuff. But the other thing that comes up too is that- so, it's 59% of the cases that were looked at by the ACFE. Those cases are cases where a company hired a certified fraud examiner to look into their fraud. So, if you don't hire a fraud examiner, you're not going to be in the study.

But also, if you don't hire a fraud examiner, I'm going to say you're even less likely to report your fraud to the authorities. Don't you think? What are your thoughts about that.

Caleb: Yeah. I mean, that strikes me as perfectly reasonable. I mean, I think, you know, one thing- one question that you have here is, what's the motivation to not report something to law enforcement? And I think for many businesses, they want to either handle it themselves in whatever that means. It may mean nothing, or it means just letting them get away with it, and they fire that person, or it means- or they're too embarrassed, like, for whatever reason, because they got taken for a ride. You know, they got hoodwinked.

Greg: Absolutely.

Caleb: And the embarrassment of that, and the publicity that could come along with it, people don't want to have to reckon with that. And so, they're just like, “Yeah, it's only money.” You know, they- and like you say, the person- there's no accountability, and the person probably moves on to a maybe rip someone else off.

Greg: Right. Everything that you just said, I 100% agree with it, but then, even things- like the embarrassment side of stuff, think about how much that's ramped up if it's an accounting firm that gets- because that's why I think we see so few accounting firms who get- where there's an embezzlement at an accounting firm, where that's publicized at all.

And I also think that's the reason why so many of the facts of this case are so hard to find. Our research was difficult, getting into the nitty gritty on this case because I think the accounting firm was like, “We have to take this to law enforcement because it's too big of a deal,” but then they're also like, “But we're only going to say exactly as much as we need to, to get this guy to go to jail.

And apart from that, we're going to- tight-lipped and we're not even going to say anything at all. And we're just going to shut it down, not answer any questions that we don't have to.” So, yeah, there's definitely the embarrassment side, because again, if I was one of the other partners, maybe they all had CFEs, who knows who the other partners were.

Because if the other partners also were certified fraud examiners and they had a fraud perpetrated against them, how ridiculously embarrassing would that be?

Caleb: Not a good look. Not a good look.

Greg: Plus, like we said, PKF Pacific Hawaii, they had to close their doors. That's not an easy- even if they did you know re-emerge as a Phoenix of Squire whatever, squirrel, whatever they came back as.

Caleb: Spire Hawaii.

Greg: Spire Hawaii. That's what it was. They, you know, that's still a giant pain in the ass. And if you just kept hush hush and didn't do anything, then PKF may well have still been a firm that was still happening, and they would just would be like, “Yeah, our managing partner, he had to retire,” and that’s the story you tell the clients.

Caleb: So, one of the things that I think applies to both questions, which is why do companies and why do CPA firms, I think something that applies to both is that if this is- yeah, and you're touching on it, so maybe I'm just taking it to the next logical place, but not only is it embarrassing, but I think there's a very good chance that you just lose business as a result of this thing, right?

Greg: Absolutely.

Caleb: And so, like, if you're a business where someone perpetrate- where an owner perpetrates a fraud, whether it's a hardware store, or whether it's a CPA firm, people are probably going to think twice about doing business with you because they think that, “Well, my money is going to be stolen by a person. I want it to actually- I want the proprietors of the business to get the money, or I want that money to go to the employees of the business, or I want them to be able to expand their business or whatever the case may be.”

Like, if it's somebody who's just lining their pockets with the money that we're spending, why would they patronize that business?

Greg: Absolutely. Yeah.

Caleb: And so, yeah, there's all kinds of reasons why people- or why a business would not report a fraud. But I still think that, you know, the whole fact that 41% of the cases in the ACFE study were not re- I mean, that is a remarkable-

Greg: Yeah.

Caleb: That's a pretty remarkable stat.

Greg: Absolutely. So, the last stat that I want to look at again, coming from the ACFE, is that- and this blows my mind. So, they say that 80% of fraudsters received some kind of internal punishment. But again, so you go, “Oh, so the vast majority of them receive internal punishment.” But the- to me, the headline is the flip that around, 20% of fraudsters receive zero internal punishment within the company that they stole money from.

One in five people that commits a fraud isn't even punished by the company in which they committed the fraud. That is mind blowing that it's that much. Like, to the point where I have a hard time even believing that statistic. What's- do you have the same reaction?

Caleb: Yeah. I mean, maybe it lacks some context, I don't really know, but I agree with you. The fact that one in five would receive no internal punishment at all seems extremely, extremely high.

Greg: Right. And then- but then the ACFE goes further and they drill down on some of this data, and they dis-aggregate it for the different level- like, again, for the employees, the managers, versus the owners and executives. Only 45% of owners or executives are terminated for committing a fraud. So, it's not that they may have had some other kind of internal punishment but the punishment wasn't “Were firing you,” which it should be, “If you committed fraud, we're firing you.”

Less than half of the owners and executives are terminated for fraud. Now, again, that might be the case that- like we were saying for Oki, where they're like going, “Okay, you caught me. How about you just take all that money out of my, you know, out of my equity in the firm and I probably- you know, maybe I'm not the managing partner anymore? So, you know, but then we're cool. Right, guys?” And maybe that's a real thing. Do you- I mean, do you think?

Caleb: I mean, I don't know. I mean, that's what I think I'm so curious about is like, how do- these places of- you know, these companies where fraud is occurring and there are no consequences. And no consequences.

Greg: Right. And in terms of consequences-

Caleb: Like, the fact that 55- yeah, like, don't lose their jobs, don't repay the money, I've just- I'm kind of blown away. Like, “Well, wait a minute. You just like let them get away with it, and they get to keep it?” Like, this is what I have a hard time getting my head around is that, how do you keep someone in a company after all that?

Greg: Yeah. Well, not just how do you keep them in the company? ‘Cause again, they even drill down the data a little bit more, and they state, 13% of the owners and executives who perpetrated a fraud, 13% of them received no punishment at all. So, 45% of them are terminated. So, 55% are not terminated, but then, 13% of them, not just are they not terminated, there was zero punishment for the fraud. It was just like, “Knock it off, I guess.”

Caleb: See you Monday.

Greg: Yeah. Right? And that's-

Caleb: See you Monday.

Greg: That is unbelievable because again, you know what, 13 percent, that's about- I want to say that's one and eight. Isn't that about one in eight?

Caleb: About right. Yeah.

Greg: Yeah. One in eight executives who commits fraud at their company are literally off scot-free for that, which-

Caleb: Which is not the case for Patrick Oki.

Greg: Not the case for Patrick Oki. Not at all. But then again, I mean, gosh, I really- I wish that I could explain that better, of how that could even possibly happen. The only- no. I have no idea. ‘Cause if there's no internal consequences, they wouldn't have been taken to law enforcement either. And the only explanation that I could give for someone having no consequences whatsoever for committing fraud is if it's all just the company is deathly afraid of the bad PR that would come out of it.

And it's like, “We're going to pretend like this never happened because all of us would lose our retirement account if they- if the press caught wind of this or something like that.” Do- can you think of any other justification for it, besides that?

Caleb: I mean, that seems to be- that's where my mind goes immediately.

Greg: I guess the only other thing that comes to my mind is- okay, so, the owner commits the fraud and he doesn't get punished by the board because he has naked pictures of all the board members, and he can dis- he can put them out on the internet with a click of a button. So, like, “You know what, you're good. How about you- how about you- here's a raise. Stay in there, pal.”

Caleb: Right. I mean, it's not that farfetched in that- you know, especially in small businesses, right?

Greg: That the owners have naked pictures of each other?

Caleb: Yeah. I mean that, well, some kind of compromising information.

Greg: Oh, okay.

Caleb: Yeah, yeah, yeah. I mean, it doesn't have to- just doesn't have to be-

Greg: No, you’re being for real.

Caleb: It doesn't have to be nudes. It could be an affair It could be- it could be other bad behavior, you know, that is- maybe it's on a personal level, rather than on a fraudulent level. But yeah, I mean, I feel like yeah, that's not outside the realm of possibility in my mind.

Greg: Right. Interesting. And yeah, and I guess I could say- ‘cause the other thing with the ACFE, they're not just talking to embezzlement, and that's one of the things that they don't disaggregate the data down in terms of how many of those were financial statement fraud, how many of those were- because a lot of the justification for things like financial statement fraud is just like, “I was doing it for the good of the company.

I was trying- we had to meet our numbers or else our stock price would plummet. So, I was doing this for the team,” and then they might've gone, “He was doing it for the team, so you know what, not cool, but we're going to keep them because loyalty,” which again, weird and backwards. But I guess I can understand that.

Caleb: We'll get into loyalty in another podcast. Not on this one.

Greg: Not on this one because Patrick Oki, you go to jail. All right, everybody, that's it for this episode of Oh My Fraud. And remember, if you commit a crime, do it in Hawaii because you'll be in prison, but you'll be in prison in Hawaii.

Caleb: And also, remember for your Hawaiian court appearance, to wear your good Hawaiian shirt.

Greg: Caleb, if people want to find you out there in the internet, where can they go?

Caleb: I'm on Twitter @CNewquist, and you can find me on LinkedIn at Caleb Newquist. Greg, where are you on the internet?

Greg: The best places to find me, also on Twitter @GregKyte, or like you said, LinkedIn, just put in my name, Greg Kyte, CPA. You'll find me there. Don't put it in Greg Kyte, Erstwhile CPA, just Greg Kyte, CPA That's all you got to do.

Caleb: Current. Current.

Greg: The other thing is I got some cartoons that I have out there in the internet. Those are on Instagram @exposuredrafts.

Caleb: Oh My Fraud is written by me, Caleb Newquist, and Greg Kyte. Our producer is Blake Oliver. Music supervision, sound design, editing and mixing by Zach Frank. If you like the show, leave us a review, or share it with a friend, and be sure to subscribe on Apple, Stitcher, Spotify or wherever you listen. Join us next time for more average swindlers and scams from stories that will make you say-

Greg: Oh-

Caleb: Aloha Fraud. Oh My Fraud.