Nashville Post recently talked with Capital Confirmation CEO Chris Schellhorn about growth and how one client can change everything.
Describe in layman’s terms what you do.
We’ve automated and operate a clearinghouse for the various types of audited confirmations a CPA does when auditing a client.
The main type of confirmation type is what is typically referred to as bank confirmations. When an auditor audits a client, they have to validate certain transactions and elements. They have to verify a deposit. They send a confirmation to the financial institution, which then responds with a balance validation and the auditor has some confidence. Before we existed, this was done through the United States Postal Service. My colleague (Brian Fox) came up with the idea and we came together and put in place this clearinghouse model. In the process of doing that, we also validate who the recipients [of the statements] are, which is hard to do with the postal service.
Capital Confirmation made big news by helping to expose the Peregrine Financial fraud. Tell us what happened.
Over the last 100 years, there have been a series of well-known frauds. The most recent is the PFG Peregrine fraud. Over the course of a decade, the founder and president (Russell Wasendorf) went ahead and created false bank statements that reflected what he had on account.
They were false but ... he claimed he had a relationship with U.S. Bank.
Prior to using our service, the auditors used the postal service. He had a P.O. Box to send them to, and he would intercept them and respond with false information. The auditors saw the balance matched the statement and everything is OK and he was off to the races.
We struck a relationship with the National Futures Association and the Chicago Mercantile Exchange … they audit future traders. NFA was auditing Peregrine and they apparently became suspicious. We had already entered into a dialogue with them and they pressed Wasendorf to use our service. He initially balked and finally he acquiesced.
The confirmations of the fraud were submitted on a Sunday and he knew the gig was up and Monday he tried to commit suicide. There’s no telling how frequently it happens in the postal world.
It showed that, in addition to the efficiency gain, they gain the assurance in the case of the accountants. It’s going to be sent to the right place and the appropriate responder is going to respond.
How did the publicity help your business?
Our business has a lot of confidentiality, but what allowed us to talk about Peregrine was that the client disclosed they used our service to uncover the fraud. They opened the floodgates and allowed us to talking about it.
It resulted in a great deal of further interest and exploration and we began to talk to the futures side. The expansion of the use of our service is expanding.
[As far as new hires], the incremental cost in labor is insignificant. We operate this platform and we build in anticipation of volume, so we’ve actually got excess capacity. We’ve added several new responders. We’ve added several new requesters.
We’ve experienced year-over-year growth in excess of 20 percent. We’ve had good growth and that will continue.
We’ve received confirmations from 100 countries and 10,000 audit firms and 300 banks, including the top 10 banks in the U.S.
The vast majority of our growth has been accountants that are in foreign countries that are auditing principally U.S. companies that have deposits that have relationship with U.S. financial institutions. Twenty banks have mandated the use of our service.
Was getting banks and accountants to change to your service difficult?
Both banks and accountants tend to be a little more stodgy, a little more set in their ways, their adoption is slower in some instances, but once they make a commitment, they hop on board pretty quickly.
We’ve created this industry. Young accountants adopt early, but the older folks are slower to change, but we’re picking up a head of steam and we’ve been doing that for four and a half years.
The biggest challenge was getting the first few requesters and responders. Then over time, once we built and had a proven model, we could get some endorsements. It made the message a lot easier.
We’ve done this with two principal sales folks. … We’ve managed to achieve that with few people resources. And as you grab some of these large banks, it becomes a relationship over time more than a sales activity.
Talk about the technology side and how that benefits your clients.
Our service, because we’re cloud-based, doesn’t require them to buy software. We charge per transaction, so you pay as you go.
We’ve created a series of enhancements allowing the accountant to download the information back into their electronic working papers and store it electronically. Those are significant benefits.