Financial detectives: The rising demand for forensic accountants

January 30, 2008

Like ripples from a pebble pitched into a pond, the federal law passed to combat white-collar crime is -- six years later -- prompting business colleges to beef up their forensic accounting curricula.

"Forensic accounting always involves an investigation, and the mission is to answer a question: was employee or management fraud committed? What are the economic damages resulting from a fire? How much was embezzled? What happened in this contract dispute? And often, you then testify in court about the answers," explained Joe Epps, a Scottsdale, Arizona, certified public accountant who specializes in forensics.

The demand for forensic accountants these days is so high that those who practice the specialty don't have to go looking for business. "We're always completely busy," Epps said.

Training the accounting detectives

Once simply a component part of audit courses, forensic accounting is being offered as a standalone class, or an emphasis within the accounting major or graduate certificates at an increasing number of universities. For instance, the University of West Virginia offers a new, 12-credit graduate certificate in forensic accounting and fraud investigation through its College of Business and Economics. Its program was developed with grant money from the Department of Justice.

Students at Louisiana State University learn forensic accounting and fraud investigation in standalone classes, rather than as an auditing component; W. P. Carey School of Business masters of accountancy students can study forensic accounting beginning in the spring 2008 semester; California State University at Fullerton offers a graduate-level certificate in forensic accounting and even Mount Marty College, a private Catholic school in tiny Yankton, S.D., now offers a forensic accounting major.

All of the new programs mingle accounting, criminal justice and information technology, and focus on turning graduates into financial sleuths. Ideally, a forensic accountant can follow a twisting money trail, ferret out insurance cheats, identify internal scams, price intangible assets like copyrights and patents, untangle a complicated contract and figure out lost-business damages.

Depending on their clientele, some forensic accountants function more like private detectives than tax preparers, said Epps, who's been hired to teach the new forensics class at the W. P. Carey School.

Tracking fraud through cyber space

Interest in forensic accounting blossomed in the wake of disastrous corporate accounting scandals at Enron, Tyco, WorldComm and Adelphia. But these spectacular frauds, and the passage of the Sarbanes-Oxley Act in 2002, aren't the only reason for the increased demand for accountants who can dissect a 10-K report.

"Along with the changing legal environment that had led businesses to examine their activities more closely, there are also more acquisitions and mergers occurring," according to Perseus Munshi, faculty director of W.P. Carey's accountancy master's program. This means greater demand for due-diligence services that can encompass forensic accounting.

Munshi emphasized that forensic accounting "has always been around," but was far less essential when the business world didn't rely on computers. Crimes facilitated in cyberspace are often especially difficult to track, so forensic accountants further specializing in IT can charge more -- and usually take their pick of clients.

Two other major factors helped catapult forensic accounting to the head of the class: post-911 terrorism and Hurricane Katrina. In fact, the professional accreditation offered through the National Association of Certified Valuation Analysts was developed by a CPA who helped design the National Security Agency's terror-fund tracking program.

"Back then, terrorists were transferring money in smaller amounts than the $10,000 amounts that were automatically reported to the government, so it was hard to detect," notes Al Robins, who works in the NACVA's member-services department.

NACVA'a courses emphasize statistical tools such as "Benford's Law." Forensic analysts use BL, embedded in computer software, to count how many times the number "1" appears in a financial report. "If it appears in reporting less than 32 percent of the time, it is out of the statistical norm, and you know to look more closely," Robins said.

Then there was the mother of all storms, Hurricane Katrina, that hit the southeastern coast in August 2005 and destroyed much of New Orleans. The enormous natural disaster multiplied the need for forensic accounting services of various types, especially "loss of income" investigations for businesses closed by the storm. Epps has worked on more than 300 loss of income cases of business tagged to Katrina. "Insurers want to be sure their clients' claims for loss of business are reasonable and fit within the contract," he said.

A standalone specialization

More than 200 people, many of them representing colleges and university business programs, attended a national symposium on forensic accounting education in Savannah, Georgia, last year. This year's symposium, planned for May 2008, will emphasize the importance of standalone courses, said Munshi.

He's seen the trend toward forensic accounting heavily reflected in how the Big Four (PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG) accounting firms and many second-tier firms handle operations. "Now, instead of having forensic accounting services offered through their auditing departments, it's a separate department -- distinct divisions for tax, audit, accounting and forensics," Munshi continued.

A wide variety of entities hire forensic accounting services through these firms, including corporate clients eager to keep their books clean and attorneys, insurers and other organizations that rely on expert witnesses for litigation. Government agencies also increasingly rely on forensic accountants, both for internal compliance and regulatory oversight, he said.

Still, Epps estimates that only one of every hundred or so certified public accountants currently focuses primarily on forensic work. That may be partly because forensic investigations often wind up as evidence in legal proceedings, including full-fledged trials. As Epps said, "some don't want the stress of ending up on the witness stand, being cross-examined. And once a judge sets deadlines, and the trial starts, you lose control of your life; your schedule revolves around the needs of the case."

He added, "regular accountants are very busy during tax season. Forensic accountants have perpetual tax season, year-round."

Bottom Line:

  • Forensic accountants look for crimes besides fraud, such as embezzlement, price-fixing, insider buying, falsification of reports and theft of materials according to "White Collar Crime," an August 2007 report by Russ Long, sociology professor at Del Mar College in Corpus Christi, Texas.
  • Ninety-one percent of convicted bank robbers go to jail, while only seventeen percent of those convicted of embezzling from a bank serve time, according to the American Bar Association.
  • Epps says that in forensic accounting "the devil is in the details." Forensic accountants look for the small transactions that, combined, tell the story of what really happened.