Accountants, especially those in public accounting, normally strive for attainment of the coveted Certified Public Accountant (CPA) designation. After four to five years of study, followed by a regimen of preparation for the CPA exam, candidates may become fatigued by the process. After joining a firm, however, accountants are eager to get hands-on experience in their new profession. Therefore, this is the best time to strive for, and pass, the CPA exam. Astute new accountants can quickly identify teachers and mentors within the organization to help them achieve and define their career goals.
Unfortunately, many accountants, even those with years of experience, lose interest in reading professional journals or furthering their knowledge through the study of a new specialty area. Those who do stay academically motivated, however, will come across numerous articles on the topic of forensic accounting. This topic, and several connected to it, is well worth keeping abreast of; for example, fraud is in the news on a daily basis, as whistle-blowing and class action lawsuits leading to large fines, and even criminal charges, levied on those responsible. CPA firms are sometimes brought into the mix, since the public wants to know what the accountants knew and what is in their workpaper files. If the CPA firm has culpability, it can be charged, with the same financial consequences. Developing a curiosity about such cases provides professionals with valuable insight in terms of what happened, why it happened, and how could it have been prevented—questions frequently posed by fraud victims.
This basic reading of accounting journals and news publications may lead to a larger interest in forensic accounting. At this point, a career can become dynamic and energized; by focusing efforts on a specialty area, it becomes easier to remain highly motivated and determined to succeed.
There are many career paths in forensics for accounting graduates, whether they work for a nonprofit organization, private company, university, hospital, or government. Forensic knowledge is most helpful for those employed in the nonpublic sector, with higher value and compensation awarded to highly credentialed forensic specialists. Controllers and internal auditors should have a working knowledge of forensic accounting as well. A CPA who attains forensic skills and then moves to a private accounting position can expect higher rewards, as there is a growing need for these skills across the spectrum.
Forensic Accounting Concepts and the Need for Skills
Forensic accounting is not a complicated concept; it is essentially litigation support involving accounting. The application of forensic accounting techniques is also fairly straightforward. Forensic accountants apply their skills to legal cases to answer questions regarding damages, generally with an economic bearing, or where there is a concern expressed by a company potentially experiencing fraud or suffering from deficient internal controls. Forensic accounting skills are also useful in assisting the audit team with fraud-risk assessments, where it is vital to know how to ask probative questions in a non-threatening manner.
Digital forensics is a fast-developing subspecialty within forensic accounting, as today’s complex fraud schemes sometimes require digging through very large databases to detect patterns of fraud and expose efforts to conceal it—a basic component of the fraud triangle. In this regard, it is important for a forensic accountant to appreciate that the fraudster is just as smart as the investigator. Thus, a forensic accountant becomes part detective, uncovering evidence to prove the existence of a crime. In civil cases, forensic accountants attempt to compile sufficient evidence of fraud and data manipulation to develop a defensible case for the recovery of damages.
Forensic training helps professionals build interviewing skills when speaking with witnesses. Clues to look for include body language, speech, and conflicting responses. Skilled interviewers learn how to interpret a witness’s comments and effectively probe for helpful information. These are some of the values placed on attainment of the Certified Fraud Examiner (CFE) certification.
There are many career paths in forensics for accounting graduates, whether they work for a nonprofit organization, private company, university, hospital, or government.
In litigation support services, the use of forensic accounting techniques helps a professional address certain questions. One example is the calculation of lost net profits, where the objective is to analyze the company’s historic financial performance and evaluate its economic future. Such evaluation includes analysis of the industry at present and in the future in order to determine a reasonable basis for computing the lost future net sales as saved costs. Using general accounting skills, forensic accountants dive deeper into the details to consider multiple factors, such as whether or not the injured party has, or could have, mitigated its own damages in part or in full. Being aware of the many variables encountered in a damages case, the model selected should be one that will withstand challenges by the defense. Thus, the pressures shouldered by forensic accountants are great, but the benefits are commensurately rewarding. Ultimately, becoming a qualified expert witness able to testify in court, arbitration, or mediation can lead to career advancement. This is especially true when a forensic specialist becomes highly knowledgeable in one or more specific industries.
Having some knowledge and skill in forensics aids CPAs in serving their clients. For example, consider a company that needs an overview of its internal control system. In such a case, being aware of fraud risk empowers a CPA with forensic knowledge to detect and help improve deficient internal controls.
Being available for forensic assignments in a specialty area enables a forensic specialist to promote himself as having interest in career growth and a specialized breadth of knowledge. Imagine the enhanced value of a baseball player able to play all positions in the infield, as opposed to just second base; such utility is invaluable to the team. The same analogy applies to accounting firms; multiple capacities lead to increased recognition.
CPAs who gain knowledge of forensic accounting through reading, specialized continuing professional education, and hopefully hands-on client experience, will be more prepared to market their skills and add value to their client engagement teams. Earning the CPA designation is a fine start, but the road to success is paved with other achievements—forensic knowledge being one of them.
When Accounting and Forensic Skills Intersect A Personal Case Study
A few years ago, the owner of a commercial real estate company called me in a panic to ask for help understanding why the cash flow in his highly stable business had recently deteriorated. He explained that his former controller had been with him for about six years and was recently terminated due to the owner’s increasing suspicions about his actions. After lengthy telephone conversations over the course of a weekend, I made an appointment to visit with the owner on Monday morning to get a better feel for what was going on.
After discussing the situation with the owner and his bookkeeper and reviewing financial data, I quickly realized that the bookkeeper was incompetent; the numbers were just not adding up and that the owners’ suspicions were supportable. I proposed a complete forensic investigation to uncover any fraud schemes and assembled a small team of forensic specialists to begin the review, including interviews of the office staff.
Within days, my team uncovered several disturbing trends in the books and records:
- Large monthly payments were made to an unknown American Express account.
- Payroll taxes were not deducted from the controller’s own compensation because he was paying himself through expense checks, even though he functioned as an employee.
- Additional compensation was being paid to the controller, as well as the bookkeeper.
- Mysterious funds were deposited into the company’s bank account from external sources, recorded as loans from the controller, and repaid to the controller.
- Real estate taxes had not been paid, resulting in overdue penalties and interest.
- Some tenants were paying in cash, even though the owner specifically objected to this method.
- Cash rent payments were being stolen by the controller.
- A purchase of artwork was made using company funds, but the piece was shipped to the controller’s home.
- The controller had signed documents usurping the authority of the owner.
- The controller convinced the company’s counsel to pay him a large amount of money at the closing of a real estate refinancing, claiming that the company owed him the money.
The company’s accounting firm failed to detect the schemes, even though they were hired years prior to ensure no theft was occurring and that robust internal controls were in place.
My team developed documentation in support of our findings and brought them to the owner’s attention. I then arranged a meeting with the controller and, together with a member of my forensic team, asked questions leading to a second meeting, at which time admissions of fraud were made. The owner hired a law firm and commenced a civil suit against the controller. The bookkeeper, who had written several letters noting awareness of the controller’s actions, was terminated at our suggestion. After the civil suit was filed, the owner decided that he also wanted the controller prosecuted for embezzlement. We arranged a meeting with an assistant district attorney, where we presented the case and the owner issued a formal complaint. The case was accepted, and the NYC District Attorney’s Financial Frauds Bureau launched a full investigation, using our forensic findings and documents as the starting point.
After several months, the case was brought to the grand jury. Due in part to my testimony, the controller was indicted. He accepted a plea to three felony counts and was ordered to pay restitution in excess of $1.5 million.
Using traditional accounting skills and forensic knowledge, we were able to plan, conduct, and report on a thorough and successful forensic investigation.