Article, AICPA's CPA Insider – July 2010
Legal / Corporate
Most people think of forensic accounting in relation to fraud investigations. And there is no doubt that fraud has been the mainstay of many departments over the years. But the scope of forensic work has expanded and will continue to do so. In litigation, the role of the adviser or expert witness is well defined and is applied in many areas where evaluation of quantum — how much a case is worth — is the key.
It is this breadth and interest of work that has seen the growth in forensic accountants. Most firms seem to be on the lookout for the right forensic mind. Many can supplement their requirement with experts from the audit departments, but this is not always a viable long-term solution; the audit mindset is very different from the forensic mindset.
As the rise of the forensic niche firm continues — in part thanks to the conflict-of-interest issues that prompted their evolution in the first place — so the revolution continues, and they become the hunting grounds for the Big Four and mid-tier firms.
In the U.S., business valuation was initially driven by the tax authorities and academic research by the universities. This has since been taken one step further and now business valuation has developed into both a practice and an industry.
The AICPA issued Business Valuation standards several years ago that helped to define business valuation as an integral part of the accounting industry, with professional education and practice standards as a cornerstone. The AICPA has created a National Business Valuation School that offers courses introducing valuation, research and analysis, income and market approaches and more. The Institute also offers a business valuation designation (ABV) that enhances the quality of valuation services that ABVs provide, increases the practice development and careers of ABVs and promotes member services throughout the FVS site.
The AICPA has been a leader in the world of forensic accounting as well. The AICPA’s FVS section provides CPAs with tools and resources that can help you serve your clients and enhance your business. Forensic accounting encompasses much more than just valuation and technology. FVS resources, such as the Creating a Niche Forensic Practice Web Seminar Series and the Business Valuation Practice Management Toolkit, focus on helping CPAs develop or expand their forensic accounting and business valuation services. Additionally the SSCS have been in place a number of years now, which are applicable to forensic engagements.
In May 2008, the AICPA's governing Council authorized the creation of a new CPA specialty credential in forensic accounting. The Certified in Financial Forensics (CFF), combines specialized forensic accounting expertise with the core knowledge and skills that make CPAs among the most trusted business advisers. The CFF encompasses fundamental and specialized forensic accounting skills that CPA practitioners apply in a variety of service areas, including: bankruptcy, insolvency and reorganization; computer forensic analysis; economic damages calculations; family law; fraud prevention, detection and response; financial statement misrepresentation; and valuations.
As forensic accounting evolves from being a department within the Big Four to a niche sector in its own right, it is only natural that the training model of forensic accountants will evolve.
Forensic accounting is now a career choice in its own right. With the growing number of specialists, it is natural that standards have been raised across the industry; a trend that will continue.
The biggest change we have seen is the growing use of technology in investigations. The traditional tool was always the sacred spreadsheet. But the maximum number of records that the average spreadsheet holds is just over 65,500 — and a machine that can handle that many records would need to be seriously beefed up. This is changing with the newer versions of Microsoft Office, for instance, and the ever-increasing speed of computer processors. However, spreadsheets are fluid environments in which a simple change to a single formula can have huge effects on the final result. This is amplified when the data set is increased greatly and can be a real headache to manage the integrity of the information.
Accessing the entirety of the base data, rather than a pre-prepared ‘report’ that only shows a summary, allows us to use sophisticated techniques and specialist software programs to slice and dice information or look at it in different formats. We can now seek out potential anomalies and answer questions almost immediately about, for example, the re-stratification of sales figures.
Such technological advances will continue to open up new markets also in other investigative areas.
Blueprint for the Future
Many CPA organizations are currently expanding their forensic reach by direct hiring. It will be interesting to see how the blueprint of the forensic firm develops. In the future, we may see the development of multidisciplinary forensic firms that provide the professional skill-sets within the framework of industry sector specialities.
For some, peering into the future can become an obsession. But any true forensic accountant would do well to avoid the urge to do so and rely on their investigative instincts instead — at least for the foreseeable future.