Forensic accountants: Under the microscope

Similarly, a forensic accountant digs through the entrails of a corporate corpse, fraud or financial dispute, investigating what went wrong, why and the consequences that flowed from it.

The forensic accountant combines investigative skills with the ability to explain detailed technical matters simply to a judge or jury untrained in that specialist area.

Until the mid 1980s, accountants appeared in court only occasionally, mostly in criminal cases, insurance claims, patent, personal injury and matrimonial cases. Witnesses were usually the leaders of the profession, institute presidents, senior partners of firms; full-time forensic specialists were rare.

The next decade saw the emergence of forensic accountants throughout the profession. Growth was fuelled by a combination of increased financial scrutiny following the Big Bang, with the use of accountants by the Serious Fraud Office, the DTI, Bank of England and other regulators, and a flood of litigation arising from the recession of the late 80s and early 90s.

Many investors and banks lost money and lawsuits flew. More than 400,000 High Court writs were issued in 1991; compared to 120,000 a decade later.

Professional firms, with supposedly deep pockets from indemnity insurance, were frequent targets for litigation: auditors of failed companies, surveyors who had valued property used as collateral for lending before the property crash, and lawyers.

Investigating the complex accounting and auditing issues and then quantifying the alleged resulting losses earned huge fees for forensic accountants.

Some who worked on those dripping roasts didn’t return to the auditing and insolvency practices from which they had emerged. Forensic work was fun and business was booming.

As international business became more complex, so the scope for disputes increased. Inward investment, particularly in developing markets, spawned investigations as deals went awry, money disappeared and multinationals had to find out what had gone wrong. Although forensic accountants have a higher profile in the common law jurisdictions of the UK and US, where accountants appear in court more often than in the civil code countries in other parts of Europe, financial irregularities respect no borders and forensic investigations are conducted across the globe.

New technology created clever investigative tools to collect, manage and analyse data. Forensic technology became an integral part of the business, capturing electronic data, by-passing security codes and recovering deleted files. People who thought the electronic evidence of their misdeeds had been destroyed were in for a nasty shock.

The highest profile forensic investigation commenced in 1997 and lasted nearly four years. The investigation for the Volcker Commission into the existence in Swiss banks of dormant accounts which might relate to victims of Nazi persecution (VNPs) was a landmark event. More than 400 accountants from four firms, drawn from the USA and across Europe, delved into the archives of banks throughout Switzerland to investigate whether monies had been deposited by people who had subsequently been killed by the Nazis. If so, what had happened to the funds? If they weren’t still in the bank, had they been claimed by the VNP’s heirs or other rightful owners?

Forensic accountants recreated accounts from over 50 years ago and then matching them electronically to lists of VNPs, Nazis who had used Swiss banks and other data sets; this talk was a phenomenal logistical and technological challenge.

Forensic accountants have expanded their offerings, often signalling this by swapping ‘accountant’ for ‘services’ in their practice’s name.

They moved into the traditional loss adjuster/loss assessor markets for insurance claims. They progressed from the quantum issues in construction disputes by employing engineers to investigate how and why capital projects encountered problems and delays.

Ex-policemen, non-financial investigators and forensic technologists work with accountants to unravel frauds and recover funds. And the experience gained from contentious work is now turned into advice, to assist companies manage their risk of fraud and, the current ‘hot topic’, comply with new money laundering regulations, improve their management of capital projects and better protect their intellectual property.

The complexity of business and financial instruments, increased regulation, the flow of capital and ever more sophisticated technology will ensure there will always be work for forensic specialists. Deals will go wrong, acquisitions turn sour and human error and criminal greed will need investigating; stakeholders demand accountability. SEC or similar investigations into corporate accounting problems will increase and there will always be a demand for financial and accounting analysis to resolve disputes whether through litigation, arbitration or expert determination.

Stakeholder scrutiny extends to forensic services too. The courts have laid down stringent rules for forensic accountants giving evidence in court and risk management is at the forefront of our work. But whatever rules say, a good forensic accountant will maintain objectivity and professionalism for two reasons.

Firstly, without those, one’s evidence is of little value, and that’s bad business. Secondly, an expert who does a bad job risks being embarrassed personally in a public court, and that’s a deeply unattractive proposition.

Is increased scrutiny a threat to the profession? No. The market hasn’t diminished. Rarely a day goes by now without mention of some financial scandal or problem. Winning work may not be as simple as it once was but there are lucrative rewards for those whose forensic skills meet the ever present demand.

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