by Melissa Klein
While an upsurge in the number of financial restatements and events such as the Enron/Andersen scandal have fueled concerns over financial reporting issues, one faction of the accounting profession is reaping the windfall from the increase in corporate misdeeds - forensic account-ants.
Employees embezzling funds? Missing inventory? Fraudulent financial reports?
Enter the accountants. Portrayed as accounting’s "sexy" side, forensic accounting is fast becoming a hot niche area for an increasing number of CPA firms.
In the 2002 Accounting Today Top 100 Firms survey, forensics/fraud ranked seventh among niche services by CPAs as growth areas for their firms, cited by 55 percent of respondents, compared to 37 percent (10th-ranked) in 2001.
And it looks as if business will be booming in 2002.
The latest report by the Association of Certified Fraud Examiners in Austin, Texas, forecasts that occupational fraud and abuse will cost U.S. businesses about $600 billion in revenue this year - an increase of roughly $200 billion over the losses estimated in 1996.
Research by the Financial Executives International Research Foundation showed that the number of restatements has risen dramatically since 1998. From 1990 to 1997, restatements averaged 49 per year, compared to 91 in 1998, 150 in 1999 and 156 in 2000.
Indeed, RGL Forensic Accountants & Consultants, an $18 million firm in Englewood, Colo., which focuses solely on forensic work, has been busier this year than it has in the past two years, according to chief executive Sherlyn Farrell. She noted that the firm’s 2002 revenue, through April, was tracking about 15 percent higher than last year’s actual annualized revenue.
RGL’s forensics services fall under four main areas: insurance support services; fidelity services - measuring the quantity or the value of stolen money or goods; litigation support; and business valuations.
At RGL, insur-ance work - includ-ing quantifying claims, fidelity work and health care audits - comp-romises the bulk of their forensics services. but litigation support is where the growth is, according to firm co-founder Steve Rosenthal.
"Insurance is really the backbone of what this firm does, but the litigation support area is really where the growth is," said Rosenthal, who serves as the firm’s director of insurance support. "We see (litigation support) as really taking off. This country is very litigious. There’s a need for forensic accountants who can quantify damages and get on the stand and present those damages articulately."
These days, insurance claims analysis stemming from the devastating Sept. 11 attack on New York’s World Trade Center are keeping the firm busy.
"We’ve been inundated with hundreds of claims as result of 9/11," said Rosenthal. "The insurance industry found itself in situation unlike anything it had ever seen. It’s unprecedented in the number of claims, in the amount of money involved, in the issues involved. It really put the insurance industry back on its heels."
"What we’re seeing is a lot of loss of business claims there. If that was a company’s only location, they may have lost every asset," Rosenthal continued. "Many businesses have been faced with finding a place to relocate. Depending on the coverage they have, it may be at a greatly increased cost."
Relocating after the attack was an issue that RGL had to deal with itself. The firm’s New York office, which was located on the 52nd floor of Tower One, has since relocated nearby.
As part of its insurance support practice area, RGL created a catastrophe response plan to respond quickly to events such as Sept. 11th, hurricanes and earthquakes, which result in widespread damage and thus, in a large numbers of insurance claims.
"That’s when [insurance companies] need the accounting help. They need to know we’re right there, ready to be of assistance," said Farrell. "We tell them what books and records they’ll need. We help the insurance companies establish reserves, based on the companies’ gross margins, annual sales and how long they’re likely to be out of business. We determine the value of assets destroyed."
On the litigation support side, two areas in particular are booming, noted Farrell. "Business valuations are becoming a bigger piece of the business. And health care audits are an emerging practice area for the firm," she noted.
Berdon, a $53.7-million firm based in New York, has more than doubled its forensics practice in the past five years, and the area is expanding rapidly, according to Sally Hoffman, co-director of the top-ranked firm’s forensic accounting and investigative services group.
Berdon currently has 22 employees dedicated to forensics, which is a subset of the firm’s Litigation Services practice. Litigation services account for about 10 percent of Berdon’s revenue, with forensics comprising half of that, and valuations comprising the remainder.
"There are two pieces: fraudulent financial reporting and fraudulent statements, and also employee embezzlements or stealing funds, which includes criminal behavior," said Hoffman. "Both are fast-growing areas, but fraudulent financial reporting is what we’re seeing a lot of in the papers right now - with Enron and Global Crossing."
Hoffman added, "The number of public companies who have restated financial statements is increasing rapidly. There’s a lot more of it happening, so there’s a growing need for that type of work."
Bankruptcy work led Bederson & Co., a $10 million firm in West Orange, N.J., into forensic accounting, according to chairman Edward Bond, head of the firm’s Insolvency and Litigation Services Division.
"We started out more than 40 years ago doing bankruptcy work - representing debtors, creditors, acting as examiners, or trustees. In essence, that led us into forensics," said Bond. The firm set up a dedicated forensics practice unit about four years ago as part of its 21-employee bankruptcy and litigation support group.
"Litigation support and bankruptcy makes up about 45 percent of the firm’s volume. Forensics is probably 10 percent or 12 percent of that. It’s becoming a significant area," added Bond. "We’re getting more requests than we’ve seen in the past."
A large portion of the firm’s forensics work, these days, is providing collateral audits and similar services for banks. In addition, Bond said that the firm is seeing a lot of insurance claim work.
And it isn’t just accounting firms getting in on the act. At the beginning of this year, attorney Jeffrey Grant merged his law firm, Jeffrey D. Grant & Associates, with Real Estate Evaluation Service Inc., a real estate forensics firm, to form what is now known as REES LLC, in Mamaroneck, N.Y. Six of the firm’s 12 employees are CPAs.
"Post-Enron, what was a quiet and relatively unappealing side of the business has become a very fashionable side of the business," said Grant. "We’re literally the accountants who hunt other accountants. Our job is to find the hidden value inside the deals and to create accurate records where, generally, there are inaccurate records presented to our clients."
The firm’s business focuses on three main areas: real estate, litigation and bankruptcy, said Grant. Of the three, bankruptcy is the fastest growing, while real estate constitutes the largest portion of the firm’s business - about 50 percent. The remainder is split evenly between litigation work and bankruptcy work.
Grant noted that document digitizing is a rapidly expanding area for REES. "Document scanning, digitizing and coding has become its own industry and it is so important now," said Grant. "It’s a skill set no one wanted to have because it didn’t have much glamour attached to it. Now, companies have become appropriately concerned about reviewing their records properly and having them in order."
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