by Melissa Klein
In the aftermath of Enron and the Sarbanes-Oxley Act, it may be the proverbial best and worst of times for accountants. While public company auditors have taken it on the chin, the public’s crisis of confidence and the flailing economy have been a boon to forensic accountants.
Forensic business is booming, thanks in part, many firms say, to an uptick in internal investigations brought about by Sarbanes-Oxley. In an effort to comply with new corporate governance rules, companies are relying on outside experts, including forensic accountants, sooner rather than later, according to partners at several firms.
Once thought of as the domain of only the largest firms, a number of firms beyond the Big Four are building lucrative practices in one of the profession’s hottest areas.
Among firms surveyed in Accounting Today’s 2003 Top 100 Firms report, fully 60 percent of respondents said that they are increasing their business in forensics/fraud, ranking it the fourth-most popular niche service. Over the past year, the scandals at Enron, WorldCom and HealthSouth - and the resulting backlash against corporate malfeasance - have bolstered business for forensic accountants around the country.
Investigations into alleged irregularities in financial statements have been the fastest growing area of forensic accounting services at Chicago-based Grant Thornton, according to Larry Redler, national director of forensic accounting and investigative services. “A big piece of what we do is still litigation support - the calculation of damages - but the real growth is in the investigative area right now,” Redler said. “We’re getting three to four times as many of these cases versus three years ago.”
Much of that growth is the result of business picked up from the Big Four, who are often conflicted out of engagements because of their public company audit work. “We’re getting a lot of calls from large companies that need investigative help, and all of the Big Four are conflicted off. Relationships that didn’t used to be considered conflicts are now considered conflicts, either by the company or by its counsel,” Redler noted.
Redler, an audit partner at the firm, started GT’s forensics practice in 1999. While others in the firm were doing forensics work part time, Redler was the only full-time partner at first. “In the first year, we probably had three or four engagements. Now, we have 30 people and we keep them all busy,” he said.
The forensics group’s revenue has increased fourfold, and today he estimates that forensics accounts for about 2 percent of the firm’s net revenue. Grant Thornton is ranked No. 7 among the Accounting Today Top 100 Firms, with $400.65 million in revenue in fiscal 2002.
Internal corporate investigations have also kept Eisner employees busy around the clock, said Larry Goldfein, partner-in-charge of the New York firm’s litigation support/forensic accounting practice.
“Our fastest growing area in the legal support service group has been in investigations,” said Goldfein. “We have been involved in a number of cases in which we’re giving guidance to attorneys in their representation of audit committees - or a company’s management with respect to internal investigations of a company’s officers actions, or the company’s records may be allegedly not in accord with appropriate ac-counting standards under generally accepted accounting principles.”
And the group’s work doesn’t always end with the investigation. If the matter goes to trial, the accountant is often called as an expert witness. New corporate governance requirements are also driving companies to seek compliance guidance from accounting firms, Goldfein added.
Goldfein’s group has seen revenue growth in excess of 33 percent, the vast majority of which is from corporate governance matters. Legal support services account for more than 10 percent of Eisner’s revenue. For fiscal 2002, Eisner reported $71 million in revenue, ranking it No. 23 on Accounting Today’s Top 100.
When Goldfein, an attorney, joined Eisner in 1990 and set up the legal services support department, he was the only partner, with a couple of staff members. Today, the group has seven partners and roughly 20 staff members, and partners from other areas of the firm are often called on to assist in investigations.
“We’re getting a lot of work in technical accounting issues relating to litigation,” said Kenneth Yormark, director of forensic and investigative services for New York-based Berdon. “There are a lot of cases relating to specific GAAP and [generally accepted auditing standards] issues, which can be gray issues when decisions are made at the audit level and sometimes come under attack.”
He added, “A lot of the things we’re doing are preventive in nature.” In the past, it was difficult to get companies to spend money for preventive services. With the regulations in place today, compliance is becoming a much stronger part of companies’ corporate attitude.”
When the forensics group at Berdon launched in 1997, it accounted for about $1 million of the firm’s revenue. Today, forensics, part of the firm’s litigation and business valuation practice, accounts for about 8 percent to 9 percent of the firm’s business. Berdon ranked 26th among the Top 100, with $60.3 million in revenue.
“The Sarbanes-Oxley Act is going to bring a lot more preventive measures. We envision being a source for corporate counsel, audit committees and boards of directors. We’ll be the eyes and ears of those groups,” said Yormark.
“With the new Sarbanes-Oxley requirements, in my experience, even non-SEC clients are now adhering to those standards,” said Pat Brady, national director of forensic services at Peoria, Ill.-based Clifton Gunderson, where internal corporate investigations into financial fraud have been the fastest growing forensic service. Those investigations have helped drive the growth in revenue and staff that the practice has seen over the last four years, according to Brady. The group has close to 90 employees today. Clifton Gunderson ranked 17th on the Top 100 Firms List, with $136.7 million in revenue.
In response to corporate fraud, Denver-based RGL Forensic Accountants & Consultants recently launched a professional liability practice devoted to accounting malpractice and fraud cases. It’s been the firm’s fastest growing area, according to chief executive Sherrie Farrell. “We hadn’t seen a lot of activity in that area previously, and now we’re seeing several cases,” said Farrell.
She attributes the increase to a backlash against the 1990s culture of aggressiveness within the accounting profession. “In the 1980s, there was a culture of conservatism, but in the 1990s, the pendulum took a big swing. There was a much more aggressive posture taken in accounting,” said Farrell. And consulting took center stage.
“The dynamic changed,” said Farrell. “What we’re seeing now is an awareness of the potential wrongdoings that occurred during that culture of aggressiveness. That’s where professional liability work is coming from.”
Those same factors are also driving an increase in corporate fraud cases at her firm, Farrell said.
While the firm’s core business, insurance support services, still accounts for 70 percent of revenues, Farrell said that the litigation support and business valuation services that account for the remaining 30 percent are increasing each year. In the three years since she joined the firm, Farrell estimates that RGL has grown by about 25 percent in terms of staff and revenue.
For fiscal 2002, RGL reported $18.87 million in revenue, 21 partners, and 112 total employees, ranking the firm 87th among the Accounting Today Top 100 Firms. This year, Farrell said that the firm has already increased its staff by 8 percent to 10 percent.
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