Bruce Dubinsky, a partner and director of forensic accounting and dispute analysis at the Bethesda, Md., firm of Klausner Dubinsky + Associates, was brought in by the American Federation of Teachers a few years ago to look into the books and records of the Washington Teachers Union in the District of Columbia.Dubinsky subsequently discovered that as much as $5 million may have been lifted from the local coffers.
"There's some strange bookkeeping taking place," he said.
Dubinsky is one of a new breed of forensic accountants - he isn't interested in performing standard audits, but instead is out trying to find fraud.
"You could say that Klausner Dubinsky is the Sherlock Holmes of the accounting world, and we have been so for over 20 years now."
Deceitful behavior bubbling
The Federal Bureau of Investigation estimates that white collar crime costs the U.S. more than $300 billion annually.
Many of these crimes are difficult to identify, because the perpetrators have concealed their activities through a series of complex transactions. Usually, large volumes of financial information are involved, and the complexity of these investigations can be a strain on a company's resources.
Enter the forensic accountant.
Ruby Sharma, who handles fraud investigation and dispute services at Big Four firm Ernst & Young in New York, pointed out that the collapse of Enron began a chain of events that has led to regulatory authorities extensively tightening their policies, guidelines and regulations, as the need for stronger corporate governance, independence and risk assessment grows.
"This has prompted greater investigation and concern within many organizations' business activities and practices," Sharma said. "From the many findings of fraudulent behavior within these organizations, auditors and forensic accountants can no longer accept financial information at face value. From the bank teller to the CEO of a company, all levels have been guilty of misleading the business environment in which they work. As standards and procedures become more detailed, so too will the investigations, to ensure the correct establishment of these regulations. As long as human nature exists, fraudulent behavior will undoubtedly follow."
She added that, as a result of significant corporate collapses, a growing need has arisen for accountants in specialized investigative areas. She said that E&Y has a team of professionals who are trained as specialists. "They have significant experience in utilizing accounting, auditing and investigative skills to assist in legal matters dealing with fraud and other such financial business disputes," she explained.
In fact, E&Y's forensic accounting team is comprised of 350 practitioners in the U.S. alone, and focuses on strategies to mitigate and manage conflict in bankruptcy disputes, financial and economic damages, fraud and investigations, government contracts and grants, insurance claims, intellectual assets, and legal technology.
Adding to bottom line
Dubinsky noted that this niche accounts for more than two-thirds of his firm's revenue. "We're continuing to see strong demand for fraud investigations. Actually, we have had double-digit growth for the past six years."
Sharma said that her firm's computer forensics practice has also experienced substantial growth - in the neighborhood of 25 percent per year - over the past several years, as the use of electronic evidence in investigations and litigation has gained increasing prominence as a necessary component of discovery, and concurrently has received increased emphasis from the courts.
"We anticipate that the demand for computer forensic services will continue to grow at a similar pace for the next several years," she said, "as the market continues to expand and as computer forensics becomes a routine and recognized investigative necessity on par with the traditional techniques of interviews and review of paper documents."
R. James Alerding is managing partner of valuation and forensic services at Clifton Gunderson in Indianapolis, in which forensic accounting is a vital and growing part of the practice. "About two years ago, our firm's board of directors decided to set the Valuation and Forensic Services Group out into a separate client service center," he explained. "This meant that the partners and staff who were at that time spread over eight different geographic centers were all placed under one division for operating purposes, regardless of physical location."
The result, said Alerding, is a center with close to 45 people (including nine partners) in 10 different physical locations and eight states. The locations stretch from Phoenix in the west to Baltimore in the east, with spots in Wisconsin, Illinois, Indiana and Iowa, as well. "Uniting the operations of the VFS Group across geographic lines has been a boon to our marketing and our growth. We believe it gives us a leg up on our competition," he said.
Steven Bankler is a San Antonio CPA with wide-ranging forensic experience. In fact, he was the sole investigative tax accountant for the U. S. Senate in the Whitewater matter. He has also provided expertise to The Wall Street Journal, Time Magazine, NBC Nightly News, and the Washington Post. Moreover, he was the document reviewer on the audit of Swiss banks concerning Holocaust victims' assets.
"Forensic accounting ranges from 10 percent of my revenue to 35 percent of revenue, depending on the specific projects," Bankler said. "Over the last several years, it is usually around the 25 percent mark."
Laurie Holtz is the partner-in-charge of litigation support at the Miami firm of Rachlin Cohen & Holtz. A nationally recognized professional in forensic accounting, he has dedicated most of his career to helping clients and attorneys trace and recover funds in fraud cases. He also provides management consulting services to a wide range of corporate clients. "To say that forensic accounting is an integral part of the firm with an enormous growth area is an understatement."
Moshe Levitin is a partner with New York/New Jersey-based Lazar Levine & Felix, and a recognized expert in forensic accounting, as well as in litigation support, traditional accounting and auditing.
"At Lazar Levine & Felix LLP, we continue to invest heavily in this practice to attract top talent ... . Our practice CPAs are also Certified Fraud Examiners and have accreditation as a Diplomat of the American Board of Forensic Accounting and are accredited at business valuations. In our practice, our forensic professionals are solely dedicated to the areas of forensic services. It's a full-time job and they are never transferred to staff standard audits."
According to Levitin, corporate fraud cases and the impact of Sarbanes-Oxley regulations have increased scrutiny of a company's financial statements, and as a result, forensic accounting has become a growing niche practice, to the point where it generates almost half of the firm's revenues.
Chris Frederick is a manager at Matson, Driscoll & Damico in its Seattle and Portland, Ore., offices. "For more than 70 years, we have focused our practice in forensic and investigative accounting with major practice areas in property insurance, casualty and general liability, specialty insurance risks, and litigation services. In fact, we were one of the first firms in the industry with this special niche, and have seen it grow and change since the 1930s."
Frank Piantidosi is the chairman and chief executive of Deloitte Financial Advisory Services LLP and the global managing partner for forensic and dispute services at Deloitte Touche Tohmatsu. He has led the financial advisory services practice since September 2003.
According to Piantidosi, Deloitte's forensic accounting expertise includes anti-money laundering, the Foreign Corrupt Practices Act, purchase price disputes, arbitrations, construction fraud, health care fraud, construction oversight, intellectual property theft, and misdirected royalty revenues, to name just a few.
"We have forensic labs in nine major cities across the U.S. and an additional 18 cities around the world, including Hong Kong, London, Amsterdam, Frankfurt, Cape Town and Melbourne," he said, adding that all FAS labs meet the FBI's chain of custody requirements. "They are secure, state-of-the-art, and house advanced systems for storing and accessing data, including dedicated servers and fire-resistant safes."
Quality staff an issue
Dubinsky emphasized that although forensic accounting is currently on the "hot" list of client services, there are plenty of accountants getting involved who shouldn't be, because they don't understand the ins and outs of the niche.
"The only limit to our size is finding competent professionals." He explains that just being an accountant is no longer enough to do this work - the person has to understand the legal system, and what the law says. How to interrogate and interview people are musts. Tracking leads and obtaining legally usable intelligence is also crucial. "Many accountants think it is simply fraud investigation and it's not. It really is much more than dealing with the numbers. It's no longer just basic fraud work."
Rachlin Cohen's Holtz admitted that there are fewer and fewer people to do it: "It's simply very hard to find qualified people." He looks for a good auditor who has a solid background for forensic accounting. He says there must be an awareness of public fraud, and notwithstanding some teeth being put into new regulations, there is still plenty of fraud going on.
Demand for varied services
Dubinsky maintained that the area shows continued growth and an extraordinary high demand for his services. He lectures at the University of Maryland's Smith School of Business on topics including forensic accounting and business ethics, and to prepare for such lectures, he said that he simply picks up the business section of the Washington Post and has the day's lecture.
"The news about fraud hasn't stopped," he said. "It's a constant. The demand for services and the demand for professionals is running very high, but clearly it will require accounting programs at universities to integrate more criminal justice courses in the accounting courses."
Also, Dubinsky pointed out that the need for computer forensics has dramatically increased. This represents the use of computer science principles and investigative techniques to obtain digital evidence from computer systems that is admissible in a court of law.
"Statistics indicate that 92 percent of new data is created electronically and that 70 percent of this data never migrates to paper," he said. "When investigators ignore electronic evidence, it's analogous to only reviewing three out of 10 boxes containing potentially relevant and discoverable information."
Cal Klausner, founder and managing partner of the firm, said that Klausner Dubinsky now has an affiliated company, U.S. Data Forensics LLC, that examines data to determine whether any crucial evidence exists that can be used to prove a case in litigation or to identify vulnerability areas of possible concern to management.
"Computer forensic examinations are often invaluable in cases involving employment law, family law, white-collar crime and litigation practices," Klausner notes.
The firm's computer lab is ensconced in the office. "If I need to verify something," said Dubinsky, "I walk right down the hall, open the door and get my answers there and then."
Holtz said that at Rachlin Cohen & Holtz, there is also a great emphasis on computer forensics. "Our specialists here focus on providing sophisticated technical analysis and support in three primary areas: electronic discovery, computer investigation and incident response," he explained.
Sharma pointed out that at E&Y, computer forensic services, as well as electronic discovery and forensic data analysis, are provided by its legal technology services practice, which currently consists of 52 professionals, around one-fourth of whom are primarily devoted to computer forensics and closely related disciplines.
"These computer forensics professionals provide a range of services to clients beyond the traditional identification, preservation and extraction of electronic evidence from digital media," she said. "They also provide forensic investigations and analysis of digital media to determine the circumstances surrounding the creation, deletion or modification of specific documents; determine the provenance of documents; locate and recover evidence that has been either intentionally or unintentionally deleted; and determine timelines and event sequences of computer activity that may be of value to the investigation."
Running the gamut
Alerding said that Clifton Gunderson provides a number of specific services, such as expert witnesses in antitrust, fraud and Securities and Exchange Commission investigations, Medicare fraud and abuse, intellectual property, breach of contract, bankruptcy, economic damages including lost profits and valuations of business interests, and family law and marital dissolution.
"We provide computer forensics and e-discovery, fraud and forensic investigations, a full range of valuation services for all purposes, and intellectual asset management services," he said. "In addition, the firm provides fair value valuations, including those required for SFAS 141, 142, 144 and for 123R, and merger and acquisition consulting."
Glenn Newman is the principal-in-charge of forensic and litigation services at Parente Randolph LLC, a large regional accounting and consulting firm based in Philadelphia. In addition to traditional assurance and tax services, the firm has a distinct group that offers forensic accounting and litigation services. This group, comprised of six partners and 30 staff, provides a wide array of services, from financial investigations to assistance with complex commercial litigation disputes.
"A multitude of investigative work revolves around fraud documentation, fraud prevention and analyses of internal controls," Newman said. "This aspect of our practice has grown tremendously since Sarbanes-Oxley. The nature of the commercial dispute projects center around the determination of economic damages associated with intellectual property infringements, breaches of contract, construction problems and shareholder disputes, among other causes of action."
Frederick of Matson Driscoll said that his firm provides services in a variety of forensic and investigative areas, including business interruption, extra expenses, catastrophe recovery, workers compensation, subrogation and fraud. "We have more than 250 professionals in 30 offices around the world, so we offer our clients a large footprint to access our services, which has helped us gain experience in a number of industries."
Deloitte's Piantidosi said that his forensic accounting team has diverse experience and includes former FBI agents, Royal Canadian Mounted Police, SEC lawyers, Department of Justice lawyers and agents, Ph.D economists, statisticians, computer forensic specialists and private investigators.
"Technology is the heart of most financial investigations, and electronic data drives the investigation," said Piantidosi.
He says that his group provides repositories of all the data to the legal teams electronically, rather than through the antiquated system of boxes and boxes of hard copy files.
"We have developed a technology solution that can quickly find and accumulate data from various sources anywhere in the world," he explained, "then read the data files using software from India, then store the data using Australian technology for five to 10 years."
Focus on protection
Newman of Parente Randolph said that he has seen an increase in the level of fraud prevention work. "With the fallout from SOX, many companies have focused on compliance by spending significant efforts with the assessment of the internal controls. In most cases, we've noted that the strengthening of internal controls has increased the ability for fraud deterrence and detection to occur within an organization."
He pointed to the fact that since the days of Luca Pacioli, a company's susceptibility to fraud is directly impacted by its implementation of strong internal controls.
"The stronger the control environment, the easier it is to detect and deter fraudulent activity," he said. "Having said that, clearly there is no way to guarantee that a fraud will be prevented. Overall, I believe companies are more focused on fraud prevention; however, the implementation of strong internal controls and close oversight of the control environment is what will reduce the chances that a fraud will occur."
Still, a recent study from PricewaterhouseCoopers' third biennial "Global Economic Crime Survey 2005" indicated that, while the number of companies reporting fraud increased 22 percent during 2003 to 2005, nearly 80 percent of the survey respondents felt it unlikely that their company would suffer fraud over the next five years. It noted that only aggressive, pro-active fraud prevention programs would achieve such a result. "While it is nearly impossible for a CPA to uncover fraud due to management collusion unless it is reported or detected by accident, most of the public, business and legal communities feel that CPAs should be held responsible for detecting fraud," it said.
Ted Felix said that given this set of contradictions, accounting practitioners, as part of their role as business advisors, should be more proactive in educating clients to implement a fraud prevention approach, even if it just means pointing out poor internal controls.
"Similar to programs associated with SOX compliance," he said, "CPAs should be expected to help small and midsized private client companies create a solid fraud policy that includes a strict code of conduct; set up a whistleblower's hotline reporting system via a third party to assure anonymity; advise employees that the company will routinely conduct fraud audits; and screen employees."
In fact, he added that more progressive companies are actually increasing their staff levels in internal control and investigative units, and other companies want more outside experts to conduct independent investigations.
Matson Driscoll's Frederick thinks there is a definite increase in the need and potential for more fraud prevention work to help restore consumer confidence. "However, as forensic accountants, we are oftentimes called upon when a fraudulent activity is suspected; therefore, our engagement is generally after the fact. Once we're retained, we work to determine how the fraud occurred and what actions should be taken to determine the amount of damage. After the problem has been identified, there is an opportunity to counsel the client and provide feedback on fraud prevention in the future."
Looking ahead, Dubinsky sees shakeouts in the industry, because when many CPA firms get involved in an investigation that's over their heads, it'll wind up being the last one they do.
"Keep in mind that this area is chock full of landmines," he said. "Firms have to be fully committed. You have to make a commitment, and you have to train your staff properly."
Newman projected that over the next five years, he expects that companies will continue to strengthen the control environment and the internal controls that will act to discourage, deter and detect fraudulent activity. "I think the massive corporate scandals that occurred over the last five years will diminish somewhat; however, I do not believe that SOX and an increased focus on internal controls will eliminate all fraudulent activity. We see this area continuing to grow, particularly for firms of our size."
He feels that is based upon the following:
* The independence provisions of the Sarbanes-Oxley Act, which have forced many company's to look beyond their outside auditors for resources to conduct a forensic investigation when a fraud is suspected or discovered.
* The growing realization within many organizations that they must proactively and aggressively address situations where fraud is suspected or detected, or risk losing the confidence of the markets. In many cases, this means bringing in an outside, independent resource to conduct the investigation.
* The belief that many companies tend to be leanly staffed in the internal audit area, which is the internal function area that would most naturally be utilized to conduct a fraud investigation. Therefore, many companies turn to outside resources to perform the work.
The Association of Fraud Examiners has grown from 5,500 members in 1992 to 25,000 in 2002, illustrating the rising need for investigative accountants. And it is predicted that there will be a sustained increase in these numbers, at least for the next five to 10 years, as regulations get more stringent.
Frederick said that all areas of forensic accounting services, including fraud, have experienced large growth and will continue to grow in future years. "As more and more accountants enter the sector, we continue to see more Certified Fraud Examiners and other professional designations and credentials. We are continually adding the CFE designation to our professional staff. This raises the bar on our proven experience in fraud matters, and has opened doors to new lines of related business opportunities. Much like an iceberg, we know that the main danger in a fraud case is below the surface, so we drill down until we get to the bottom of each assignment."
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