Forensics and fraud move to the top of specialty chart

by Stuart Kahan

Nearly two years after President George W. Bush signed Sarbanes-Oxley into law, there has been an enormous upheaval in the world of forensic accounting.

As an example of that surge in investigative auditing, Accounting Today’s 2004 Top 100 Firms Survey reported that 60 percent of the firms on that elite roster indicated an increase in their forensics/fraud business — just a notch below SOX compliance services, which came in at 63 percent.

So, from what area are accountants seeing all this activity coming? What are the major problems involved, and will the profession be able to sustain this growth in forensics?

Stephen Ferraro, founder and managing partner of Ferraro Andrie CPAs, in Saratoga Springs, N.Y., said that there has been a considerable increase in his work, especially in insurance loss accounting.

Ferraro Andrie is a nationally recognized forensic accounting and consulting firm specializing in insurance loss accounting and litigation support services. They quantify insurance claims and other economic losses and advise on related issues for insurance companies, independent claims adjusters, lawyers, and individuals or businesses in dispute.

“We are hired by insurance companies to assist in the calculation of insured losses in the areas of business interruption, lost wages, stock/inventory losses, employee theft and dishonesty,” said Ferraro. “We also help evaluate financial motives in arson cases.” In that last one, he pointed out that there has been a steady upturn in this end of the business over the last four-plus years. “In 2000, we grossed $200K in this area, and in 2004 we should gross close to three times that amount. The unfortunate events of 9/11 and the World Trade Center disaster has fueled our growth to some degree.”

He specifically noted that, from a white-collar standpoint, forensic accounting has also been growing very nicely for them. “The accounting scandals have provided an awareness of the profession that wasn’t there before. We are now getting cases involving disgruntled shareholders and related disputes, including business and license valuation, damages from construction delays, employee theft and the like.”

Ernest Patrick Smith is the partner-in-charge of forensic accounting at Melville N.Y.-based Callaghan Nawrocki, a regional public accounting firm founded in 1986. It has four partners, and 24 associates and support staff. Smith, who is vice chairman of the Association of Certified Fraud Examiners’ Insurance Fraud Committee, agreed that there has been a remarkable increase in forensic accounting work, which, he explained, covers litigation support and fraud investigation. “In fact, there is more of a focus for people today in trying to head off costly problem areas.”

Callaghan Nawrocki started in this niche in 1987, a time, Smith noted, before most people even knew what forensic accounting was all about. “It’s grown dramatically from then, with clients primarily from insurance companies and the law field. Most of the area is related to employment investigative work and internal controls. In other words, what are the appropriate controls? This is precisely what SOX is all about. The bar here has been raised.”

Bruce Dubinsky, senior partner and director of forensic accounting and dispute analysis at Klausner Dubinsky + Associates, based in Bethesda, Md., said that there certainly has been an upward movement in the extent of his work. However, he is a forensic accountant who explained, quite frankly, that he isn’t interested in performing standard audits. “We’re looking to find fraud. You could say we are the Sherlock Holmes of the accounting world. Our public accounting practice is over 25 years old and we have always been actively vigilant toward detecting fraud and working on cases involving fraud.”

To Dubinsky, fraud is only one component of forensic accounting. “I have shed my accounting and tax practice and have staffed that area with other people. My group, known as U.S. Data Forensics, primarily handles dispute analysis. We are 100 percent zeroed in on that. I get lots of resumes from people who want to get into this area, but keep in mind that some forensic accounting, of course, is not necessarily fraud-related. For protection, you want outside help. That’s what businesses should be thinking.”

At large regional firm Parente Randolph, in Philadelphia, Glenn Newman heads forensic and litigation services for the firm. Business for them, too, has grown rapidly. “There is lots of fraud in the insurance industry and this has accounted for a 40 percent annual growth. We now have four partners in our group, when only a few years ago there was just one.” Newman specifically pointed out that, with the microscope well out there, “We are also looking at prevention and controls.”

Services provided
Callaghan Nawrocki’s litigation services practice provides services to counsel for plaintiffs and defendants in a variety of areas, including identifying the financial aspects of a case, identifying relevant documents in discovery, evaluating the strengths and weaknesses of the financial evidence, preparing and analyzing damage claims, preparing counsel for depositions of opposing experts, preparing settlement analyses, participating in settlement negotiations, preparing demonstrative evidence, and providing oral and written expert testimony.

“Our litigation services professionals have experience providing valuable insights and credible testimony in litigation, alternative dispute resolution, and bankruptcy-related matters,” said Smith. “Our partners have provided testimony on damage claims, accounting practices, industry issues, bankruptcy-related matters, valuations, tax and other litigation.”

In fact, the extent of what the firm can provide covers a multitude of areas, such as tax controversies; general contract disputes, including lost profits and diminution in value analysis; post-transaction disputes; business ownership disputes; intellectual property and patent infringement claims; professional liability claims; forensic and investigative services; distributor and franchise disputes; business interruption claims; life, health and disability claims; bankruptcy-related litigation; construction and real estate-related claims; complex lost earnings analysis; royalty/licensing audits; and marital dissolutions.

Ferraro’s firm specializes in the calculation of self-employed losses in, for example, an auto accident setting. “We assist several insurance companies in this regard. The claims reps have no problem calculating lost wages for employees who receive a W-2. However, they usually require assistance for the self-employed due to the income and expense structures of the business, the entity type, seasonality issues and the like.”

Forensic accounting, for Dubinsky, means providing an accounting analysis that is suitable to the legal community and the courts, which then forms the basis for discussion, debate and, ultimately, resolution of the dispute at hand. “It is often referred to as ‘investigative accounting,’ and is often associated with investigations of criminal matters. A typical forensic accounting assignment would be an investigation of employee theft or a deliberate misstatement of the financial statements by management.”

As forensic accountants, Klausner Dubinsky + Associates utilize accounting, auditing and investigative skills when conducting an investigation. “Equally critical is our ability to respond immediately and to communicate financial information clearly and concisely in a courtroom setting,” noted Dubinsky. “We are trained to look beyond the numbers and deal with the business reality of the situation. Our representation is confidential and the client is kept informed at all stages of the assignment. At all times, we maintain a high level of personal involvement by our partners in every engagement.”

Forensic accountants are often retained to analyze, interpret, summarize and present complex financial and business-related issues in a manner that is both understandable and properly supported. They provide expertise in the investigation and analysis of financial evidence; the development of computerized applications to assist in the analysis and presentation of financial evidence; the communication of their findings in the form of reports, exhibits and collections of documents; and assistance in legal proceedings, including testifying in court as expert witnesses and preparing visual aids to support trial evidence.

Dubinsky pointed out that, as a forensic accountant, he is familiar with legal concepts and procedures. “In addition, the forensic accountant must be able to identify substance over form when dealing with an issue. In other words, we come in from a multi-disciplinary background. It’s gone beyond simple debits and credits, and financial is just one piece.”

Shades of gray
Ferraro said that the major problem he encounters is the fact that, many times, the situations are not black and white, but in fact very subjective. “We accountants are used to things fitting very nicely and neatly in their respective boxes. This work requires one to think outside that box and employ good negotiating and writing skills. We are not always trained that way and the transition from a traditional number cruncher to a forensic accountant is not always easy or even possible.”

Smith didn’t see many problems. “There is little resistance today as to what I am trying to do from the client’s perspective, although all businesses are worried about costs. I say we add value, that we work with a company rather than reinvent the wheel.”

Dubinsky maintained that a big problem today is that the public simply doesn’t understand what it takes to do this kind of work. “There are lots of legal issues involved and many accountants jump in without fully understanding what it will take to succeed. For example, we found one employee who was working at a competitor at off times and feeding information in that direction. We formed a rapid response team that could zero in on this and arrest the situation — and the person.”

Newman pointed out that a company doesn’t really need his firm to add a column of numbers, but it certainly does need the firm to analyze supporting documentation for amounts claimed and to objectively evaluate and present complex financial issues to the trier of fact. “The firm handles a wide range, including acquisition dispute, antitrust dispute, breach of contract, class action, construction cost certification, fire loss, fraud investigation, patent infringement professional liability, and surety claim analysis.”

He added that, clearly, the forensic accountant’s world consists of assisting attorneys and their clients in the financial aspects of a dispute involving commercial litigation, an insurance claim or a fraud investigation. “Typically, forensic accountants research, quantify and present the financial impact of a dispute as it relates to a legal action.”

Ferraro believes that the forensic accounting area will continue to expand.

“It covers a very wide range of service offerings, and as long as we have business involved in natural disasters, such as fire, floods and tornados, then litigation, support from financial experts will be required to evaluate the economic damages.”

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