The Changing Landscape and Evolution of the Forensic Accounting Profession: Introduction
The following excerpt is from an article that was published in the August/September 2020 issue of the Financial Valuation and Litigation Excerpt.
For many attorneys, retaining the services of a forensic accountant has become an integral part of resolving their clients’ legal battles, either before or during litigation. With the modern-day complexities of a perpetually changing environment, coupled with the growing demand for business-related investigations, forensic accounting professionals are increasingly asked to investigate and uncover deception in financial-related issues.
As a result of the expanded range of knowledge and skills needed to perform investigative services, forensic accountants—the past object of bean counter humor—are viewed much differently these days. This multi-faceted expertise requires the forensic accountant to reach beyond accounting and finances as they are tasked with analyzing complicated financial data and effectively communicating the conclusions with a high degree of credibility.
Thus, the forensic accounting profession—although dating back to the early 19th century—continues to evolve, being shaped by the many aspects of an ever-shifting world such as the economy, society, legislation, and the increasing complexity of financial transactions. More than a general accountant, a forensic accountant may function simultaneously as an investigator, auditor, and in some respects a quasi-attorney. This is in an effort to search for clues, contemplate an individual’s nefarious minded thought process, and analyze documents for irregularities, all while applying a sufficient understanding of the law to recognize which evidence is relevant to a case.
One of the first institutions to use forensic investigative techniques was the Bureau of Internal Revenue. 1 In 1931, Special Agent Frank Wilson was credited with playing a significant role in the conviction of the infamous gangster Al Capone—however, not as a result of the St. Valentine’s Day Massacre, bribery, prohibition infractions, or illegal gambling— but for income tax fraud.
The case against the then public enemy number one was bolstered as a result of a financial forensic technique known as the net worth method 2, an indirect method of presenting circumstantial evidence for proving hidden and unreported income. If investigating the difference between an individual’s net worth (total assets less total liabilities) on two given dates can establish that a person’s net worth increased more than the net receipts 3 recorded by that person, then this surplus would be considered additional taxable income for that person.
The first known person to pen the phrase “forensic accounting” was Maurice Peloubet in 1946, then a partner in a New York CPA firm, when he published an article entitled “Forensic Accounting: Its Place in Today’s Economy.” Although forensic accountants work every day to expose fraudulent activities, there have been some seminal moments since the term was first introduced as a self- contained profession.
As examples, in O.J. Simpson’s 1997 civil trial, although Simpson had claimed poverty, forensic accountants were able to establish that he understated his assets by millions. In the early 2000s, after the Enron and WorldCom scandals, among others, there was a public outcry for the need of forensic accountants when financial investigations were expanded as a result of new accounting rules, including SAS 99 and the Sarbanes-Oxley Act.
Additionally, after the terrorist attacks of September 11, 2001, the Federal Bureau of Investigation agents employed forensic-type tactics to shut down the cash flow of terrorists’ networks. At that time, the USA PATRIOT Act4 was signed into law, which created a demand for forensic accountants because of the excellent tracking abilities required to trace the trails of money in an effort to collect sufficient evidence for an arrest.
Then, in 2009, the forensic accounting professional took center stage again as a result of the Bernard Madoff Ponzi scheme, when investigators examined multiple sets of books to successfully uncover billions of dollars that disappeared. Bernard Madoff, a well-respected investment advisor and financier, pleaded guilty to eleven federal crimes for running this elaborate Ponzi scheme.
Therefore, as a result of these growing demands on their profession, forensic accountants have sought a broader range of capabilities needed to perform their services.
This series will discuss investigative techniques forensic accounts should master to look beyond the numbers in order to find the connections, or the actual intent of the transactions that are not apparent or expected. Three investigative topics discussed in this series are:
- Open-source intelligence
- Communication and interpersonal skills
- Digital analysis technology
Successful investigations require not only solid accounting proficiency, but also bloodhound- like tracking and meticulous analytical abilities. These three topics represent only a selection of the tools and techniques available to the forensic accountant.
- The Bureau of Internal Revenue was reorganized in 1952, and the agency officially became the Internal Revenue Service on July 9, 1953
- The net worth method has been endorsed by the U.S. Supreme Court and every circuit court. Its use is not limited to matters of income tax fraud.
- Refers to receipts reported in the form of money or property, less expenses.
- In 2001, President George W. Bush signed into law an anti-terrorist bill, known as the USA PATRIOT Act, containing major money laundering provisions. Among other items, the law requires financial institutions to screen accounts for any trace of terrorist assets.