By Greg Harms
Professor of Accounting and Finance, American Public University
Accounting was once primarily focused on verifying the accuracy of company accounts and ensuring that the declaration of a firm’s financial positions was correct. Key events over the past 10 to 20 years have drastically challenged this assumption. The 2001 Enron scandal and the demise of its complicit accounting firm, Arthur Anderson, brought into the national consciousness the manipulation of accounting practices by some large firms. The fallout from the Enron scandal ushered in a new era of legislation and forensic accounting practices that were designed to prevent and hold accountable those who perpetrate corporate accounting fraud.
What is Forensic Accounting?
Forensic generally means—pertaining to a court of law. Forensic accounting is a specialization related to investigations of fraud, negligence, claims, and other cases. It builds on the verification basis of traditional auditing by applying legal precedents to an individual case to determine if criminal activity occurred. The field of accounting has always taken into account the likelihood that a company may be misrepresenting its financial position. However, prior to the early 2000s, most infractions were dealt with privately. Boards of directors would fire executives and managers who were found to have lied or committed fraud in the course of their duties, and the story would essentially end there. However, the Enron scandal resulted in such widespread damage to the U.S. economy that in-house sanctions were deemed to be insufficient. So many people were hurt financially and professionally, that it was decided that the directors of Enron and Arthur Anderson needed to be brought to account. The field of forensic accounting was thus born to ensure that directors who allowed fraud to occur on their watch were held responsible.
The Role of a Forensic Accountant
According to the Occupational Outlook Handbook, forensic accountants are CPAs specializing in the examination of financial records for evidence of wrongdoing. Their function is very different from most accountants and auditors in that they do not keep records for companies or clients, but review financial records and reports prepared by other accountants or financial professionals when wrongdoing is suspected. They are employed by law enforcement agencies (the FBI is increasingly utilizing them), law firms, or accounting firms. Their primary roles are investigators, consultants, or expert witnesses. Forensic accountants are not as likely to be focused in specific business industries as their primary employment is in the legal arena.
Implications and Changes to Accounting Standards
Today, there’s an increased awareness of generally accepted accounting principles (GAAP) among nonfinancial business executives and the criminalization of deviations from these standards. Accounting professionals who wished to pursue a career in forensic accounting pushed for federal regulations and the codification of accounting standards. The Sarbanes-Oxley Act of 2002 (a.k.a., SOX) is a direct result of this activism which established far-reaching federal accounting standards for U.S. firms. It is simply no longer enough for accountants to “keep the books.” There are now legal penalties for failing to do so, or even simply giving the appearance of failing to do so. Given the current political state of the country, forensic accounting will continue to play a prominent role in legal proceedings. Even accountants who do not intend to pursue forensic accounting are advised to stay abreast of legal developments in order to provide guidance to their employers on how to remain on the right side of the law.
Summing it All Up
Maintaining current knowledge of federal regulations and SOX standards is critical in many areas of the accounting discipline. Additionally, the growing specialty of forensic accounting as part of the overall accounting discipline is a key driver of new opportunities. Existing professionals in the industry and those considering starting a career in accounting, can explore education specific to forensics. Many universities, such as American Public University have developed specialized programs in this area of accounting, like the Bachelor of Science in Accounting which provides an overview of complex tax codes, finance law, and compliance requirements associated with federal SOX standards and SEC regulations.
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