Chapter 14 QUALIFICATIONS AND TRAITS OF A GOOD FORENSIC ACCOUNTANT

• Jurisdiction: United States

Chapter 14 QUALIFICATIONS AND TRAITS OF A GOOD FORENSIC ACCOUNTANT

Marion A. Hecht

The 21st century had barely begun when one of the worst financial crimes of the century began to unravel. Enron Corp., a high-flying energy company based in Houston, collapsed and entered bankruptcy, a consequence of a series of maneuvers aimed at hiding massive debt inside the company. Shareholders lost $60 billion; bondholders endured losses that, though less publicized, were of a similar magnitude. And before it was over, Arthur Andersen, the nation's largest accounting firm and one whose name had always had a sterling public reputation, was dissolved because of its role in helping Enron executives prop up the company's value by concealing its liabilities.⁵⁰¹

Federal prosecutors brought the full weight of law enforcement down on Enron. The Federal Bureau of Investigation (FBI) untangled the complex financial strategies that the company had used in furthering its schemes. But they could not have done so without the help of a distinctive breed of professional: the forensic accountant.

I. What Is a Forensic Accountant?

Forensic accountants employ their accounting and analytical skills in situations that are, or could become, the subject of litigation. The forensic accountant "follows the money," along with other assets. He or she examines complex, intertwined transactions, as well as whether to assist in civil litigation, criminal prosecution, bankruptcy cases or marital matters. Forensic accountants collect, analyze, investigate and interpret data that might document suspected fraud. They may work for private lawyers, for state or federal prosecutors, or inside individual corporations. They are to the world of analyzing numbers what canny lab workers depicted in the television show "C.S.I." are to the profession of chemistry. As the Forensic CPA Society points out, "'Forensic' means suitable for use in Court, and it is to that standard and potential outcome that forensic accountants generally have to work."⁵⁰²

A. Categories of Forensic Accounting

1. Litigation Support

Forensic accountants providing litigation support are usually retained by one of the parties in a lawsuit or other form of civil litigation to provide unbiased and independent analysis of financial questions that are germane to the dispute at hand. In particular, they may be asked to prepare an expert report to support a specific assessment of damages in the case of an alleged harm sustained by parties to the lawsuit. A well-researched and supported analysis may help persuade the disputing parties to settle a case before it even gets to court. And if a trial goes forward, the forensic accountant might be called to testify as an expert witness — a responsibility that requires a detailed understanding of court procedures.⁵⁰³

2. Investigation

We tend to think of "investigators" as professionals who concern themselves with crimes. While that is accurate, it is also incomplete. Forensic accountants who act as investigators do lend their skills to law enforcement and administrative agencies responsible for uncovering and prosecuting violations of the law. But they also may work directly for private parties, and they might be called upon to investigate non-criminal matters. Whether working for a government law enforcement agency or for a private company, a forensic accountant can help uncover and document evidence of employee theft, securities fraud and falsification of bank and financial statements, identity theft, or insurance fraud, among other misappropriation and unauthorized transfer schemes. On the civil side, a forensic accountant might be retained to investigate whether a party in a divorce or a party in a business dispute is hiding assets or manipulating financial statements in ways to secure an inappropriate advantage.⁵⁰⁴

D. Larry Crumbley, editor of the Journal of Forensic Accounting, once put it this way in an interview with a journalist: "You have an external auditor — that's like a guard dog, maybe a bulldog.... An internal auditor is a Seeing Eye dog. A forensic accountant is a bloodhound."⁵⁰⁵

B. Professional Skeptics

Forensic accountants require the skills of any other member of the accounting profession: a clear and deep understanding of financial transactions, principles of accounting and financial record-keeping. They must also have the ability to analyze the meaning and patterns behind financial reports and records and to determine "what is missing" from the picture. But forensic accountants require an additional skill as well: professional skepticism. In the course of reviewing particular records and documents, forensic accountants — in ways that are not so much a part of the traditional accountant's mindset — need to consistently look for patterns that may suggest whether someone else is trying to hide something from public view — and if so, what that something is.

Top-notch communication skills are also critical for successful forensic accountants. They will be called upon to write investigative reports explaining and summarizing the findings drawn from a review of financial and corporate documents. Forensic accountants may help attorneys develop subpoenas, including advising on their scope and rationale. They also may assist in formulating interrogatories for depositions or for court proceedings. And he or she may be called as an expert witness. That will require not only the professional technical knowledge essential to the field, but also the skill at relating to a judge, to juries, and even to the lawyers on both sides of the dispute, the findings uncovered through the forensic accounting investigation, and to relay them accurately, clearly, precisely and understandably.

C. Not Arbiters of Legal Issues

It is important to note, however, that there are very strict limits to the forensic accountant's role. Whether serving primarily as an investigator or in the role of litigation support, the forensic accountant is not the arbiter of whether a fraud has occurred or who is in the legal "right" in a dispute. Such decisions fall to the trier of fact. In court, that is a judge, or a jury under the instructions of a judge.

II. The History of Forensic Accounting

In the early 1900s, the U.S. Justice Department established a corps of investigators whose job it was to uncover tax evasion by combing through the records of businesses with multistate operations that were suspected of using their scattered holdings to conceal taxable profits. This investigative team evolved into the Federal Bureau of Investigation.⁵⁰⁶ When President Theodore Roosevelt officially founded the FBI in 1908, the first 34 agents included a dozen bank examiners. The FBI's mission now encompasses a wide range of interstate crimes, from drug trafficking to terrorism, but forensic accounting remains among the agency's most important tools.⁵⁰⁷

It was the 2001 Enron scandal that brought the forensic accounting profession into its own, raising the profile of its practitioners in the public eye. In a 2007 speech, Joseph L. Ford, an associate deputy director of the FBI who had served as inspector in charge of the FBI's Enron Task Force, credited forensic accountants from independent firms who worked with the agency and "helped to identify some of the improper transactions that formed the basis for criminal charges against several executives." With their skills, the accountants "gave us valuable insights and pointed us in the right directions, so that we could build a solid case to present in court."⁵⁰⁸ It was an irony, Ford noted, that Enron's accounting firm, Arthur Andersen, had forensic accountants on its very staff. If they had been called in earlier, he said, "they might well have been able to identify breakdowns in Enron and Andersen internal controls and see key risk areas of the audit. They might well have been able to raise the red flags in time to mitigate some of the damage to both Enron and Andersen."⁵⁰⁹ And even as the Enron scandal was resolved, still larger accounting scandals unfolded and were investigated with the assistance of forensic accountants.⁵¹⁰

III. Personality Traits of the Forensic Accountant

What sort of person makes a good forensic accountant? The job requires mastery of many technical skills, as well as a professional understanding that encompasses business, finance and law. But even before that, there are a number of personality traits or characteristics that mark someone as especially suited to the field. Whether you are born with them or manage to cultivate them through practice and experience, these traits will at the very least serve you well in pursuit of this profession. And some of them are more than that: They are truly mandatory if a forensic accountant is to do the job successfully.

A. Integrity and Ethics

Probably no single trait is more important for a forensic accountant than a strong ethical sensibility and fundamental personal integrity. In whatever capacity he or she is working, the forensic accountant is in essence a form of law enforcement professional. Just as we expect police, prosecutors, defense attorneys and judges to adhere to the highest ethical standards, forensic accountants must as well. Their expertise puts them in a position of working closely with legal counsel who employ subpoena authority and other remedies through the judicial system to obtain financial and other records. Because of their role in the legal arena, forensic accountants also carry enormous responsibility. The accuracy and objectivity of their work must be beyond question.

The Code of Professional Conduct of the American Institute of Certified Public Accountants (AICPA) calls on CPAs to act in ways that serve the public interest, honor the public trust, and demonstrate commitment to professionalism. They are expected to discharge their responsibilities with integrity, objectivity, due professional care and a genuine interest in serving the public.⁵¹¹ The...