Risk & Compliance

Forensic Detectives Back on the Case

Surprise ending: After years of neglect, forensic accounting stages a comeback.
Tim ReasonDecember 13, 2001

Fraud Detectives

The first known accountants were pairs of scribes who independently recorded daily transactions for the pharaohs of ancient Egypt. If their numbers didn’t match at the end of the day, explains Joseph T. Wells, chairman of the Association of Certified Fraud Examiners (ACFE), both were put to death. “One of the first internal controls, if you will,” he says.

Today, that historical emphasis on fraud detection is making a comeback (albeit with less dire consequences) after decades of neglect. Thanks to the globalization of business in the early 1900s, and especially after the stock market crash of 1929, explains Wells, auditors shifted their focus from fraud detection to public reporting. “That created an expectation gap between auditors and the reading public,” who still viewed auditors as the first line of defense against fraud, says Lawrence Redler, who runs the Forensics and Investigative practice for accounting firm Grant Thornton LLP.

Now that gap is being filled. The ranks of specialized forensic accountants and fraud examiners who sniff out financial shenanigans by practicing a mix of accounting, law, technology, ethics, and criminology are growing. Since its founding in 1988, the ACFE has swelled to 25,000 members in 105 countries. And all of the Big Five accounting firms have recently formed forensic- accounting and fraud-detection units.

Forensic accounting is “one of the busiest areas of our financial consulting practice,” says Harvey Kelly, a partner in PricewaterhouseCooper’s Corporate Investigation practice. That’s due in part, he says, to the SEC’s increased vigilance in recent years. That’s something PwC is painfully aware of–it’s audit division is under investigation for possible negligence in failing to detect fraud at MicroStrategy and Allegheny Health Education and Research Foundation.

In fact, despite their new antifraud speciality divisions, the Big Five are also making sure that regular auditors are more alert to fraud. For example, this year, all KPMG LLP auditors received training by forensic investigators, says Richard Girgenti, principal of the firm’s Forensice and Litigation Services practice. That’s in line with the Public Oversight Board’s O’Malley report, released in September 2000, which recommended that “auditors should perform some ‘forensic-type’ procedures on every audit to enhance the prospects of detecting material financial statement fraud.” Says Girgenti: “It’s a trend that goes back to the origins of the accounting profession.”

Except these days, auditors aren’t put to death for missing numbers– they just get sued. Jokes Wells, “Which is worse?”