Scandals shine light on forensic accounting

Sunday, July 7, 2002

BOSTON -- They don't wear cowboy hats or boots, but they certainly have a little more swagger than your typical bean counters.

Forensic accountants inhabit a cloak-and-dagger corner of the accounting world. Their job: respond at a moment's notice when a client spots trouble -- anything from procurement fraud to a top executive cooking the books to industrial espionage.

Its practitioners -- you're as likely to see FBI as much as CPA or MBA on their resumes -- scour hard drives, retrieve long-lost e-mails and confront suspected wrongdoers.

It's usually a quiet field. Part of the mission often is to keep things under wraps.

"The charter in virtually any issue is, 'Tell me how big my problem is, how I got there, who's involved, and how to fix it,'" said John O'Connor, a former Justice Department investigator who heads the New England forensic accounting practice at Deloitte & Touche. "'And fix it so we don't have to go through this a second time. And ... I don't want to read about this in the newspaper.'"

Lately, though, forensic accounting has gotten more of the limelight, and its practitioners say business is good. Accounting scandals at Enron Corp., Sunbeam Corp. and others have increased companies' sensitivity to the slightest whiff of trouble.

D. Larry Crumbley, editor of the Journal of Forensic Accounting and an unofficial historian of the profession, offered a canine metaphor to describe the field.

"You have an external auditor -- that's like a guard dog. Maybe a bulldog," he said. "An internal auditor is a seeing eye dog. And a forensic accountant is a bloodhound."

Growing practices

The major accounting firms all have forensic practices, which are generally separate divisions to maintain independence from traditional auditors. Deloitte's practice has grown from 150 to 250 in the last three years (it recently added several people from disintegrating rival Arthur Andersen). Ernst & Young declined to say how large its practice is but claims it has expanded by 30 percent in the last year.

Both companies expect continued growth. In February, U.S. News and World Report named the field one of eight "careers to count on." The American College of Forensic Examiners has begun offering a certification in the field.

For Deloitte, a typical case came last fall with a desperate call from a computer company. An entire research unit had left suddenly for a competitor. With air travel halted after Sept. 11, the Deloitte team drove 13 hours to the site, "imaged" hard drives and brought the data back to be examined at a super-secure "clean room" at Deloitte's Boston office.

Technicians pinpointed 50 documents printed by an engineer the night before the departure. The final document was his resignation letter. The others were company secrets, evidence the client used to get an injunction that kept the rival from using the information. The investigation took three weeks, start to finish.

Forensic accounting is at least two centuries old, said Crumbley, a professor at Louisiana State University. He's found records of a Scottish accountant advertising such services in 1824 and court records from before that. The term itself appears to have been coined by a New York accountant, Maurice E. Peloubet, in 1946.

New field

But this kind of work wasn't really part of private accounting world for most of the 20th century. Most firms were not eager to take on difficult tasks. The techniques were developed largely by the Internal Revenue Service.

"Over the years we've said 'That's not our job,' so we don't get sued," Crumbley said. "But the public, the SEC and everybody else thinks that's our job."

It's become so again, with the increased demand for sophisticated services blending expertise in computers, interviewing and finance.

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