LONG ISLAND, NY — For accounting firms looking to expand their services, the areas of forensic accounting, business valuation and litigation support are a fairly safe bet.
These practice areas – which Accounting Today reported were among the fastest growing niche service areas in its 2013 Top 100 Firms survey – are expected to see increased demand in the next several years, as the way businesses are operated and services are financed drastically evolves.
Forensic accounting
Forensic accounting requires accountants to use their expertise to collect, analyze and evaluate data, interpret the findings and present the results in a way that is easy for various audiences to understand.
The core principles of forensic services began with accountants.
“In the early days, CPAs worked with lawyers to help clients with litigation and investigation matters,” said Matt Shelhorse, a partner in the forensic services practice at PricewaterhouseCoopers. “We had a forensic mindset. We were skeptical, curious and objective.”
In the past, however, forensic matters were often reactive in nature – for example, an investigation into missing cash or inventory, he said. Today, due to increased regulatory scrutiny, a struggling economy and more complex business relationships, forensic accountants are providing services more proactively to help their clients identify potential areas of exposure and develop processes to better manage related risk.
As the Dodd-Frank Wall Street Reform Act has made it easier for whistle-blowers to come forward and potentially be compensated, and other regulations, including the Foreign Corrupt Practices Act, have received recent media attention, companies have dedicated more time and resources to their compliance programs, Shelhorse said.
“CFOs and CEOs recognize they have a responsibility for setting the right tone for the organization,” he said. “If they don’t do things the right way, there could be ramifications, for the company and for them as individuals.”
Additionally, in a down economy, partners and shareholders tend to scrutinize their financial records, agreed Mark S. Warshavsky, partner-in-charge of the business valuation and litigation services group at Gettry Marcus in Woodbury.
“Our definition of forensic accounting is an investigation of the money and the people,” he said, noting it’s often not enough to simply trace checks. Investigating the target individual’s other companies, as well as brothers, sisters and other relationships, could lead to the trail to follow.
Another factor upping demand for forensic services is the trend toward companies expanding their global presence. Oftentimes if business owners or senior management are not familiar with the culture or regulations in another country, they are not in a position to identify and effectively manage the local risks, including bribery and corruption in emerging markets, Shelhorse said.
Because of global expansion and acquisitions, many companies end up with disparate computer operating systems and email servers, requiring a need for information risk management. Forensic accountants and their technology counterparts may be called in to help a company determine which types of information exist and develop a plan for the effective management and retention of the information, Shelhorse said. They may also get involved in cybersecurity measures, ensuring a company’s sensitive information is well-protected.
“One of the ways that we’ve grown over the years is by adding people with different backgrounds and skill sets to our team,” such as former members of law enforcement, lawyers, technology experts and professionals who worked in government, Shelhorse said.
“When you get a team of people like this together, with all of those different perspectives, we can really enhance the value that we bring to our clients,” he said. “We follow the market to determine where our clients may face challenges and then use that forensic mindset to see how we may help them address these new challenges. It’s a field that’s constantly evolving.”
Business Valuation and Litigation Support
According to the American Institute of Certified Public Accountants’ 2011 Forensic and Valuation Services Trend Survey, valuation professionals expect to see increased demand for shareholder and partner disputes, contractual disputes and family law, as well as bankruptcy, insolvency and reorganization over the next two to five years.
With nine full-time, certified valuation professionals and a team of forensic accountants, Gettry Marcus has completed hundreds of company valuations. As an example, a valuation case may involve a shareholder dispute in which one shareholder who owns one-third of the company may want his interest to be purchased by the others, Warshavsky said. Before a valuation is completed, Gettry Marcus would step in to determine the real cash flow of the company.
The firm also handles the business valuation and forensic accounting aspects of litigation in contract disputes as well as matrimonial and bankruptcy cases. A common contract dispute might involve a business owner looking to expand his product line by purchasing new machinery. The buyer may claim the product did not perform as the seller indicated and his company lost business because the machinery was faulty. In this situation, a forensic accountant or business valuation professional would be retained to calculate damages related to the dispute, Warshavsky said.
Accounting firms expanding into valuation services should have a structure in place to handle the unpredictable work flow and potentially hundreds of thousands of documents that could be involved with large cases, Warshavsky said.
Don May, principal-in-charge of the forensic, litigation support and valuation services practice area at Grassi & Co. in Jericho, said there has been a lot of movement and growth in the industry as more firms have chosen to bring these support areas in-house.
In addition to meeting a demand, “I think a lot of accounting firms are looking for ways to expand their revenues and generate more business,” he said. While many firms may see these areas as complimentary to their current offerings – for instance, valuation uses accounting data as raw input for forecasting – May cautions it requires the skills of a financial economist.
Warshavsky agreed, noting, “It’s important to have the right experience and training,” such as certification in financial forensics and accreditation in business valuation.
“If a case goes to trial and you are called as an expert witness to testify, you will be challenged on your knowledge, training and experience,” he said.