Don't Blame Madoff
February 5, 2009
by Sukanya Mitra
First it was Enron and WorldCom. Then it was the avalanche at Wall Street and falling or rather the failing of Bear Stearns and Merrill Lynch. Surely, Bernie Madoff was a catalyst somewhere in all this, right? Wrong!
There has been a sudden surge for forensic accountants. More than half (54%) of AICPA’s 5,400 Forensic Section members say business has grown over the past year, while 75 percent of top accounting 100 firms have reported that business in forensics and fraud has increased. And apparently Madoff is not to blame.
“The regulatory audits that Madoff went through were not full-scale audits; they weren’t complete audits,” said William Barrett, III, CPA, ABV, CFF, at a recent Webinar. Barrett, who was recently voted by his peers as one of Virginia’s “Best Valuation and Litigation Support Specialists,” has more than 20 years of public-accounting experience and provides accounting and economic damage assessment services to clients in financial institutions, professional-service firms, federal, state and local government as well as high-tech and not-for-profit industries among others.
He continued to say that since Madoff was a money manager, he — as do all money managers — went through broker-dealers and investors. In the financial industry, this is considered an “omnibus arrangement,” and so money managers, such as Madoff, fall through the cracks because regulators do not look at him, but at the investors, clearing houses and broker-dealers to make sure they are following regulations properly. Barrett went on to say that regulators have a lot of contact with the firms that they regulate, but none with the investors, money managers and consumers. “There’s a disconnect here, and that’s how it [will] continue to be,” Barrett added.
Still, thanks to Madoff, several firms such as Eisner LLP, J.H. Cohn and Habif, Arogeti & Wynne among others, have created economic crisis teams to handle such crises.
Basics of Forensic Accountants
So what do forensic accountants do? Barrett said to understand what they do, one must first understand what fraud is. He likened forensic accountants and fraud to locks, keys and locksmiths. “For every lock that is created, there’s infinity of keys” some of which the locksmith knows about and prevents locks from being opened, while there are locks that are allowed to be opened. Continuing his example, Barrett said that with time, an industrious individual may come up with a way to unlock a lock that was not supposed to be unlocked. In the same way, forensic accountants are expected to rummage through and find sense in the barrage of information that is out there, and define what can and cannot be considered in a court of law.
Barrett explained that forensic accounting “is not a destination or a designation, but is a continual path” and should be looked at as two different fields. “Forensic is defined as of or belonging to the courts of justice,” said Barrett, and as most already know, accounting can be defined as the “methodology for organizing, preserving and reporting of business transactions,” he added. He went on to define some terms that are closely-related to the industry:
Path to Designation
The Certified in Financial Forensic (CFF) designation is provided exclusively by the AICPA. To qualify for this designation, you need to:
What if you already have an existing accounting firm and want to add forensic accounting as a service? What are some of things you should consider?
While the above list is important, Barrett advises accounting firms that want to get into strategic areas, to form strategic alliances in which they can manage the process and have the authority in the eyes of the client.
If your firm wants to start a forensic accounting division, Barrett suggests bringing ex-regulators on board and even IRS agents, many of whom have spun off into different services.
Today, forensic accountants and CPA firms are charged with looking for fraud in day-to-day practices. As Barrett quips, to be a forensic accountant, you can’t take yes for an answer. “You should be able to go out there and take on all the Madoffs and hold their feet to the fire and tell them that ‘I want this and I want it now,’” says Barrett.
Intrigued? Want to learn more about the designation, its application process and how you can grow your business? Visit AICPA’s Web site on CFF.
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Sukanya Mitra is Managing Editor of the Insider™ e-newsletter group.