By Christine Graf
Of the approximately 675,000 CPA’s in the United States, less than one percent are certified to practice as forensic accountants. In addition to investigating financial crimes, forensic accountants work with companies to develop internal controls intended to prevent and detect these types of crimes.
While many business owners believe that it is the job of internal or external auditors to detect financial crimes, that is not the case. The job of an auditor is to ensure that a company is adhering to generally accepted accounting principles (GAAP), the default accounting standard used by companies based in the United States.
The savings and loan scandal of the 1980s and 1990s was a driving force behind the creation of the field of forensic accounting, but it was Internal Revenue Service CPA Frank Wilson who is considered the father of forensic accounting. In 1930, after reviewing more than two million documents, Wilson found evidence that notorious mobster Al Capone has committed tax fraud. The following year, after being found guilty, Capone was sentenced to 11 years in prison.
During the past decade, the field has evolved, with firms specializing in forensic accounting opening their doors throughout the country. One of these firms, FAZ Forensics, is located at 268 Broadway in Saratoga Springs.
“We specialize in forensic accounting and valuation work mostly in a litigation environment,” said partner Stephen Ferraro. “We’ve all done traditional accounting and tax work, but now we focus 100 percent in this area.”
FAZ Forensics was founded seven years ago after two CPA firms that had merged decided to split.
“When that happened, our forensic group went independent,” he said. “At the time, there were six of us who spun off and started FAZ, and we currently have 16 people.”
According to Ferraro, he and some of his colleagues have been practicing forensic accounting for decades, long before the field even had a name.
“We kind of fell into it about 30 years ago. We were doing mostly traditional CPA work, and we got a call from a claims adjustor who was working with a local automobile dealership that had had a fire. He had to help the owners of the company determine what their lost profits might be.”
By reviewing the dealership’s financial statements, they were able to come up with an estimated value of what the company’s profits would have been had it not been for the fire.
“After that, we started doing insurance loss accounting, which is a piece of forensic accounting,” said Ferraro. “So, we were doing forensic accounting before we even knew what forensic accounting was.”
Although most people think of forensic accounting in terms of fraud detection, Ferraro said the field itself is much broader.
“There are several specialties within forensic accounting that we work on. Investigating fraud and embezzlement is one piece of that. A lot of the work that we do is in litigation.”
FAZ Forensics works with attorneys on a wide variety of cases involving financial disputes. For example, in cases related to matrimonial disputes, they may be asked to look for hidden assets or to value businesses that need to be divided.
“We work on any cases where there is any kind of financial dispute at all. When there is any contention over money, we’ll get called in to help settle the issue,” said Ferraro.
According to Ferraro, there are two components to the firm’s work.
“It’s mostly reactive—reacting to some type of financial concern, but we also have a proactive piece to our business, which is fraud prevention. We make sure that there are internal controls within a business so that fraud is not perpetrated. It’s hard to perpetrate fraud when you have good segregation of duties and other internal controls in place.”
FAZ Forensics also works on business valuations for non-litigation purposes.
“We also value businesses for trust and estate gifting purposes as well as exit plans,” he said. “If someone is looking at the next chapter of their life and they own a privately-held business, that is typically their largest asset. We can come in and help determine what the business is worth and explore options of how best to transition to their next chapter.”
Demand for the firm’s services continues to increase, prompting FAZ Forensics to open a small office in Boston.
“It’s a very specialized niche, and there’s not a lot of competition in our space,” said Ferraro. “We’ve got some fairly aggressive expansion plans. We want to continue to grow, and we are looking to replicate what we’ve done in Boston and New York City as well as Washington D.C.”
For more information, visit fazforensics.com.