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IS FORENSIC ACCOUNTING BECOMING A PROFESSION?
- Forensic accounting in the economy
According to Huber (2012), there exist two schools of thought when it comes to the classification of forensic accounting. One refers to forensic accounting as a niche within the public accounting profession while another exhibits forensic accounting as a profession in its own right.
The first argument posited by AICPA is that the market for forensic accounting services was below 5.5% of total revenue taking into consideration the Top 100 CPA firms in the USA (Accounting Today 2010). However, Huber (2012) argue that the other services generating higher revenue, that is, auditing and attestation services (44%) and tax and advisory (50%) can also be considered as niche markets. Furthermore, Xu and Wang (2008) assess the relative decline in demand for accounting and auditing services as a percentage of accounting firm revenue.
Furthermore, Huber (2012) argues that a professional certification in traditional accounting services and compliance to accounting standards does not entail that a traditional accountant can practice as a forensic accountant, given the additional range of skills the latter require.
Allegretti and Slepian (2010) consider the academic side of accounting whereby they found that the traditional accounting curriculum is revised in many colleges and universities to incorporate forensic accounting courses as electives. They further posit that there has been a dramatic increase in the number of post-secondary educational institutions offering undergraduate and post graduate courses in forensic accounting.
Considering the importance of forensic accounting in society, Abbott (1988) states that accounting is rooted in the development of the capitalist economy. Accounting thus has substantial economic consequences for industry, commerce, and governments both at national and international level (Hopwood, 1992). Chiapello (2007) observes that capitalism is symbolic to a representation of economic life from an accounting perspective and thus, accounting is the foundation of our economic system which consists of entities and commercial relationships existing between them.
However, the culmination of the number of corporate scandals, frauds and failures in the first decade of the 21st century precipitated and contributed to the Great Recession and significantly impacted to the mechanisms of the free-market capitalism, with legal and economic claims reaching hundreds of billions of dollars (Ball, 2009). In addition, legal proceedings related to scandals, frauds and failures have risen steeply in both the number of cases and their complexity, leaving public accountants in a vacuum. (Seda and Kramer, 2008; Durkin and Ueltzen, 2009).
Such scandals, frauds and corporate failures have led to an erosion of public confidence in the ability of public accounting to provide viable solutions to financial problems (Huber, 2012). Nightingale (1996) states that fraud affects the efficient allocation of real and financial resources and the ability of markets to disseminate information in a timely and accurate manner. In addition, completion is reduced and confidence in the economic system is lost, thus causing harm to the entire economic system. Public accounting is implicated, whether by intent or by negligence.
Montagna (1986) asserts that as a consequence of the enactment of the Securities Law in the USA, public accounting had the responsibility of protecting the public from financial misrepresentations in corporate reporting.
The number of scandals and frauds show that public accounting has failed to fulfill its responsibility and that forensic accounting services are required (Huber, 2012). He further points out that forensic accountants have basically become the descendants in interest to public accountants when the latter neglect their responsibilities to protect the public or when they facilitate fraudulent acts like in the Enron case. As such, forensic accountants have played an increasingly important role in litigation and other legal disputes fuelled by the recent scandals and failures.
Models of classification of a profession
- The Attribute/Taxonomy Model
This model aims to identify attributes, traits, categories and characteristics of professions (Pavalko, 1988). Thus, he identifies 8 major categories namely:
- Theory and intellectual technique – the profession has developed a special expertise
- Relevance to social values – application of knowledge to social problems
- Training – amount and content of training relevant to profession
- Motivation – Desire to serve society as part of the profession
- Autonomy – degree of self-regulation among members within the profession
- Commitment – Members show strong commitment to their work
- Sense of community – Members have a common identity and degree of interaction among members
- Code of Ethics – Can be written or unwritten, but represent an essential attribute of the profession
- Horn’s Model of Profession (1978)
Horn (1978) enunciated seven characteristics of a profession:
- Commitment to high ethical standards
- Prevailing attitude of selflessness – integrity and objectivity
- Mandatory educational preparation and training
- Mandatory continuing education
- Formal association or society
- Public recognition as a profession in its own right
- Carey’s Characteristics of a profession (1969)
Carey identified seven characteristics of a profession as having:
- A specialised body of knowledge
- A formal education process
- Standards governing admission
- A code of ethics
- A recognised status indicated by a license or special designation
- A public interest in the work that the practitioner performs
- Recognition by its members of their obligation towards society
- Brante’s traditional studies of professions (1988)
In his study, Brante (1988) identified eight most frequently occurring characteristics:
- Use of skills based on theoretical knowledge
- Education and training in those skills
- Competence of professionals is ensured by examinations
- A code of conduct to ensure professional integrity
- Performance of a service that is for the common good
- A professional activity that organizes its members
- Members have a sense of identity and share common values
- A common language is used within the profession which can only be partially understood by outsiders
Taking a look at the institutions that provide certifications from forensic accountants in the USA and reviewed by Huber (2012); namely the American College of Forensic Examiners, the Association of Certified Fraud Examiners (ACFE), the Association of Certified Fraud Specialists (ACFs), Forensic Certified Public Accountant Society (FCPAS) and the National Association of Certified Valuation Analysts provide the following insights:
- Standards governing admission exist where the minimum requirement is an undergraduate degree or a CPA credential except for the FCPAS where no education requirement exists.
- Competence of professionals is ensured by examinations in all above corporations except on special grounds by the FCPAS where the member possess a license to act as a Certified Public Accountant and already has a credential in forensic accounting.
- Education and training in skills for forensics through required experience for admission to membership except for ACFE where experience may be substituted by a degree and FCPAS where no experience is required
- The Associations already have a Code of Ethics except for the FCPAS.
- Many of the professional bodies lay emphasis on continual professional education.
- Independence is key for the proper exercise of duty of forensic accountants and maintenance of public confidence.
- Experience and apprenticeship is required by many of these bodies
- The certifications, examinations, code of ethics are nonetheless fragmented and dispersed among several organisations but at least the foundation stone has been laid for the future.
Huber (2012) derives that the existence of multiple organisations and certifications depicts the fact the forensic accounting is at least in the process of becoming a profession. In addition, the evolution of new organisations and certifications in forensic accounting portrays the latter as a growing social and economic function within society. Finally, demand for forensic accountants with certifications in the domain is growing, given the specialised skill and knowledge they have compared to public accountants.
The table below provides an overview of the theories dealing with attributes of a profession and that of the characteristics of forensic accounting:
Source: Huber (2012), ‘Is Forensic Accounting in the United States Becoming a Profession?’, Journal of Forensic & Investigative Accounting, Vol. 4, Issue 1, 2012 pp. 280
Obstacles to Forensic Accounting Becoming a Profession
For Huber (2012), the main obstacle concerns the independence of forensic accounting from public accounting, given that the set of skills required by a forensic accountant is distinctly different from that of a public accountant. He cites the examples of many forensic professional bodies in the USA with the pre-requisite of having a Chartered Public Accountant (CPA) or Chartered Accountant (CA) credential.
However, with the introduction of the Certified in Financial Forensic credential by the AICPA itself, and the requirement of having a CPA certification as a pre-requisite for entry, other professional bodies have to demarcate themselves by eliminating the CPA pre-requisite to be able to grant access to a larger target group. Huber (2012) further that the CPA pre-requisite was actually sought as it added more legitimacy, credibility and recognition to the professional body and whatever purpose the requirement may have served in the past has little validity in today’s market and. He cites the Association of Certified Fraud Examiners as example that does not have the CPA requirement and is yet one of the world’s most renowned professional bodies in areas of fraud investigation and anti-money laundering services.
Another potential obstacle would be to identify when and how forensic accounting will reach the critical point of recognition as a profession, that is, where it will be separately identifiable from public accounting. As example, Huber cites the evolution of public accounting which reached the critical point for recognition while cost accounting did not due to regulatory changes to Tax Laws of 1909, 1913 and 1917 and it became absorbed as a corporate tool to aid management in decision-making.
The key milestones in the evolution of public accounting as reported by Previts and Merino (1998) started with a high rate of corporate mergers that peaked in the 1890s resulting in a greater demand for public accounting services, and the creation of the earliest professional accounting bodies and their mergers. It followed with the enactment in 1896 of a legislation establishing the title of Chartered Public Accountant. Later the crash of stock markets in 1929 led to the passage of the Securities law in 1933 aiming at restricting competition among public accountants which was perceived as the contributor to the profession to avoid the crash. This law created greater demand for public accountants and imposed a social obligation on them of helping to create and maintain investor confidence in capital markets. Thus with this acknowledged social obligation, public accounting was conferred as a profession in its own right.
The recent changes in corporate and securities law and regulations like the Sarbanes-Oxley Act and the advent of the Public Company Accounting Oversight Board resulting from frauds and scandals like that of Enron have contributed similarly to the demand for forensic accounting services. The evolution of forensic accounting is hence similar to that of public accounting, as it possesses many essential attributes to be classified as a profession, and public accounting and forensic accounting are in close competition to each other. Besides, while cost accountants were not independent, forensic accountant are independent and independence is an aspect of a profession. (Huber, 2012)
The Future of forensic accounting
For Huber, the key for the development of forensic accounting as a profession will be the consolidation of the several forensic accounting professional bodies and the adoption of a common Code of Ethics and Standards of Practice. A common code of Ethics and Standards of Practice would be a powerful statement to the public that would create consciousness from the public that forensic accounting is distinct from public accounting. This public recognition of forensic accounting as a profession in its own right would help to establish parameters within which forensic accountants can be held accountable to society.
Another issue to address would be the regularisation of terms and standards in the market given the large number of corporations and certifications in the industry. The intervention at state level would help to regularize the profession through adoption of state laws requiring minimum standards for professional bodies to issue forensic accounting certifications. The adoption of state regulations would thus help in establishing forensic accounting as a profession as it was for public accounting.
It would be interesting to address the licensing requirements for forensic accountants as well as establishing an agency to adopt minimum standards of practice and ethics and review the certifications issued by those forensic accounting bodies.