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Electronic copy available at: http://ssrn.com/abstract=2385134 Electronic copy available at: http://ssrn.com/abstract=2385134 Electronic copy available at: http://ssrn.com/abstract=2385134
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Should the forensic accounting profession be regulated?
Wm. Dennis Huber
Electronic copy available at: http://ssrn.com/abstract=2385134 Electronic copy available at: http://ssrn.com/abstract=2385134 Electronic copy available at: http://ssrn.com/abstract=2385134
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Abstract
Adopting Huber’s (2012a) argument that forensic accounting has become a profession,
this paper examines whether the forensic accounting profession and the forensic accounting
certification industry should be regulated. Several recent studies have uncovered significant
problems within the forensic accounting profession and the forensic accounting certification
industry. The failure of forensic accounting corporations to disclose either their legal status or
the qualifications of their officers and directors, their failure to publish financial statements, and
their failure to adopt or enforce a Code of Ethics or Standards of Practice, were among the most
significant problems uncovered. The failures of the corporations were exacerbated by forensic
accountants’ failure to investigate diligently the corporations that issued their certifications prior
to obtaining their certifications. This resulted in a significant number of forensic accountants
holding certifications from corporations that were inconsistent with their beliefs that a forensic
accounting corporation should be not-for-profit, and their officers and directors should be
qualified.
Those studies suggested three alternatives for addressing the problems: voluntary action
by the corporations, establishing an independent agency for accrediting the corporations and
certifications, and regulatory intervention. However, the feasibility of the recommended
alternatives was not sufficiently evaluated to be able to arrive at a conclusion for recommending
which alternative should be implemented.
This paper evaluates the feasibility of alternative solutions. It concludes that the most
realistic alternative is for government regulation of forensic accounting in the form of legislation
at the state level.
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Key Words
Forensic accounting, certifications, profession, regulation
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Introduction
Several recent studies have uncovered significant problems within the forensic
accounting profession and the forensic accounting certification industry that adversely affect the
credibility of the profession and the industry. The failure of forensic accounting corporations to
disclose either their legal status or the qualifications of their officers and directors, their failure to
publish financial statements, and their failure to adopt or enforce a Code of Ethics or Standards
of Practice, were among the most significant problems uncovered. The failures of the forensic
accounting corporations were exacerbated by the failure of forensic accountants to investigate
diligently the corporations that issued their certifications prior to obtaining their certifications.
Those studies suggested three alternatives for addressing the problems: voluntary action
by the corporations, establishing an independent agency for accrediting the corporations and
certifications, and regulatory intervention. However, the feasibility of the alternatives was not
sufficiently evaluated to be able to arrive at a conclusion for recommending which alternative
should be implemented.
The purpose of this paper is to evaluate the feasibility of alternative solutions for
addressing these problems. After evaluating the alternatives, the paper concludes that the most
realistic alternative is for government regulation in the form of legislation at the state level. The
less intrusive approach is for states to adopt legislation to limit the use of titles that include the
use of any combination of the words “certified/chartered,” “financial/ forensic/fraud,” and
“accountant/auditor/examiner,” to those who obtain their certifications from corporations that
meet minimum standards set by the state regarding disclosure of their legal status and the
qualifications of corporate board of directors and officers, publishing their financial statements,
and adoption and enforcement of a Code of Ethics and Standards of Practice.
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The remainder of the paper first discusses the problems associated with the absence of
standards governing the forensic accounting certification industry that affect the credibility of the
forensic accounting profession and the industry, and the need to find solutions before the
problems reach a stage which could result in more drastic and more intrusive actions being taken
by the state than limiting the use of titles. It then considers the historical development of public
accounting as a recognized and regulated profession in the United States, and the current status
of the both the forensic accounting profession and the forensic accounting certification industry.
Finally, it presents arguments why, as a matter of public policy, regulation is the only
feasible alternative to address the problems. It argues that licensing is the more intrusive, less
effective, and less desirable intervention, and suggests that the less intrusive and more effective
form of regulation is to limit the use of the title “forensic accountant” in its various forms.
Problems
There are several reasons why forensic accounting can be considered important enough to
the subject of state regulation. The first reason is the nature and function of forensic accounting
and its role in the judicial process. Apart from expert witness considerations, discussed below,
the role and importance of forensic accountants in the judicial process cannot be overstated.
Federal Appeals Court Judge Harry T. Edwards considers, “Forensic science [to be] the
handmaid of the justice system” (Edwards, 2012). While not a forensic science, forensic
accounting plays an equally important role in the justice system. Forensic accounting has a
broad social, legal, cultural, organizational and economic impact in the socio-legal environment
in support of specific legal claims (Williams, 2002).
A second reason stems from the nature of the forensic accounting certification industry.
Williams (2002) refers to the “forensic accounting and investigation industry” as a sphere of
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professional practice that spans the boundaries of law, accounting, business, and the economy.
Here, the forensic accounting industry is more narrowly construed. It refers simply to the supply
side of forensic accounting related certifications and the corporations that issue them. Williams
explains that the proliferation of unfamiliar specialty forensic accounting certifications is the
result of the extent to which the development of the forensic accounting industry is motivated by
narrow organizational interests and objectives related to competition and profitability.
As discussed in greater detail below, the forensic accounting certification industry is
characterized not just by strong, competitive forces but also by outright legal conflict between
the corporations that issue forensic accounting certifications. The competition can easily be seen
in the various self-promotional materials. The conflict, if now outright animosity, is manifested
in the legal actions taken by one corporation against another which, while claiming it is to
protect the corporation, does little to advance the forensic accounting profession. The disparity in
the legal statuses of the corporations; the qualifications of their Directors and Officers; the
educational, experience, and examination requirements; and the (non)existence and
(non)enforceability of Codes of Ethics and Standards of Practice, combine to cause confusion
among not just forensic accountants (Huber 2011, 2012b, 2012c, 2011d), but also the users of
forensic accounting services (Braun, Mauldin, & Fischer, 2001).
Lawyers are the biggest users of fraud auditing and forensic accounting services
(Williams, 2002; NACVA, 2010; Davis, Farrell, & Ogilby, 2010). Attorneys who seek the
services of a forensic accountant for litigation support often begin by looking at their
certifications (Fielstein & Lemanski, 2009). When hired by attorneys, however, forensic
accountants are not hired to provide a benefit to the attorneys, but to the clients of the attorney in
an adversarial proceeding.
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There is at this time nothing that prohibits anyone from forming a corporation and issuing
forensic accounting related certifications to anyone willing and able to pay. The only limitation
is the creative ability of the organizers with what to call a certification, and the trademarks
already owned by other corporations.
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With the growth in demand for fraud auditors and forensic
accountants expected to continue (Seda & Peterson Kramer, 2008; McMullen & Sanchez, 2010),
and no barriers to entry, there is no limit, at least in theory, to the number of forensic accounting
corporations that can enter the market, with a corresponding potentially limitless demand for
forensic accounting certifications.
Third, there are Daubert considerations. Beginning with Daubert v. Merrell Dow
Pharmaceuticals, Inc., (509 U.S. 579, 1993) and the cases that followed,
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Federal District Courts
have been charged with the responsibility of exercising “gatekeeping” functions over the
admission of expert testimony under Federal Rules of Evidence Rule 702. The District Courts’
gatekeeping function is made more difficult by the absence of uniform, or even generally
accepted, ethics, standards, or credibility of forensic accounting certifications.
Certainly certifications alone do not translate into acceptance for qualifying an expert
witness for purposes of admitting expert testimony. But certifications are one of several factors
that courts will consider and a certification, when considered as part of the overall qualifications
of a forensic accountant, could make the difference between being allowed to testify and not
being allowed to testify.
1
A new for-profit corporation, the Association of Certified Financial Crime Specialists (ACFCS), was incorporated
in Florida in December 2011 which will offer the “Certified Financial Crime Specialist” (CFCS) certification as
early as 2013. See http://www.acfcs.org/. The founder of the ACFCS, Charles Intriago, also founded the for-profit
Association of Certified Anti-Money Laundering Specialists (ACAMS) which issues the Certified Anti-Money
Laundering Specialist (CAMS). Mr. Intriago and the Officers of the ACFCS are qualified.
2
See, e.g., Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999).
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The difficulty in the courts’ gatekeeping function is compounded by both judges’ and
attorneys’ lack of knowledge of the forensic accounting certification industry. Concerning
forensic science laboratories, Federal Appeals Court Judge Harry T. Edwards observed that there
is either a lack of accreditation or no mandatory accreditation, and no enforcement (Edwards,
2012). Again, the same argument can be applied to the forensic accounting certification industry.
Daubert has been adopted by some, but not all, state courts and thus the same reasons
apply in state courts. For those states that have not adopted Daubert standards, the situation is
more challenging since a court may have inadequate guidelines on which to base decisions of
admissibility of expert testimony which may result in the court placing greater reliance on
certifications than courts that have adopted the Daubert standard.
Research recently conducted by the AICPA found, among other things, that users’
perceptions of forensic accountants’ skills are inconsistent. The study also found that there was a
consensus that a forensic accounting certification is a positive attribute, and attorneys believe
that the credibility in the courtroom of the forensic accountants they hire is enhanced by a
certification. (Davis, Farrell, & Ogilby, 2010).
Emergence of the Public Accounting Profession and Regulation in the U.S.
The social, economic, and political forces that contributed to the creation and institution
of the public accounting profession in the U.S. resulted from a surge of corporate mergers in the
late nineteenth and early twentieth centuries in conjunction with the occurrence of several
corporate scandals and corruption. There were also significant schisms, competition and conflict
within the profession itself as new organizations formed and others dissolved, organizations vied
with each other to attract members, and members resigned from organizations to join other
organizations over disagreements with admission criteria (Edwards, 1958; Carey, 1969; Miranti,
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1990; Lee, 1995; Previts & Merino, 1998; Zeff, 2003). For example, beginning in 1875, no less
than twelve accounting societies were formed within a fifteen year period. One of the societies
created during this time was The Institute of Accounts of New York which required meeting
minimum qualifications, including passing examinations, in order to be admitted to membership.
The Institute issued certificates to members. Also organized during the time was the American
Association of Public Accountants, the predecessor of the American Institute of Certified Public
Accountants (Previts & Merino, 1998).
It is generally recognized that the official recognition of public accounting as a regulated
profession in the U.S. began in 1896 with the passage of the New York Certified Public
Accountants Law.
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Within the next 25 years all other states adopted similar, but not identical,
public accounting statutes (Previts & Merino, 1998). The public accounting statutes served to
limit not just who could practice public accounting, but also who could call themselves
“Certified Public Accountant,”
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to those who were licensed by the state and who met minimum
education, experience, and ethical requirements. Importantly, there were strong public policy
considerations justifying adopting the statutes which were first, to protect the public interest and
second, to protect the integrity of the profession.
The Forensic Accounting Profession in the U.S.
Forensic accounting services, according to the AICPA’s definition,
“3. …generally involve the application of specialized knowledge and
investigative skills possessed by CPAs to collect, analyze, and evaluate evidential
matter and to interpret and communicate findings in the courtroom, boardroom, or
3
See Appendix 1 for the New York statute that governs Certified Public Accounting as it exists today.
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The title is somewhat of a misnomer. Anyone can be an accountant, and use the title accountant, without any
special education, training, or license. Furthermore, anyone can be an auditor, and use the title auditor, without any
special education, training, or license. Anyone can audit or examine a company’s financial statements. The only
thing a CPA can do that no one else is permitted to do, is to express an opinion on the fairness of the financial
statements of a company; whether the audit, review or examination is performed according to some standard such as
GAAS’ and whether the statements are prepared in accordance with GAAP, as a result of the audit. (See Appendix
A.) A more accurate and more descriptive term would be “Certified Public Auditor.”
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other legal or administrative venue. More simply, in a litigation context, the term
forensic means to be suitable for use by a court of law.
4. Forensic accounting services include dispute resolution, litigation support,
bankruptcy support, and fraud and special investigations, among many other
services. Forensic accounting services utilize the practitioner’s specialized
accounting, auditing, economic, tax, and other skills to perform a number of
consulting activities. The provision of forensic accounting services often requires
the practitioner to serve as an expert or fact witness…” (AICPA, 2010).
As seen by the AICPA’s definition, forensic accounting is broader in scope than fraud
auditing, a view shared by Hopwood, Leiner, & Young (2008) and Crumbley, Heitger, & Smith
(2009). Fraud auditing, also called fraud examination, is often considered as part of forensic
accounting (Stanbury and Paley-Menzies, 2010; Singleton and Singleton, 2010).
Huber (2012a) recently suggested that forensic accounting has become a profession in its
own right. Applying the attribute model borrowed from the sociology of professions, Huber
argued that forensic accounting fulfills a sufficient number of criteria to be considered a
profession separate and apart from public accounting. If so, the issue of regulation of forensic
accountants and the forensic accounting certification industry is a legitimate concern.
Forensic Accounting Corporations and the Forensic Accounting Certification Industry
A forensic accounting corporation is a corporation that issues forensic accounting related
certifications.
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There are five organizations in the U.S. that issue certifications forensic
accounting and fraud examination. A comprehensive review of the corporations is beyond the
scope of this paper. For a more in-depth analysis, see Huber 2011, 2012b, and 2012c, from
which much of this summary is taken. Although the AICPA is not a forensic accounting
corporation it, too, recently entered the forensic accounting certification industry and is thus
included here.
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Forensic accounting for this paper includes fraud auditing or fraud examination as defined by the AICPA.
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The National Association of Certified Valuation Analysts (NACVA) is a for-profit
corporation, incorporated in Nevada in 1993 by Parnell Black and others. NACVA issues the
Certified Forensic Financial Analyst (CFFA).
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First issued in 2000, requirements for obtaining
the CFFA include having another certification, such as a CPA, a Cr.FA, or other certification, a
college degree, experience, and passing an examination. The Officers and Directors of NACVA
include members who are qualified (defined as having either a degree or certification in forensic
accounting). NACVA maintains an enforceable Code of Ethics and Standards of Practice. It does
not publish its financial statements (Huber, 2011, 2012b, 2012c).
NACVA claims that approximately 15,000 of its members have obtained the Certified
Valuation Analyst (CVA), Accredited Valuation Analyst (AVA), or Certified Forensic Financial
Analyst (CFFA) designation. (NACVA, 2010)
The Association of Certified Fraud Examiners (ACFE) consists of two corporations – a
for-profit corporation and a not-for-profit corporation. The for-profit corporation, which issues
the Certified Fraud Examiner (CFE), was incorporated in Texas in 1989. The not-for-profit
corporation, with the same name, was incorporated in Texas in 1996. Both were incorporated by
Joseph T. Wells and others. Although the not-for-profit ACFE originally had no members, it now
has members. Requirements for the CFE include either a college degree and experience, or more
years of experience without a college degree. Passing an examination is required. The Officers
and Board of Directors of both corporations include members who are qualified. It also has an
enforceable Code of Ethics and Standards of Practice. It does not publish its financial statements
(Huber 2011, 2012b, and 2012c). It promotes itself as “the world's largest anti-fraud organization
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The NACVA also issues other certifications such as the Certified Valuation Analyst (CVA) and the Accredited
Valuation Analyst (AVA).
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and premier provider of anti-fraud training and education” with more than 60,000 members
(ACFEa, 2011).
The Association of Certified Fraud Specialists (ACFS) is a not-for-profit corporation
incorporated in California in 1993. The ACFS issues the Certified Fraud Specialist (CFS). There
is no education requirement. Experience is required. There is no examination. The ACFS has
Officers and Directors who are qualified. It has no Code of Ethics or Standards of Practice. It
does not publish its financial statements (Huber 2011, 2012b, and 2012c). Its mission includes
“Propogating…the Certified Fraud Specialist (CFS)designation in the United States amongst its
members, and to the general public, as a symbol of the highest, independent standard of
excellence in its field.”
The Forensic CPA Society, Inc. (FCPAS) is a for-profit corporation owned by Debra
Larsen. It was incorporated in Washington State in 2005. It issues the Forensic Certified Public
Accountant (FCPA). A CPA or CA is required. There is no education requirement. An
examination is required. Experience is required. The Officer and Director are not qualified. It has
no Code of Ethics or Standards of Practice. It does not publish its financial statements (Huber
2011, 2012b, and 2012c). The FCPAS does not make claims about itself other than to say, “The
purpose of the Society is to promote excellence in the forensic accounting profession. One of the
ways the Society has selected to accomplish this is the FCPA certification” (FCPAS, 2011).
Membership numbers are not available.
The American College of Forensic Examiners International (ACFEI) is not a corporation
and does not technically exist. The ACFEI is a service mark is owned by the “The Trustee of the
Robert L. O'Block Revocable Trust Robert L. O'Block, a U.S. citizen TRUST MISSOURI 2750
East Sunshine Springfield MISSOURI 65804.” The ACFEI consists of a for-profit corporation,
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the American College of Forensic Examiners International, Inc.,” incorporated in Missouri in
1997 by Robert L. O’Block, and the American College of Forensic Examiners, Inc., a not-for-
profit corporation incorporated in Missouri in 1992 by Robert L. O’Block. The ACFEI issues the
Certified Forensic Accountant (Cr.FA).
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Currently a CPA is required, although previously no
other certification was required. Experience is required. An examination is required. Neither the
Officers nor Directors of either corporation are qualified. It does not have a Code of Ethics or
Standards of Practice. Rather, it has a Creed and Principles which it does not enforce.
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It does not
publish its financial statements (Huber 2011, 2012b, and 2012c).
According to the ACFEI, the Cr.FA program equips CPAs “with the tools to provide
competent and professional forensic accounting services in a multitude of arenas” (ACFEI,
2011a). It bills itself as the “Largest Forensic Membership Association” (ACFEI, 2011b).
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In
reference to its certifications it states,
“Certification provides you with documentation indicating that you have met certain
educational or training standards within your field. It establishes that you have achieved
specific accomplishments, abilities, experiences, and/or knowledge and are capable of
demonstrating these in your discipline. This supplies your employers, co-workers, and
clientele with a sort of quality assurance” (ACFEI, 2011a)
The AICPA began issuing the Certified in Financial Forensics (CFF) in 2008. Since only
CPAs may be members of the AICPA, a CPA is required in order to obtain the CFF. The CFF
requires an examination and experience. The Officers and Directors of the AICPA are qualified.
The AICPA Code of Professional Conduct applies to CFFs. The AICPA publishes audited
annual financial statements (AICPA, 2012).
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The ACFEI and its related corporations also issue certifications in forensic nursing, dentistry, social work, medical
investigation, crime investigation, homeland security, computer security, and psychotherapy.
8
“[W]e have never had the legal authority to set ourselves out as an Ethics Court. We don't have the time, the staff
or enough insurance to do so” (quoted in Huber, 2012c).
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Technically, one cannot be a member of a service mark, and the Articles of Incorporation of the not-for-profit
corporation specifically state there are no members (Huber, 2011).
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Finally, the newly incorporated Association of Certified Financial Crime Specialists
(ACFCS) is a for-profit corporation incorporated in Florida in 2011 by Charles Intriago. It does
not yet offer certifications, but its planned “Certified Financial Crime Specialist” (CFCS) will
require an examination. There is not yet any statement regarding what experience or other
certification will be required to obtain the CFCS. It does not yet have a Code of Ethics of
Standards of Practice. Its Directors and Officer are qualified (ACFCS, 2011).
Conflict and Controversy within the Forensic Accounting Certification Industry
Not unlike the early history of public accounting, the forensic accounting corporations
have exhibited as much, if not more, hostility toward each other as that exhibited by the public
accounting organizations in the late nineteenth and early twentieth centuries, particularly
between the larger corporations, as the following examples demonstrate.
In 1995 Robert O’Block and the American Board of Forensic Examiners, Inc., one of the
predecessor corporations of the American College of Forensic Examiners, filed suit in the U.S.
District Court for the Western District of Texas against Joseph Wells and the Association of
Certified Fraud Examiners, Inc. alleging copyright infringement.
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The case was settled out of
court in 1996.
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In a 1997 Editorial, Wells had this to say about the American College of
Forensic Examiners, Inc., and Robert O’Block:
“[S]everal of O’Block’s original board members resigned, impugning his honesty. One
even called O’Block a ‘con artist;” another described him as a crook…the operation was
being conducted out of a private residence by a few employees who were principally
O’Block’s relatives. And the ‘college’s’ national training director was a high school
graduate [who] resigned because of complaints about O’Block’s ethics” (Wells, 1997).
In 1995 the Society of Financial Examiners brought an action against the National
Association of Certified Fraud Examiners Inc., the predecessor of the ACFE, for trademark
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American Board, et al v. Assoc. of Certified, et al, CASE #: 1:95-cv-00550-SS.
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In emails I received from both Wells and O’Block for preparing this paper, both sides claimed victory.
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infringement of the acronym “CFE.”
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The SFE is not a forensic accounting corporation. It is “a
professional society for examiners of insurance companies, banks, savings and loans, and credit
unions” (SOFE, 2011). The case is informative, however, due to the issue involved – intellectual
property. The case was settled out of court after it was reversed on appeal and remanded for trial
after the District Court granted summary judgment for the plaintiff.
In 2009 D. Larry Crumbley founded the Forensic and Investigative Accounting section of
the American Accounting Association. Consisting of both academics and practitioners, the AAA
“promotes worldwide excellence in accounting education, research and practice” (AAA, 2012a).
The FIA section, in turn, is
“dedicated to the continual improvement of forensic accounting research and education,
through the encouragement, development, and sharing of: the promotion and
dissemination of forensic and investigative academic and practitioner research; the
relevant and innovative curricula with an emphasis on effective and efficient instruction;
the exploration of knowledge-organization issues related to forensic accounting
programs; the creation and presentation of CPE courses to members and professionals.”
(AAA, 2012b).
Although the FIA section does not issue certifications, in 2011 Joseph Wells, founder of
both ACFE corporations, resigned his membership in the American Accounting Association “in a
dispute over the organization’s titling of the AAA's ‘Forensic and Investigative Accounting’
section.” Wells recommended that the section title itself simply the “forensic accounting section”
(ACFE, 2011b) and resigned when it refused to do so.
Finally, in spite of the AICPA’s Code of Conduct’s assertion that CPAs “should accept
the obligation to act in a way that will serve the public interest” (AICPA, 1988), in 2008 in what
can be considered either an aggressive assault on the forensic accounting certification industry,
or a bold, defensive move, the AICPA began issuing the CFF. The AICPA’s National
Accreditation Commission (NAC) issues new specialty certifications only where “there is no
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Society of Financial Examiners v. National Association of Certified Fraud Examiners Inc., (41 F3d 223).
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dominant provider already in place, or if there is a significant competitive threat to the services
already provided by members of the AICPA,” and “only if the market is sufficiently large, there
is a clear potential economic benefit to CPAs, and the timing can ‘outpace any competition.’”
(AICPA, 2006). In creating the CFF, the AICPA clearly was positioning itself to “outpace the
competition” in the fraud auditing and forensic accounting industry.
Should the Forensic Accounting Profession Be Regulated?
As can be easily seen, the forensic accounting profession is in a state of chaos, confusion
and conflict. Huber suggested three alternatives for addressing the problems: voluntary action by
the forensic accounting corporations, establishing an independent accrediting agency, or
government regulation. The following sections present arguments why alternatives to regulation
will not work, followed by arguments that support the proposition that the forensic accounting
profession should be regulated.
Voluntary Disclosure Will Not Work
In an email I received in preparing this paper, Robert O’Block, owner of the ACFEI
corporations, stated, “I assume you are aware that the Courts have sided with free competition,
and let the marketplace decide who has the best program” (Personal Communication, 2011).
However, the market cannot easily decide who has the best program if the corporations fail to
disclose material facts concerning such things as their legal status, qualifications of Directors and
Officers, and financial statements. Voluntary disclosure would require forensic accounting
corporations to be more transparent than they are now. The corporations would have to voluntary
disclose, at a minimum, their legal status, qualifications of their Officers and Directors, and
publishing their financial statements.
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As discussed above, many forensic accounting corporations are for-profit and they do not
now either disclose the fact that they are for-profit, or publish their financial statements. While it
is not implausible to think that they would voluntarily disclose their legal status, it would be
unrealistic to expect privately held corporations to voluntarily publish their financial statements.
Since the not-for-profit ACFE does not file a 990, it is likely there are no financial
statements to publish. While the not-for-profit corporation associated with the ACFEI files a 990,
there is no incentive for it to voluntarily publish its financial statements since its Articles of
Incorporation explicitly states it has no members. The AICPA publishes financial statements
annually. The ACFS files a 990, but voluntarily publishing its financial statements may have
limited benefit to either the corporation or its members and it is therefore highly questionable
whether it would voluntarily publish its financial statements. Except for the AICPA, none are
audited.
Furthermore, the corporations that do not have qualified Directors and Officers (ACFEI
and FCPAS) do not disclose their qualifications. Disclosing their qualifications could have
adverse consequences in terms of membership and revenue, and thus the possibility of their
voluntarily disclosing the qualifications of the Directors and Officers seems remote at best.
The ACFEI does not enforce its Creed or Principles. There is no basis to think that it
would voluntarily begin to enforce them since, as stated by Robert O’Block, it does not have the
resources to do so. Neither the ACFS nor FCPAS have the staff or resources to develop and
enforce a Code of Ethics or Standards of Practice.
The conclusion must be that voluntary action by the forensic accounting corporations is
not a viable option to remedy the problems identified.
Accrediting Agency Will Not Work
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A second alternative suggested by Huber is for the creation of an independent accrediting
agency. An independent agency would go a long way in advancing the credibility of the forensic
accounting profession and the forensic accounting certification industry. An example is given
below.
The Institute for Credentialing Excellence (ICE) was created to “enhance professional
excellence and ensure the competency of certification” (Institute for Credentialing Excellence,
2010). Its accrediting body, the National Commission for Certifying Agencies (NCCA),
establishes accreditation standards and conducts peer-reviews of its members in order to evaluate
compliance with the standards (National Commission for Certifying Agencies, 2010).
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NCCA
accreditation demonstrates that the certifications have been reviewed by a panel of impartial
experts.
However, due the diversity of its membership and its accredited certifications the
ICE/NCAA itself would not be a viable option as an accreditor of forensic accounting
corporations and certifications and thus a dedicated agency would be required. Nevertheless, the
basic principles and structure of the ICE could easily be adapted and applied to a dedicated
forensic accounting agency.
While an independent accrediting agency would enhance the credibility of the forensic
accounting profession and the forensic accounting certification industry, there are several
obstacles that would prevent such an organization from being established. The first is that the
corporations would be required, among other things, to disclose their legal status and the
qualifications of their Directors and Officers, and publish their financial statements. Thus all the
objections for voluntary disclosure apply here as well.
13
The ACFEI claims to be a member of the ICE, but that is not correct. Management Executives, Inc., a for-profit
corporation owned by Robert O’Block, is a member, but Management Executives, Inc. does not issue certifications
(Huber, 2011)/
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The second obstacle is the cost. The smaller corporations simply could not afford to
contribute financial support to creating and maintaining an accrediting body. Also, agreeing on
how fees would be determined would be highly problematic. A percentage of revenue? A flat
fee? Number of members?
A third obstacle concerns the need for cooperation by the corporations. Cooperating to
establish criteria for accreditation, choosing directors, officers and staff, and creating a peer-
review program are just a few of the issues on which the members would have to cooperate.
Given the existing conflict between the corporations, such cooperation is not possible.
The conclusion must be that an independent accrediting agency is not a viable alternative
to remedy the problems identified. The remaining and only feasible alternative is for state
intervention which is discussed in the following section.
Why the Forensic Accounting Profession and Certification Industry Should Be Regulated
The evidence supports the conclusion that the problems in the forensic accounting
profession, and the forensic accounting certification industry, are too numerous and too
important and that as a matter of public policy they cannot be allowed to continue in the long
term. The arguments against voluntary action by the forensic accounting corporations, or the
creation of an independent accrediting agency, are sufficiently strong to rule out those
possibilities.
The following sections present arguments that support the intervention of government
regulation of the forensic accounting profession and forensic accounting certification industry.
The Public Interest Argument
Perhaps the most significant argument that can be made in favor of government
regulation is that it is in the “public interest.” The AICPA’s Code of Professional Conduct states
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Members should accept the obligation to act in a way that will serve the public
interest… A distinguishing mark of a profession is acceptance of its responsibility
to the public. The accounting profession's public consists of clients, credit
grantors, governments, employers, investors, the business and financial
community, and others who rely on the objectivity and integrity of certified public
accountants to maintain the orderly functioning of commerce. This reliance
imposes a public interest responsibility on certified public accountants. The public
interest is defined as the collective well-being of the community of people and
institutions the profession serves…Those who rely on certified public accountants
expect them to discharge their responsibilities with integrity, objectivity, due
professional care, and a genuine interest in serving the public” (AICPA, 1988).
However, in spite of the general consensus that a profession consists of individuals who
are members of an association who put serving the public interest above their own interest
(Previts, 2001), Cunningham, Tondkar, and Coffman (1990) report the results of a poll that
shows “the public has always had a healthy skepticism about the effectiveness of professional
self-regulation and about the real motives of professionals.”
Concerning regulation of the accounting profession by the government and the public
interest SEC Chairman Harvey L. Pitt had this to say:
“[E]ven before Enron's collapse, we called upon the accounting profession to work with
us to resolve its vulnerabilities and weaknesses. The Commission, not the profession,
must take a leading role in protecting the public interest…”
Certainly there is debate over what constitutes the public interest. Neither the AICPA
Code of Professional Conduct, nor any Code of Ethics of any forensic accounting corporation,
defines the term “public interest.” Dellaportas & Davenport (2008) offered reflections on what
constitutes public interest in public accounting. Borrowing from political science, they identified
four theories that can be applied to what the public interest is as referred to in the AICPA Code
of Professional Conduct.
According to normative theory, the public interest consists of the common good, with the
purpose of enhancing the common good rather than private benefits. The abolitionist theory of
21
the public interest sees professional groups competing with each other to advance their own
interests. Process theory focuses more on the processes by which conflicts are transformed into
policies that enhance the public interest, rather than the interest itself. In consensualist theory,
public interest refers to the debate in which morals, principles, and community values in
considered.
Baker (2005) makes a distinction between neo-liberal, liberal social democratic, and
critical social democratic ideologies of what constitutes the public and therefore the public
interest. The neo-liberal approach defines the public interest as conceptualized in the AICPA
Code of Professional Conduct, as maintaining the orderly function of commerce, while the
liberal social democratic sees serving the public interest as emphasizing integrity in resolving
social conflicts. A critical social democratic ideology of the public interest, however, sees the
public interest encompassing essentially as the proletariat – the working class and the poor –
which would be inconsistent with credit grantors, governments, employers, investors, the
business and financial community encompassed by the Code of Professional Conduct.
Rather than weakening the public interest argument why forensic accounting should be
regulated, the disagreement over what constitutes the public interest in public accounting
strengthens the argument why forensic accounting should be regulated. The theories advanced
regarding the definition the public interest are all found in Williams’ (2002) understanding of the
nature, function, and context of forensic accounting. Forensic accounting provides, through its
application in adversarial proceedings, the “cultural mediation through which broader economic
and political logics are legitimated and reproduced.” It is “executed according to a particular
standard of law, and with the intention of supporting specific legal claims.” The specific legal
claims are not limited to businesses or governments, but extend to individuals and families.
22
Thus the public interest that needs to be served by the public accounting profession, as
articulated in the AICPA Code of Professional Conduct, is the same public interest that needs to
be served in the forensic accounting profession, with some important clarifications. First, the
public, for forensic accountants, is mostly derivative. That is, those who use forensic accounting
services are principally attorneys who hire forensic accountants on behalf of their clients, which
consist of both the public identified in the AICPA Code of Professional Conduct, as well as
individuals and families. Just because lawyers are the principal users of forensic accounting
services does not mean that they do not need the same degree of protection since, as discussed
above, both lawyers and judges may not sufficiently understand the nature and condition of the
forensic accounting certification industry.
Second, the scope of the public interest served by the public accounting profession, that
is, the profession encompassed within public accounting statutes, is limited to auditing financial
statements according to some standard and expressing opinions concerning the fairness of the
financial statements and whether they are prepared according to GAAP. The public interest
envisioned by the AICPA Code of Professional Conduct is broader. The public interest served by
the forensic accounting profession, is much broader than both the public accounting statutes and
the Code of Professional Conduct. This point is underscored by Crumbley (2009) in explicitly
recognizing that forensic accounting applies to evaluating accounting information without the
constraints of and thus is not constrained by either public accounting statutes or the AICPA’s
Code or Professional Conduct.
Third, the importance of the arena in which the public interest is served by forensic
accountants cannot be overstated. The public interest here exists on a much higher level. The
arena, unlike public accounting, is the judicial system. But forensic accounting is used to support
23
not just specific legal claims in a specific court. It supports the judicial system itself. The
integrity of the arena, the judicial system, must be maintained in order to support the democratic
institutions of which it is a part.
The Ethics Argument
Courts should consider compliance with a Code of Ethics when deciding whether to
accept the testimony of an expert witness (Mason, 2010). Furthermore, according to the
recommendation of the American Bar Association, certification standards of forensic experts
should include an ethical code and effective disciplinary procedures (Maleng, 2004). However,
as discussed above, both lawyers and courts may not be sufficiently familiar with the forensic
accounting certification industry to understand that several forensic accounting corporations do
not have or enforce Codes or Standards.
Voluntary disclosure would not result either in all corporations having a Code of Ethics.
The establishment of an independent accrediting agency would also fail to result in all
corporations having or enforcing a Code of Ethics since membership in such an agency would be
voluntary. Regulation by the state would compel those forensic accounting corporations that do
not have, or do not enforce, a Code of Ethics to adopt and enforce a Code of Ethics.
The Standards of Practice Argument
The Standards of Practice to which forensic accountants are held vary widely from the
very strict to the non-existence (Huber, 2012b, 2012c). As with Codes of Ethics, courts and
attorneys may not be sufficiently cognizant of the differences and distinctions within the forensic
accounting profession and the forensic accounting certification industry to understand that some
forensic accounting corporations do not have or enforce a Standards of Practice.
24
Voluntary disclosure would not result either in all corporations having, or enforcing, a
Standards of Practice. The establishment of an independent accrediting agency would also fail to
result in all corporations having or enforcing Standards of Practice. Regulation by the state
would again compel those forensic accounting corporations that do not have, or do not enforce, a
Standards of Practice to adopt and enforce a Standards of Practice.
Approaches to State Regulation
14
There are two basic approaches for state regulation of the forensic accounting profession
and the forensic accounting certification industry. The more intrusive, and less desirable, calls
for the state to license and regulate the profession directly, similar to the way it licenses and
regulates public accounting; i.e., for the state to grant licenses to practice forensic accounting in
addition to limiting the right to use the title “forensic accountant.” That method is quite
burdensome, however. It would require the state to set educational and experience requirements
among other things. It would also require the state to oversee forensic accounting training
programs. This would place greater stress on state budgets as additional workers would have to
be hired to implement and oversee the licensing. Costs would most likely be passed on to
licensees which would serve to decrease the number of forensic accountants in the profession.
A less intrusive and more desirable method would be for states to enact legislation
limiting the use of the title “forensic accountant” in its various forms to those whose
certifications are issued by corporations that meet certain requirements regarding disclosure of
their legal status and the qualifications of their Directors and Officers, publishing audited
financial statements, and adopting and enforcing a Code of Ethics and Standards of Practice. The
cost of implementing this form of regulation would be minimal on state budgets, and allow both
14
Since interstate commerce may be involved, it is not beyond imagining that the FTC or another Federal agency
could find the problems sufficiently serious at the Federal level to justify Federal investigation and possible
intervention.
25
for-profit and not-for-profit corporations to issue forensic accounting certifications as long as
they meet the criteria.
Obstacles to Regulation of the Forensic Accounting Profession and the Forensic
Accounting Certification Industry
The political opposition to state regulation from the corporations will be formidable. It
may in fact be the only thing that unites the various corporations – to fight a common enemy.
The AICPA has 300,000 members and a multi-million dollar annual budget. The ACFE boasts
60,000 members. The ACFEI claims to be the largest forensic organization in the world.
NACVA claims nearly 15,000 members who have received a certification.
Nevertheless, states should take immediate steps to adopt legislation to prevent
potentially serious problems from erupting within the profession and the industry with the
accompanying potential disruption within the judicial system. It has happened several times in
the public accounting profession, most recently with the scandals involving Enron/Arthur
Anderson. There is no reason to believe that something similar could not happen in the forensic
accounting profession. A coordinated, multi-state investigation, led perhaps by the National
Association of State Boards of Accountancy, should be the first step.
Conclusions
The purpose of this paper was to evaluate the feasibility of alternative solutions for
addressing problems that exist within the forensic accounting profession and the forensic
accounting certification industry. After comparing and evaluating the alternatives, it concluded
that the most realistic alternative is for government regulation in the form of legislation at the
state level.
The least intrusive approach is to limit the use of titles that include the use of any
combination of the words “certified/chartered,” “financial/ forensic/fraud,” and
26
“accountant/auditor/examiner,” to those who obtain their certifications from corporations that
meet minimum standards set by the state regarding disclosure of legal status, publishing financial
statements, qualifications of corporate board of directors and officers, and adoption and
enforcement of a Code of Ethics and Standards of Practice.
27
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Appendix A
New York State Education Law Article 149, Public Accountancy
§7400. Introduction.
This article applies to the profession of public accountancy. The general provisions for all
professions contained in article one hundred thirty of this title apply to this article.
§7401. Definition of practice of public accountancy.
The practice of the profession of public accountancy is defined as:
1. offering to perform or performing attest and/or compilation services, as defined in section
seventy-four hundred one-a of this article;
2. incident to the services described in subdivision one of this section, offering to perform
or performing professional services for clients, in any or all matters relating to accounting
concepts and to the recording, presentation, or certification of financial information or
data; or
3. offering to perform or performing, for other persons one or more types of the following
services including but not limited to accounting, management advisory, financial
advisory, and tax exclusive of services within subdivisions one and two of this section,
involving the use of professional skills or competencies of the licensed accountant as
described in the rules of the board of regents, including professional services rendered to
one's employer not required to register under section seventy-four hundred eight of this
article, in any and all matters related to accounting concepts and to the recording of
financial data or information or the preparation or presentation of financial statements.
§7401-a. Definitions.
As used in this article:
1. "Attest" means providing the following public accountancy services which all require the
independence of licensees:
a. any audit to be performed in accordance with generally accepted auditing
standards or other similar standards, developed by a federal governmental agency,
commission or board or a recognized international or national professional
accountancy organization, that are acceptable to the department in accordance
with the commissioner's regulations;
b. any review of a financial statement to be performed in accordance with standards,
developed by a federal governmental agency, commission or board or a
recognized international or national professional accountancy organization, that
are acceptable to the department in accordance with the commissioner's
regulations;
c. any examination to be performed in accordance with attestation standards
developed by a federal governmental agency, commission or board or a
recognized international or national professional accountancy organization, that
are acceptable to the department in accordance with the commissioner's
regulations; or
d. any engagement to be performed in accordance with the auditing standards of the
public company accounting oversight board.
32
2. "Certified public accountant" or "CPA" means any person who has received a license
from the department or any other state as a certified public accountant for the practice of
public accountancy.
§7402. Practice of public accountancy and use of title "certified public accountant" or "public
accountant".
Practice of public accountancy and use of title "certified public accountant" or "public
accountant". Only a person licensed or otherwise authorized to practice under this article shall
practice public accountancy or use the title "certified public accountant" or the designation CPA
or "public accountant" or the designation PA or any other derivative or designation provided in
section seventy-four hundred eight of this article.
Retrieved from http://www.op.nysed.gov/prof/cpa/article149.htm.