COVID-19 challenges to forensic accounting

In normal circumstances an economic downturn can serve as a boon to forensic accountants. Market disruption, widespread layoffs, and economic uncertainty tend to correlate with increased fraud and legal action and the commensurate business for accountants who specialize in legal calculations.

The vagaries of the downturn precipitated by the COVID-19 outbreak, however, are such that forensic accountants encounter unprecedented obstacles. Social distancing, court closures, and business disruption all contribute to the increasingly unstable forensic landscape.

Social-distancing guidelines and stay-at-home orders have affected virtually every class of professionals, including those involved in court systems. Many forensic accountants work with attorneys to investigate or defend individuals accused of tax fraud, embezzlement, or other forms of white collar crime. These accountants have found that, while court systems have been closed or have limited operations, the supply of these types of engagements dwindled.

That’s not the only difficulty. Forensic accountants face some of the following unique challenges, and opportunities, in the COVID-19-altered economy:

The personal connection is severed. In-person meetings are one of the fundamental elements of legal work. Forensic accountants are attorney-adjacent professionals and therefore regularly interview witnesses, attend depositions, and question suspected fraudsters. The COVID-19 pandemic has put the kibosh on face-to-face interviews, at least temporarily, and forensic accountants subsequently find their investigation efforts curtailed.

For attorneys and forensic accountants, interviews are often an opportunity to review documentation with the interview subject. This practice often sheds light on previously unclear transactions and financial activity. COVID-19 guidelines have eliminated this element of a forensic accounting engagement.

In many cases, interviews and depositions have migrated to Zoom and other online meeting platforms. Forensic professionals largely view this as a stopgap measure rather than a long-term solution.

Adam Hanover, CPA/CFF, J.D., managing director of restructuring and dispute resolution at CohnReznick LLP, believes that virtual interviews are a poor substitute for the real thing.

“Zoom is just not the same,” Hanover says. “The lack of human contact is challenging. Sometimes, you need to be in the room with an individual to sense whether he or she is hiding something. A personal connection with someone who may or may not be an adversary is of utmost importance in our line of work.”

Keeping pace with fraud

Shalini Shan-Hernandez, CPA (Canada), is a forensic accountant based in Toronto. Prior to the COVID-19 pandemic, Shan-Hernandez specialized in investigating fraud cases involving employees, bookkeeping, account takeovers, credit, and securities. With the emergence of the new coronavirus, however, the fraud terrain has changed. Shan-Hernandez now spends her time tackling novel forms of fraud occurring at rates she’s never seen before.

“My employer has seen a significant increase in fraud,” Shan-Hernandez reports. “I’ve never seen anything like it.” The fraud team at Shan-Hernandez’s employer spends a lot of time on COVID-19 relief checks.

Criminals have taken to selling bogus checks on the dark web, sometimes redepositing them three or four times. “It is very challenging because this threat is new, it is happening in large numbers, and our clients are really being impacted. We have to confirm each check is really fraudulent before we pull it from the system.”

Shan-Hernandez’s team’s scope of work has expanded since the COVID-19 outbreak in order to manage the increase in fraudulent activity, which often seems limitless. “We need to work quickly to mitigate the loss to our clients,” Shan-Hernandez reports. “Due to high rate of new cases, we’ve had to be reactive rather than proactive.”

Remote work can disrupt workflow. Financial investigations require a high level of coordination. Forensic accounting necessitates frequent collaboration with internal groups, attorneys, law enforcement agencies, subjects, and witnesses. The coronavirus lockdowns have relegated white collar professionals to work-from-home status, which has proved disruptive to the forensic process.

Hanover corroborates the challenges posed by COVID-19-caused disruption. “Legal matters have been delayed by clients due to business disruption,” Hanover says. “Litigation is on hold indefinitely.”

Shan-Hernandez reports similar impediments to fraud investigation coordination efforts. “Due to COVID, we’ve been operating at decreased capacity. We work with multiple partners, and coordinating everyone’s remote work schedule definitely complicates the asset-tracing process. I can no longer simply walk over to the analytics team when I need to crunch some data.”

The work continues. Fortunately, the COVID-19 pandemic has not succeeded in totally stymieing the important work performed by forensic accountants. The bulk of the labor, document review, and analysis can be performed remotely and remains unaffected by social-distancing procedures.

Many forensic accountants find that working from home has proved easier than they expected. Shan-Hernandez reports that, aside from a few technical hitches, the transition process has been pretty seamless. “My team regularly touches base, and other banks have been really forthcoming about sharing developing industry information.”

Despite the shifts to the forensic accounting industry wrought by COVID-19, specialists in the field remain optimistic that demand will increase sooner rather than later. The priority right now is to ensure client cases remain current and their legal positions are strong in preparation for the full resumption of court operations. No two forensic accounting engagements are the same, and the industry requires a great deal of adaptability. Forensic accountants are therefore well situated to adapt to the new environment and move their projects forward.

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA‘s coronavirus resources page or subscribe to our email alerts for breaking PPP news.

— Joshua Wiesenfeld, CPA, is a financial investigator at Labaton Sucharow LLP. To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com.