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The Role Of Forensic Accountants In Stock Market Management

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When the average person thinks about accounting, they think of common functions like tax preparation and managing business finances, but those aren’t the only career options. Particularly for certified public accountants (CPAs), there are many other potential professional avenues, including forensic accounting.

Though rarely in the spotlight, forensic accountants play a critical role in our financial markets, specifically in regards to protecting the integrity of our investments. Operating with knowledge far beyond typical accounting skills, this is a glimpse behind the curtain into the complex world of forensic accounting.

Back To The Beginning.

To understand the role of forensic accountants today, we have to go back to the beginning and the origins of the field seventy years ago. This was when researchers first began studying the concept of fraud and developed the concept of the fraud triangle, a psychological and technical concept used to understand why a person commits fraud. Since then, the fraud triangle has helped experts understand and reform financial systems for decades, but forensic accounting as we understand it today – as a field concerned with asset misappropriation and other misrepresentations – has only been in existence for about thirty years.

Driven By CPAs.

During the early days of forensic accounting, the industry was only marginally connected to the work of CPAs. Rather, this era primarily focused on the savings and loan scandal of the 1980s and 1990s, an issue unrelated to the accounting industry. During this same period, however, regulatory changes put CPAs in charge of addressing antifraud issues related to financial markets, a change that defines the field today. Indeed, today’s CPA exam includes sections on regulations, auditing and evidence gathering, and professional ethics, all of which allow any CPA to consider a career as a forensic accountant.

Protective Measures.

Now that CPAs are the leading figures in forensic accounting, we see them at work in cases of brokerage fraud, and as protectors of the public trust. This includes identifying cases in which a broker may have a vested interest in a trade, beyond their standard fee or commission, identifying cases of portfolio churning (a unique challenge in the era of day trading), and protecting investors from Ponzi schemes, junk bonds, and other dishonest investment products.

In addition to smaller, private investigations, forensic accountants may work for the FBI or the IRS investigating larger incidents of fraud. Think back, for example, to the Enron scandal of the early 2000s. This case was marked by a variety of dishonest accounting practices, financial misrepresentation, and which ultimately ended with Enron’s stock falling from a valuation of over $90 to just $1 in the course of a single year. Ultimately, it was the work of forensic accountants to revealed the many forms of fraud at work at the company, and collected the evidence necessary to prosecute the company’s leadership.

Policing The Financial Industry.

Despite the common representation of accounting as a rather dry, boring field, a quick look at the work of forensic accountants reveals just how important CPAs are to how our markets function. Any time you purchase or sell a stock through properly regulated channels, when you know you can trust your broker and that publically traded companies are vetted and held accountable, you have forensic accountants to thank.