Accountants Uncover Opportunity In Forensics

shutterstock_44456887Demand for the Forensic Accounting Services industry, which includes all accounting firms that provide forensic accounting domestically, has surged in recent years, driving the growth of jobs, companies and opportunities within the industry. Major financial reform and volatility followed corruption and scandal, such as that of WorldCom Inc. and Enron, causing forensic accounting activity to boom. When Congress passed the Sarbanes-Oxley Act of 2002, it added regulation targeting internal auditing practices for corporate accounting firms that has played out over the past five years. Furthermore, after the financial crisis that spurred the Great Recession, Congress passed the Dodd-Frank Act, requiring greater financial transparency of public companies. These increases in regulation have helped Forensic Accounting Services industry revenue grow a strong 8.7% per year on average in the five years to 2013 and will continue to drive growth a forecast 6.7% per year on average in the five years to 2018. Comparatively, revenue for traditional accounting services is projected to grow a mere 3.4%.Forensics-Rev-Growth

Even with increased oversight, global antifraud organization the Association of Certified Fraud Examiners estimates that more than 5.0% of revenue costs for businesses worldwide were from fraud. While increased regulation and financial volatility can pose threats to many industries, they actually benefit the Forensic Accounting Services industry because forensic accountants are hired to document and investigate potential financial legal issues. Furthermore, booming downstream financial and insurance markets have fueled the industry. Although large accounting firms with diversified services like Ernst & Young, PricewaterhouseCoopers and Deloitte lead the industry, there is ample room for growth with medium-size and small firms. The industry has a low level of market share concentration, with business customers looking to cut costs by opting for smaller, less costly service providers. Thus, the marked growth in forensic accounting presents business opportunities for accounting firms of differing sizes.

Forensics-BankruptciesForensic accounting leads general accounting

Although the Forensic Accounting Services industry generates only a small share of revenue for the overall accounting industry, $4.6 billion of $99.1 billion, the former has a unique advantage over the greater sector: Even during periods of financial crisis and high bankruptcy rates, the need for forensic accounting services is high, supporting strong revenue growth. Contrarily, the broader Accounting Services industry declined during the recession, struggling alongside US businesses. Businesses were hurt by an overall drop in disposable income and the subsequent decreased consumer spending, which forced many to shut down. With a declining number of companies, demand for overall accounting services, including auditing or financial services, dropped. The Accounting Services industry declined 0.8% in 2009 and 3.8% in 2010 on the back of drops in the number of US businesses in those same years. As a result of drops during those years, Accounting Services industry revenue only grew 2.0% annually in the five years to 2013, while revenue for forensic accounting expanded more than four times faster.

The tremendous opportunity for accountants in the forensic field is driving expansion. Over the past five years, the number of companies and employees in the Forensic Accounting Services industry each grew more than 14.0% per year on average, while the same metrics grew a weak 1.5% and 0.8% per year on average, respectively, in the Accounting Services industry. In the five years to 2018, employment numbers among forensic accountancies are projected to continue expanding at an average rate of 9.6% per year, while general accounting services maintain weak growth of 1.9%. This employment growth is due in part to the enticing salaries in the Forensic Accounting Service industry, averaging more than $82,000 per year. By contrast, the average salary in the Accounting Services industry is about $42,000. Forensic accountants typically earn more because their services are more specialized and require a secondary certification.

Growth in downstream demand

Growth in financial regulation as a result of the Sarbanes-Oxley and Dodd-Frank Acts has played a big part in boosting downstream demand for forensic accounting, with companies increasingly using forensic accounting services to protect themselves from financial and legal risks. Furthermore, the high volume of companies going out of business during the recession pushed up demand for forensic accountants, who are generally hired to investigate bankruptcy filings. Industry performance was underpinned by the skyrocketing number of bankruptcies, which increased more than 40.0% in each year from 2007 to 2009.

Growth in major downstream markets, particularly finance, insurance and law, has spurred organic demand for forensic accounting services in the five years to 2013. The financial sector uses forensic accounting services for various consulting and auditing needs, such as during mergers and acquisitions. Insurance companies use forensic accountants in settling insurance claims, for example, while law firms use them for financial analysis and as expert witnesses. Insurance professionals account for 15.0% of the market, and businesses account for half of the overall market. The finance and insurance sectors grew more than 19.7% annually on average during the past five years, recovering fully from recessionary losses. Although slower, demand from law firms also grew, expanding an annualized 2.1%. Law firms were able to grow during the recession by balancing out the declines in corporate activity with countercyclical work, taking advantage of similar recessionary trends that allowed forensic accounting to blossom. In conjunction with rising concerns over corporate accountability, forensic accounting has received an industry-wide boost in demand, growing strongly in the five-year period.

Outlook for forensic accounting

IBISWorld projects that revenue for the Forensic Accounting Services industry will grow at an average annual rate of 6.7% in the five years to 2018, with sustained growth in its major downstream markets, particularly the insurance and finance sectors. In line with the continually growing industry, profit is expected to expand from its current profit margin. Margins are anticipated to widen thanks to the industry’s low saturation and, thus, low competition. Small and medium-size firms in particular are expected to continue to expand in their respective markets. Smaller firms will focus on niche markets, such as patent litigation, while medium-size firms take on more forensic accounting work for major public companies.

The primary markets for the industry are expected to grow as the overall health of the economy continues to improve. Demand for medical and other health-related insurance is forecast to rise as the median age of the US population increases in the five years to 2018. Older people generally subscribe to and require health insurance more than younger people because of their greater incidence of health issues. Also, reliance on life insurance for retirement is increasing.

The financial sector, meanwhile, is expected to grow as interest rates increase from recessionary lows, boosting the amount of revenue banks generate from loans. While increasing interest rates have the potential of lowering demand for loans, growing corporate profit will allow businesses to afford more loans in order to expand, ultimately resulting in the value of loans increasing.

Although growth in the Forensic Accounting Services industry will stay strong, it is slowing compared to the past five years. With continued pressure to maintain corporate accountability, financial and insurance institutions are increasingly hiring forensic accountants to work internally, which are not included in the official Forensic Accounting Services industry. Although this shift is notable, the high demand from downstream markets will keep it from having a significant effect on industry growth in the foreseeable future.

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