It is not unlikely that most people have seen or at least heard about a CSI or other crime mystery show in their lifetime. These shows generally have a run-time of approximately 45 minutes, during which some piece of obscure evidence is found that leads to the conviction of a suspect. Forensic accounting is the application of some of the depicted investigative skills, and more, that you see in many of these types of shows. One noteworthy difference is that a financial mystery is not solved in the time it takes to watch an episode of a television show.
One of the most famous forensic accounting scenes in cinematic history was in the movie “The Untouchables” where Al Capone’s accountant was put on the stand and read from a set of books about Capone’s wide-ranging business interests, for which no income taxes were ever paid. The joke that “it took the IRS to get Capone” is true, but today it isn’t just the IRS and FBI. There are trained professionals in many types of civil and criminal litigation that are called in when a court case has been, or is expected to be, filed.
Forensic accountants are most commonly associated with criminal cases: tax fraud, securities fraud and money laundering. This does not, however, encompass the full range of work forensic accounts may be utilized in. Forensic accountants may be involved in investigating professional negligence by CPAs, fraud cases against companies for providing false or misleading information to the new buyer of the company, breach of contract cases where a party was supposed to receive or pay certain amounts based on the occurrence of an event such as gross revenue or sale of a specific product or service, suing an appraiser for negligently valuing a business that was sold at a price based on that valuation, investigating employee theft or embezzlement utilizing falsified expense reports, finding assets that have been obscured in other names or locations, breach of warranties, false insurance claims, or even identity theft. You may even find a forensic accounting investigating a claim of lost profits allegedly caused by a vehicle wreck. Other cases you might not have expected to find a forensic accountant hard at work are patent or copyright cases, malfunctioning product claims, constructions cases, bankruptcy fraud, or even calculating damages in a medical malpractice case.
Because there are so many possible needs for a forensic accountant, one who chooses to pursue this line of work understands they will likely be a witness at some point for a deposition or trial. Those who are skilled at finding things others have missed can help expedite cases. Just the act of retaining a skilled forensic accountant can cause a case to settle. The great ones are feared!
Overview of the Process
It can be fairly summarized that a forensic accountant’s job is to find data, synthesize it into a usable format, and then disseminate the results of the investigation to the proper parties.
Within that job description, one can rightly imagine that the process of finding the data can be the hardest part. What most people may underestimate, however, is the difficulty of assembling that data into forms that can be effectively used in court cases, especially in economically complex cases.
Finding the Data
If forensic accountants are trying to find every possible piece of evidence existing in a case, they must understand the legal theories which may come into play in the case, the economics in certain cases, how information is obtained, stored, processed and used by the companies involved, the regulatory environment then company operates in, the technology in use and every possible source of information which might exist in a case.
Think of a situation in which the buyer of a company experiences “buyer’s remorse” after the company fails to generate revenues comparable to what were reported by the seller in the previous three years: information that was used as a basis in calculating the value of the company in the exchange between the buyer and seller. Where would a forensic accountant start if working for the buyer? Would a subjective or objective approach be best?
An objective process would involve trying to assemble all the data to arrive at a duplicate set of reports which used the same definitions as were used by the seller’s reports. For example; if the seller used simple listings such as “gross revenue”, “costs of goods sold”, etc., then the forensic accountant would use those all the relevant accessible data to come up with his/her own conclusions for these areas.
A subjective process would be to ask the seller for all of the data which went into the various areas listed in the report(s) and the determine how much of what was provided was true or false, assess whether additional information should have been included that wasn’t and, if such data was omitted, obtaining the data and reevaluating the information provided.
The threshold step is to obtain the data, whether it is looking at what the company says underlie the report numbers or finding additional data. The forensic accountant needs to come to a belief that everything that should go into the calculations for each area listed on the reports given to the buyer is in his/her hands. Believing that one has all the data needed or knowing that the data no longer exists is critical.
Problems are likely to arise in the attempt to amass all the data that a forensic accountant thinks are relevant. In cases where a seller has cooked the books, there will be tremendous resistance to providing anything which leads to the truth. The forensic accountant may be handed a Quickbooks file for each of the three years but not be supplied with bank statements showing actual deposits, invoices to verify the entries made for expenses, or any other underlying documentation to verify the existence and accuracy of recorded transactions. The forensic accountant may also be provided with falsified versions of the aforementioned documents. Determining what is and what isn’t is part of the life of a forensic accountant.
Assembling the Data into Usable Forms
Assuming that all the data collection hurdles have been bested and the forensic accountant has all the data he/she wants, the job is then to confirm or deny the results previously reported in the seller’s reports. This isn’t as simple as data entry and footing.
Imagine the seller reported $2.3 million of equipment purchases and provides the forensic accountant with 117 receipts that total to the exact amount reported in the seller’s original financial statements. The forensic accountant will need to reasonably determine the existence and accuracy of these purchases. This likely includes matching checks, invoices, Quickbooks entries and bank statements. A forensic accountant will also likely want to physically observe purchased equipment. This means going out to a location that a piece of equipment is expected to be stored or in use and comparing the information provided to the actual physical asset itself. One important item to look for is any sort of unique identified on the equipment and invoice. This will help ensure that the equipment recorded was the equipment that was actually purchased. If the equipment has been reasonably confirmed as existing, the accuracy is the next step. The forensic accountant can contact the 3rd parties who sold the equipment to the previous business owner and request transaction records for the specific company over the prior three years. The forensic accountant can compare these reports to the invoices provided by the seller of the business under investigation and look for any anomalies. The seller could have hidden expenses to inflate revenue.
“Trust nothing you are given and verify everything” is the creed of the forensic accountant. At some point, the forensic accountant is going to reach a conclusion that is going to agree or disagree with the seller’s reports.
Using the Results
As the services of the forensic accountant have been retained, it can be inferred that litigation is likely or has started. The forensic accountant needs to focus on three things.
Firstly, the forensic accountant must prepare a report of findings stating what he/she agrees or disagrees with and elaborating on the disagreements. Moreover, if insufficient data exists to confirm or deny the reports, the expert will want to state what he/she could not get access to, why the data was inaccessible, and why the data was needed to confirm or deny what was reported by the seller.
The second step is to get ready for the inevitable deposition. This involves not only working with the client’s litigators to go through trial runs of questions, but also to refresh his/her memory as to the process used to devise the reports he/she generated. A forensic accountant may take detailed notes of his/her process so that, when called upon, he/she can clearly explain and demonstrate what steps were taken to lead to the conclusion. This is also useful for review and evolution of forensic accountants as they can look back at an investigation and evaluate what could have been done differently. No expert wants that “gotcha” moment in the middle of a deposition or trial, so any items that the forensic accountant thinks may be erroneous or in need of further investigation after further review need to be addressed. Every expert knows that attorneys will focus most on the process used rather than the conclusions generated. Good experts are prepared to defend their process to the grave.
Lastly, the expert may need to testify in court if the case is not settled outside of it. Preparing for trial is different than preparing for a deposition. Much more care is given to preparing the witness compared to preparing for a deposition. Dress, body language and vocabulary are meticulously covered in preparation for how the witnesses will present themselves physically and verbally. The terminology used in explaining conclusions and how the processes used to reach the conclusions are very important. An expert’s credibility is diminished if incorrect terminology is used.
While trials are intended for the pursuit of truth, they must also be managed by the client’s attorneys so the best presentation will be made. Any data presentation methods used, such as exhibits, charts or PowerPoint presentations, need to be thoroughly prepared so as to be clear and concise. The expert may also help draft cross examination questions to be used against the other side’s expert.
Today’s forensic accountants must be as much a sleuth solver as they are an accountant. Being a good accountant is a good start, but a Sherlock Holmesesque attention to detail and ability to develop a process by which every piece of evidence need is uncovered is equally important, if not more so.
Trials live and die because of how skilled forensic accountants are. Make sure you hire one that is good at all parts of the game as your freedom or money may be at stake. You cannot afford to not hire the best qualified.