Because accounting is the language of business, litigators frequently
rely on CPAs to analyze business transactions and present technical
financial evidence to lawyers, judges, and juries. CPA's often search
for hidden financial assets, determine the value of closely held companies,
and evaluate the monetary loss resulting from a legal wrong.
You've heard of doctors solving murder cases using forensic medicine.
Well, CPAs can locate hidden assets through a process call forensic
accounting. Since it involves determining the financial facts in a case,
forensic accounting requires analyzing numerous financial documents
and transactions, reviewing public and private records, and discovering
relationships and patterns among the data. CPAs apply their forensic
skills in a wide range of legal matters:
and Partnership Disputes
These assignments often require a close look at years of accounting
records to quantify the issues in dispute. A common issue is the compensation
and benefits received by each of the disputing shareholders or partners.
Business investigations can involve tracing funds and identifying and
recovering assets. Employee fraud investigations often involve procedures
to determine the existence of fraud, identify the perpetrator, and quantify
A person who is getting a divorce generally has known about it for some
time. For years, that person may have hidden income and assets from
the soon-to-be ex-spouse, in order to make the divorce "more affordable."
If that person owns a business, he or she may have structured transactions
specifically to make the business appear less profitable and less valuable
than it really is. Ways to do this include:
valuation profession has advanced greatly in the past decade because
of the recent availability of market data useful in valuing small businesses
and professional practices.
Business Economic Losses
CPA's are well equipped to quantify lost sales, lost profits, and other
economic losses resulting from injury to a business. In may cases, economic
losses extend years into the future because the repercussions if a business
injury affect profits for years to come.
involving business economic losses include contract disputes, construction
claims, product liability claims, trademark and patent infringements,
disclosure of trade secrets, professional negligence, insurance claims,
and breach of non-compete agreements.
a CPA for Litigation Support or Expert Testimony
CPAs are often retained to analyze, interpret, summarize, and present
complex financial and business related issues in a manner that is both
properly supported and understandable. They often develop computerized
applications and other visual aids to effectively present financial
the attorney intends to use the CPA's work in connection with expert
testimony, the attorney, and not the client, should engage the CPA in
order to protect the CPA's work-product from discovery. In a recent
development, even documents prepared by a CPA to help a clients lawyers
analyze expected litigation for purposes of making a business decision
may be granted work- product protection (U.S. v. Adlman, CA-2, 1998).
litigation support team at The Videre Group, LLP is experienced in all
of the above and is prepared to assist in your litigation and valuation
Language CPA's Speak
In Forensic Accounting Assignments
Payable - Amounts owed to creditors for goods and services. The
CPA may ask questions as to how long certain accounts have existed,
whether there are any fairly new suppliers, and exactly what was purchased.
Receivable - Money owed to a business for merchandise or services
it sold. When business or personal relationships are deteriorating,
a business owner may purposely delay customer billing or even call customers
to suggest postponing payment.
- Allocating the cost of fixed assets, such as buildings and equipment,
over their useful lives. Depreciation reduces taxable and book income
but does not reduce cash. The CPA on a forensic assignment may investigate
two possibilities: that fully depreciated property no longer appears
on the balance sheet, and that partially depreciated property is actually
worth more than the books say it is.
Account - An account many bookkeepers use for posting items that
don't readily lend themselves to the established accounts. Unusual items
could be red flags for the CPA to investigate.
In Valuation Assignments
- The determination of value. The term is frequently interchanged
Value - The difference between a business's total net assets and
total liabilities, as they appear on the balance sheet. The term is
commonly interchanged with the terms net worth and shareholder's equity.
Valuation - The determination of what a business enterprise or an
interest therein is worth.
Premium - The additional value inherent in the control interest
in a business enterprise, as contrasted with a minority discount, which
reflects the absence of control.
Discount - An amount or percentage deduced from an equity interest
to reflect the difficulty of finding a buyer for this particular business
Rate - An interest rate used to convert money to be received in
the future into its present value (what it is worth today).
Before Interest and Taxes - (EBIT) - Corporate profits calculated
before deducting interest and taxes paid.
Before Interest, Taxes and Depreciation and Amortization (EBITDA) -
Operating profits before deducting depreciation.
Market Value - The price that a property would bring when both the
hypothetical buyer and seller know what they are doing and are trading
Financial Statements - An entity's financial information adjusted
to make it more meaningful for comparison with a similar entity's financial
information. Normalized financial statements may depart from generally
accepted accounting principles (GAAP) or an other comprehensive basis
of accounting (OCBOA) because their sole purpose is to determine an
In Business Economic Losses Assignments
Item - An unusual expense or loss that the business incurred and
that must be explained to shareholders in financial statements. An example
would be employee fraud that worsened the company's financial condition.
Cost - Cost that remains constant regardless of sales volume. Fixed
costs include salaries of executives, interest expense, rent, depreciation,
and insurance expenses. Cost accounting is concerned with the allocation
of fixed costs to inventory costs - or in the construction business,
to job orders.
- A business's reputation, patronage, and ability to earn more income
than one would expect viewing the business as a mere collection of assets.
Forma Financial Statements - The presentation of a hypothetical
balance sheet and income statement for the purpose of showing the future
effects of a current or imminent event.
was originally written for The Attorney's Report, a newsletter produced
by The Videre Group, LLP.