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Using a CPA Can Show You the Money

Written by:
Maria Aprile, CPA;CFE
The Videre Group, LLP

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.

Finding Hidden Assets
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:

Shareholder 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/Employee Fraud Investigations
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 misappropriated amounts.

Divorce Cases
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:

  • Taking inappropriate write-offs or receiving excessive perks
  • Siphoning off profits
  • Artificially raising costs through "dummy" middlemen, and
  • Simply not reporting cash receipts

CPA's are often called upon to trace, locate, and evaluate such business assets and evidence of higher earning potential than the business owner-spouse claims.

Valuing Closely Held Companies
Whenever business owners seek additional financing, sell their businesses, or pass their holdings on to the next generation, and whenever their business and personal relationships end up in litigation, there is need for professional valuation of a business.

CPA's examine the following items in valuing a closely held company:

  • The nature and history of the business.
  • The condition of and outlook for the general economy and the specific industry.
  • The stock's book value and the business's financial condition.
  • The operation's earnings and dividend-paying capacity.
  • Any goodwill or other intangible value.
  • Sales of the stock and the size of the block of stock to be valued, and
  • The market price of stocks of similar businesses with actively traded stock.

The 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.

Quantifying 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.

Assignments 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.

Engage 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 evidence.

Unless 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).

The 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 needs.


The Language CPA's Speak

In Forensic Accounting Assignments

Accounts 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.

Accounts 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.

Depreciation - 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.

Suspense 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

Appraisal - The determination of value. The term is frequently interchanged with valuation.

Book 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.

Business Valuation - The determination of what a business enterprise or an interest therein is worth.

Control 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.

Marketability Discount - An amount or percentage deduced from an equity interest to reflect the difficulty of finding a buyer for this particular business interest.

Discount Rate - An interest rate used to convert money to be received in the future into its present value (what it is worth today).

Earnings Before Interest and Taxes - (EBIT) - Corporate profits calculated before deducting interest and taxes paid.

Earnings Before Interest, Taxes and Depreciation and Amortization (EBITDA) - Operating profits before deducting depreciation.

Fair Market Value - The price that a property would bring when both the hypothetical buyer and seller know what they are doing and are trading willingly.

Normalized 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 entity's valuation.

In Business Economic Losses Assignments

Extraordinary 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.

Fixed 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.

Goodwill - A business's reputation, patronage, and ability to earn more income than one would expect viewing the business as a mere collection of assets.

Pro 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.

article was originally written for The Attorney's Report, a newsletter produced by The Videre Group, LLP.



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