Financial Forensics in Arson Cases
Net Cash Flow is Often the Most Significant Single Factor in a Financial Condition Analysis
A financial expert in an arson case answers four questions: What changes occurred in financial condition prior to the date of the fire? What was the financial condition at the date of the fire? What was the future financial picture if there had not been a fire? Was there a potential financial benefit from the fire?Â Joe Epps explains why each of these questions matter.Â
Arson cases require three proofs. Â This is true whether the case is criminal or civil. Â One of those proofs is motive. Â The motive is often (but certainly not always) financial. Â The financial expert in an arson case answers four questions:
- What changes occurred in financial condition prior to the date of the fire?
- What was the financial condition at the date of the fire?
- What was the future financial picture if there had not been a fire?
- Was there a potential financial benefit from the fire?
Ultimately, it is up to the jury to make the conclusion whether a financial motive for arson existed. Â A forensic accountant who performs the appropriate analysis will answer each of the questions and thereby provide the information necessary for the jury to do their job.
Analysis of financial condition requires consideration of assets, liabilities, income, expenses, and net cash inflow or outflow. Â It also requires consideration of specific financial issues such as the timing of balloon note payments or other unusually significant financial needs. Â Often, cash inflows and outflows are a key consideration.
Net cash flow (cash inflows less cash outflows) is often the most significant issue in the financial condition analysis. Â This requires the determination not just of â€śincome,â€ť but of the net impact of money flowing into and out of the personâ€™s wallet or the business.
Looking at the changes in financial condition prior to the date of the fire provides historical perspective. Â One court held that it was not enough to show that someone was in poor financial condition as a prerequisite to a motive for arson. Â If the only requirement was to prove someone was in poor financial condition, many people without a strong financial condition would have a motive. Â It is also necessary to show deterioration in financial condition. Â
The analysis of historical financial condition will generally cover the period for which data is available. Â In one recent case, data was available for more than 20 years. Â In another case, data was provided for three years. Â There is no specific time requirement for which the analysis must be performed. Â The critical element is that there must be sufficient pre-fire data to identify changes over a relevant period of time. Â These changes over time indicate whether the business or individual was experiencing an improving, declining, or flat financial condition. Â The changes occurring closest to the date of the fire are the most relevant.
The second question to be answered is the financial condition at the date of the fire. Â This question requires the forensic accountant to consider all aspects of the financial resources and needs at the time of the fire. Â This analysis includes the cash coming in and the cash going out. Â It also includes the level of assets (liquid and illiquid) and debt (short-term and long-term). Â Another issue considered is whether or not the party was current on all debt or if they were falling behind.
The third question addresses what would likely have occurred if there had been no fire. Â The forensic accountant uses past history and the situation at the time of the fire to make a projection of probable future results. Â The future projection needs only to go out for a relevant period of time. Â The relevant time period is determined by the specific situation. Â For example, whether there is a balloon note due in three months or that the party would run out of cash in five months. Â In these examples, the relevant time periods might be three months and five months, respectively.
The fourth question provides the potential financial benefit to the party being considered. Â In many cases, the benefit comes from insurance coverage. Â In such cases, it is important to know what coverages were in place and also, what was actually paid out, even if to other parties (i.e. the lender).Â
In some cases, the potential financial benefit is not related to insurance. Â The motive may be to get out from under a mortgage or to remodel an older property. Â One business realized a benefit from being able to break a long-term lease and move to a more advantageous location. Â In these instances, other additional evidence is most often tied to the financial issues.
Joe Epps is a CPA and CFE with over 30 years of experience in forensic accounting. His litigation support experience includes contract disputes, anti-trust, economic damages, fraud investigations, business valuation, and intellectual property litigation. Joe is currently President of Epps Forensic Consulting, Â and he teaches a graduate course on forensic accounting at Arizona State University. For more information, please call (480) 595-0943 or visit www.eppsforensics.com.