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The Value of Using the Services of a Forensic Accountant in Legal Matters

Engage and Assist Legal Counsel

It is critical that the right person with the right expertise, training, and background be selected. This article will describe the various areas of specialization in which a forensic accountant performs, how counsel should select the right professional for the job, and the benefits of using a forensic accountant.

One of the most critical decisions practicing attorneys have to face is the selection of a forensic accountant.  The specialized training and expertise of forensic accountants and the role they can play, either as consultants or as expert witnesses can make the difference in the final outcome of a case.  However, it is critical that the right person with the right expertise, training, and background be selected.  This article will describe the various areas of specialization in which a forensic accountant performs, how counsel should select the right professional for the job, and the benefits of using a forensic accountant.

A trained forensic professional—such as those holding or pursuing the MAFF—are best utilized in legal matters to perform investigative accounting procedures, prepare business valuations, and to determine economic damage and lost earnings calculations.

Specific areas of specialization/sub-specialization, where these professionals might be used include:

  • investigative accounting arising from:
    • shareholder/partner disputes
    • bankruptcy, insolvency, and reorganization proceedings
    • marital dissolutions
    • securities and tax fraud
    • money laundering
    • computer/e-discovery
    • disputes relating to contractual issues ranging from earn-outs to royalty audits
  • business valuations for the purpose of:
    • meeting the requirements of buy sell agreements
    • marital dissolution proceedings
    • gift and estate taxes
  • economic damage and lost earnings calculations relating to:
    • breaches of contract
    • torts

Some basic examples as to how these professionals are used can be illustrated as follows:

Example 1—Use of forensic accountant to perform investigative accounting in bankruptcy proceedings.  Lawyers for the unsecured creditors frequently hire a forensic accountant to look at transactions which preceded the date of bankruptcy filing.  The trained forensic professional will focus this part of the investigation on disbursements and other transactions by insiders and various outsiders for the purpose of determining whether any preferences might exist.  Any such preferences would revert back to the bankrupt estate, thus enhancing the interests of the various unsecured creditors.

Example 2—Use of forensic accountant to perform business valuation in marital dissolutions.  Both sides might hire their own separate business valuators or the parties might stipulate to use the same credentialed business valuator.  This would be done for the purpose of determining the value of the family owned business in order to facilitate an equitable distribution of the marital estate.

Example 3—Use of forensic accountant to calculate damages resulting from torts.  A trained forensic professional might be hired by either the plaintiff or defense to quantify the economic damages, including any lost earnings suffered from a personal injury claim arising from an automobile accident.  This would be done in order to help determine the amount of damages that the court might award.

Each of the above examples represents a different area of expertise, requiring a separate set of skills, background, and training.  Therefore, it is critical that the lawyer have a basic understanding of the different types of specialties that are available, in order that the right professional is ultimately selected.  This means that a certain level of due diligence is required of the attorney.  At a minimum, the attorney should carefully evaluate and clearly understand what is needed, and then ascertain that the forensic accountant or trained professional selected has the background, training, experience, and capabilities to fill this need.  This also includes making sure the person selected has the appropriate credentials when applicable, as well as looking into the person’s reputation.  If the attorney intends to have the trained forensic professional serve as an expert witness, the attorney should also be comfortable that the person selected will make an effective witness.  Therefore, the attorney should make it a point to ask the forensic accountant if she or he has testified in the past, get references as to which attorneys the professional has testified for, and check them out thoroughly.  Finally, remember that when in doubt, a simple consultation with another forensic accountant or trained professional can go a long way.

As for the benefits these professionals offer, this can range from the obvious, “that it is critical to the outcome of the case”, to some of the less than obvious.  Some of these less than obvious benefits can result from the ability to do the following:

  • analyze voluminous and complex financial transactions and data, and ultimately summarize them into a simpler and more concise format so that all the parties can have a better understanding of the facts;
  • assist legal counsel in discovery by formulating technical questions for deposition and interrogatories;
  • gain an understanding of the opposing expert’s position and educate legal counsel as to its relative merits and weaknesses;
  • assist legal counsel in preparing for trial by formulating questions for cross-examination of the opposing side’s expert.

Each of these benefits can bring with them a series of tangible and intangible results.  These results can range anywhere from providing the necessary preponderance of evidence to win the case, to mitigating damages, or to perhaps allowing either side to get a more objective handle on the issues and ultimately getting the case to settle, thereby avoiding the cost of a trial.

For example, in a case where the attorney was defending his client in a shareholder dispute, the largest part of the dispute involved the stock repurchase price, which was to be determined pursuant to a previously executed buy sell agreement.  According to the buy sell agreement, the repurchase price was based on the results of a third party valuation report, which I was asked to review.  While I found the substance of the valuation report to be reasonable, my experience as a forensic accountant allowed me to uncover several errors, which resulted in an overstated repurchase price.  After reporting these errors, the original valuator recalculated the repurchase price of the stock, thus dissipating any significant differences between the parties.  The end result was that the dispute was settled and the cost of a lengthy trial was averted.

In another situation, I received a call from an attorney for the defense in a product liability claim.  The attorney advised me that the claimant was in the process of filing a legal action against his client and that he had been hired to evaluate the veracity of their alleged claim.  The attorney gave me the claimant’s calculations, which I studied, after which I submitted a list to him.  This list asked for certain internal documents from the claimant in order to see if they supported the alleged damage claim.  In response, the claimant did produce many of the documents that were requested.  However, the claimant was still reluctant to produce certain other documents, which would have clearly supported the amount of their alleged claim.  I then indicated to legal counsel that the opposing side’s resistance to producing these documents could be an indication that the amount of damages claimed was without merit.  The attorney was able to use this newfound information to effectuate a favorable settlement.

In each of these illustrations, the use of a forensic accounting expert added an extra dimension to the legal team’s overall effectiveness, thereby getting a favorable result.  This is something that should be kept in mind whenever faced with the cost-benefit analyses of whether to use a forensic accountant.  In closing, there are many more examples showing how a forensic accounting expert contributed significantly to the legal team’s performance and end result.  However, it should always be kept in mind that selecting the right professional with the right experience, background, and credentials is as critical to this process as is the decision to use someone in the first place.

Copyright 2015–2017, Robert Mayeri

Bob Mayeri is a certified public accountant licensed in the states of California and Alabama. Mr. Mayeri also holds credentials as a Certified Valuation Analyst (CVA) from the National Association of Certified Valuators and Analysts (NACVA), and Master Analyst in Financial Forensics (MAFF) from Consultant’s Training Institute (CTI). With over 35 years of experience, Mr. Mayeri’s practice consists of business valuations and forensic accounting, as well as traditional tax and accounting services. Mr. Mayeri’s practice is based in Birmingham. AL and his services are available on a nationwide basis. For further information please see his website at http://www.robertmayericpa.com/ or his LinkedIn profile at https://www.linkedin.com/pub/bob-mayeri/9/b58/282.

Mr. Mayeri can be reached via telephone at (818) 497-1200 or via e-mail to RMayeri2@gmail.com

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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©2017 NACVA and the Consultants' Training Institute • (800) 677-2009 • 5217 South State Street, Suite 400 Salt Lake City, UT USA 84107

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