What Do Crime Scene Witnesses and Business Owners Have in Common?
Look at the Numbers and Exercise Skepticism
Often, business owners will inadvertently present a biased account of their company’s success. Is there a similarity between the bias of business owner’s and crime scene victims? In this article, the author answers this question.
Imagine this: you are at the scene of a crime. Witnesses are canvassed, each with their own version of events. One witness is adamant the suspect was wearing a red jacket, another swears it was blue, and a third did not even notice a jacket at all. The accounts are varied, often conflicting, and shaped by personal biases, faulty memories, the way the question is asked, and limited perspectives.
Now, shift that scene to the boardroom of a small business. Instead of detectives, we have an executive, an accountant, a salesperson, and a business consultant. Instead of eyewitnesses, we have business owners recounting the financial performance of their companies. These two scenarios underscore a critical point: when it comes to understanding the factual account of events, relying on subjective accounts could lead you down a very murky path.
Witness Statements vs. Business Owner Accounts
Research consistently shows that eyewitness statements are often unreliable due to a variety of factors, including the misinformation effect.[1] This phenomenon occurs when a witness’s memory of an event is altered by exposure to incorrect or misleading information after the fact.
For instance, in classic studies by Elizabeth Loftus and her colleagues,[2] participants who were given subtle suggestions—like using the word “smashed” instead of “hit” when describing a car accident—were more likely to recall false details, such as seeing broken glass that was not there. Similarly, participants that are misled about seeing a “yield” sign instead of a “stop” sign were more likely to incorrectly remember seeing the yield sign in the initial event.
These studies underscore the broader issue that human memory is highly malleable and susceptible to distortion from external influences, whether from suggestive questioning by law enforcement, conversations with other witnesses, or even personal biases. This unreliability has been widely recognized in psychological research, legal settings, and even by courts, including the United States Supreme Court,[3] as a significant concern when relying on eyewitness testimony.
At a crime scene, witness statements are notoriously unreliable. People’s memories are imperfect, their observations colored by stress, personal biases, or simply by what they wanted to see. In the heat of the moment, details could be exaggerated and/or completely overlooked. Similarly, when a business owner discusses their company’s financial performance, they are often influenced by their own experiences, aspirations, and emotions, or the questions asked. A business owner’s perspective is no different; they see their business through a lens of hard work, sacrifices, and dreams for the future. The business owner’s narrative might be more of a perception than a precise account of the financial results.
In crime scene investigations, detectives know to treat witness statements with caution, aware that human bias is a significant factor. One witness might have a personal connection to the suspect, another might be influenced by media portrayals, and some might just want to be helpful, filling in gaps with what they think happened.
Een the Mishnah (a foundational text of Jewish oral law) in “Ethics of the Fathers” includes guidance related to how judges should conduct themselves in questioning witnesses.[4] The text cautions: “Be thorough in the questioning of witnesses, and be careful with your words, lest they learn to lie.” This passage advises judges to be diligent in their questioning to avoid inadvertently providing cues or leading the witness to give a tailored or false response and so preventing witnesses from adjusting their answers to align with what they think the judge wants to hear.
Business owners, too, have their biases. They may paint a rosy picture of their business when discussing their financials, driven by optimism or even a subconscious desire to impress stakeholders. This bias could lead to overestimating revenue, underestimating costs, and/or overlooking risks. This results in a skewed version of the company’s financial health that, while likely well-intentioned, may not match the hard facts on the company’s financial statements. This is especially true of any forward-looking forecasts and projections.
The Value of Quantitative Analysis
Just as detectives rely on forensic evidence (fingerprints, DNA, and surveillance footage) to piece together the truth, financial professionals turn to quantitative analysis to get a clear, unbiased view of a company’s performance. Numbers do not have biases. They do not remember things differently because they were tired, stressed, biased, or overly optimistic. Financial statements, cash flow analyses, and balance sheets provide a consistent, objective foundation to understand what is really happening in the business.
Quantitative analysis digs into the actual data; revenue trends, expense patterns, profit margins, and more. It reveals the hidden truths that a business owner’s narrative might miss or misrepresent. For instance, while an owner might be thrilled about a recent surge in sales, a deeper analysis could show that the surge was temporary and unsustainable, masking underlying issues such as market saturation, “channel stuffing,”[5] or changes in consumer behavior and demand.
For forensic accountants, expert witnesses, business valuation professionals, or anyone involved in assessing a company’s financial health, understanding the distinction between narrative and data is crucial. Just like detectives should not base their entire case on witness statements alone, financial experts know that a business owner’s take on their performance is only one piece of the data.
Relying solely on an owner’s perspective can lead to decisions based on wishful thinking rather than solid financial footing. By prioritizing quantitative analysis, professionals can utilize facts instead of opinions. This is necessary to perform a complete, accurate, and defensible financial analysis.
According to the AICPA’s Code of Professional Conduct, members are required to exercise due professional care, which includes maintaining an attitude of professional skepticism throughout the engagement. This skepticism involves being alert to conditions that may indicate possible misstatement due to error, fraud, or bias, and critically assessing audit evidence rather than simply accepting assertions made by the client.[6]
Similarly, the NACVA’s Professional Standards emphasize the need for analysts to maintain objectivity and independence, ensuring that their valuation or financial analysis is not unduly influenced by the business owner’s subjective accounts.[7] This commitment to professional skepticism is what separates a thorough, defensible analysis from one that may be swayed by personal biases or incomplete narratives, reinforcing the idea that robust, data-driven methods should form the basis of all financial analyses.
Ensuring Due Professional Care and Addressing Bias
Economic damages and business valuation professionals, like crime scene investigators, should exercise professional skepticism. To ensure they are not unreliably swayed by client assertions, these professionals should implement specific procedures that safeguard objectivity. For instance, professionals can:
- Cross-check Subjective Claims: Whenever a business owner presents an overly optimistic forecast or recollection of past performance, it is important to consider if these claims can be verified with third-party data, such as industry benchmarks or actual financial records. Just as a detective does not solely rely on witness statements, a financial expert should dig deeper into the facts.
- Conduct Forensic Inquiries: Be on the lookout for inconsistencies in the client’s narrative or any unusual trends that could signal fraud or error. Consider investigating the company’s general ledger, accounting policies, and internal controls might uncover hidden biases.
- Utilize External Sources: Consider relying on objective sources of data such as market reports, industry trends, and audited financial statements to mitigate the influence of subjective opinions. Quantitative analysis becomes a powerful tool to counteract a business owner’s emotional or aspirational view of their business’s value.
Quantitative Analysis
NACVA professionals should consider employing quantitative analysis techniques to uncover the truth behind the numbers, just as detectives use forensic evidence to build a solid case.
To evaluate financial data, NACVA professionals could, depending on their engagement’s risk assessment:
- Analyze Revenue Trends and Expense Patterns: Instead of relying on generalized statements from the business owner, professionals could disaggregate revenue streams and note any fluctuations and long-term trends found. This may help to assess whether revenue growth is sustainable or if there are seasonal or temporary spikes. Professionals should also analyze expense categories; this could provide insights into where inefficiencies may exist.
- Examine Profit Margins and Financial Ratios: Professionals should consider conducting a ratio analysis, focusing on ratios such as profit margins, return on assets, debt-to-equity, etc. This process provides a summarized view of the subject company’s financial health and helps professionals see beyond the surface to assess whether a business is managing its resources effectively.
- Use Financial Benchmarking Data: Consider comparing a company’s performance to similar businesses in its industry using benchmarking data (from sources such as IBISWorld, BizMiner, or RMA) can highlight where a company’s performance deviates from industry norms. This can help professionals identify potential risks or opportunities.
Quantitative analysis is a powerful tool for NACVA professionals as it enables practitioners to strip away biases and dig deeper into the financial realities of a business. Just as detectives sift through forensic evidence to form a clear picture of what transpired, NACVA professionals must carefully examine the numbers to uncover the true story behind a company’s financial performance. This requires moving beyond the surface of the data provided by the business owner and instead relying on empirical evidence to assess the health of the business.
Conclusion
In both crime scene investigations and business financial assessments, the truth may be obscured by human biases. While a business owner’s insights are valuable and provide context, they may not be a substitute for the rigorous, data-driven analysis that will reveal the full picture. The next time you hear a business owner describe their company’s performance with the same confidence as a crime scene witness describing the suspect, consider that the numbers do not lie. Whether you are solving a crime or assessing a business, it pays to evaluate the evidence and exercise professional skepticism. The best detectives and the best financial professionals know that while stories are compelling, it is the hard facts that ultimately close the case.
[1] Puddifoot, K. (2020). Re-Evaluating the Credibility of Eyewitness Testimony: The Misinformation Effect and the Overcritical Juror. Episteme, 17(2), 255–279. doi:10.1017/epi.2018.42.
[2] Loftus and her colleagues conducted numerous studies on this topic:
- Loftus, E. F. 2005. ‘Planting Misinformation in the Human Mind: A 30-year Investigation of the Malleability of Memory.’ Learning and Memory, 12: 361–6.
- Loftus, E. F. and Palmer, J. C. 1974. ‘Reconstruction of Automobile Destruction: An Example of the Interaction Between Language and Memory.’ Journal of Verbal Learning and Verbal Behaviour, 13(5): 585–9.
- Loftus, E. F., Miller, D. G. and Burns, H. J. 1978. ‘Semantic Integration of Verbal Information into a Visual Memory.’ Journal of Experimental Psychology: Human Learning and Memory, 4(1): 19–31.
[3] Wise, R.A., Fishman, C.A. and Safer, M.A. 2009. ‘How to Analyze the Accuracy of Eyewitness Testimony in a Criminal Case.’ Connecticut Law Review, 42(2): 435–513.
[4] Pirkei Avot 1:9.
[5] According to Investopedia, “Channel Stuffing” is a deceptive business practice used to inflate accounting records in which a company inflates its sales figures by deliberately sending retailers more products than they are realistically able to sell. Source: Hayes, A. (August 31, 2024). What is Channel Stuffing? How It Works, Purpose, and Legality. Investopedia. https://www.investopedia.com/terms/c/channelstuffing.asp
[6] AICPA. (n.d.). Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards. AU-C §200.14. Retrieved from https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest/
downloadabledocuments/au-c-00200.pdf
[7] NACVA. (June 1, 2023). Professional Standards. Retrieved from https://www.nacva.com/Files/NACVA_Professional_Standards_
Miranda Kishel, MBA, CVA, CBEC, MAFF, supports the completion of business valuations, business calculations, forensic accounting, economic damages, and asset tracing engagements, focusing on in-depth financial analysis including modeling, forecasting, research, and report preparation. Her previous experience lies in small business consulting, commercial lending, accounting, real estate development, and economic development.
Ms. Kishel may be contacted at (312) 229-1720 or by e-mail to kmiranda@litcpa.com.
