Three Steps for Building a Winning Case with Financial Analysis

Tracy L. Coenan published a succinct guide to fraud analysis last year in the Wisconsin Law Journal that’s very much worth reading.  Excerpt:

The financial portion of a lawsuit is often high-stakes . . . There is almost always a story behind the numbers. Things are not always as they appear, and it is unwise to take the financial story at face value. A case can be won or lost based on your ability to find out the hidden truth about the numbers.

Finding the data

Getting your hands on the right financial data depends on knowing what to ask for. The financial statements and tax returns are the obvious places to start. While they may not always be truthful, they still hold many clues to the financial story.  Manipulated financial statements may be unreliable, but they are often still useful because they may inadvertently provide clues about a company’s true income and expenses.

Tax returns could provide information on property owned, new lines of business, and related companies.  Verify the authenticity of tax returns provided in discovery by getting data directly from the
government. This doesn’t mean that the income and expenses were reported correctly on tax returns, but it does offer us one way to check whether the data we receive was actually filed with the government.

Other data sources

. . . The best, most reliable documentation in a financial investigation is provided by an unrelated third party. A great example of reliable third party data is that contained in bank statements, deposit slip copies, and check copies. Except in the rare case in which there might be collusion between a bank employee and a party under investigation, bank documents are very reliable. They show exactly where money has flowed to and from, reliably reporting the truth about the funds. [pullquote]”People lie about money”[/pullquote]

Banks may also provide helpful data from loan applications and credit card applications. While an applicant may misrepresent information while applying for credit, there is often valuable information contained in the application. At the very least, manipulated figures on a loan application may confirm that the target of the investigation is dishonest . . .

Digging deeper

After the right financial documentation is gathered, the heart of the investigation can begin. The analysis is often very labor-intensive, especially in cases of money laundering or Ponzi schemes, in which many accounts, entities, and transactions are deliberately used to create a web of confusion. The financial investigator must harvest the data and put it into a format that allows for verification of accuracy, tracing of funds, and connection of people, organizations and money.  People lie about money, so it is important to have the assistance of a financial investigator who can get behind the numbers to find the truth . . .

Read the whole thing here.

 

People lie about money; exposing fraud requires sophisticated analysis.