By Cesar Mejia, CPA, CFE
What comes to mind when you hear the term forensic accountant?
Most individuals who have not worked with a forensic accountant before believe they concentrate on investigating criminal activity. It is true that some of the work may involve investigating criminal activity — fraud investigations, for example. But in litigation, forensic accountants work in many different types of financial disputes outside of criminal proceedings.
Many litigation cases involve economic damage calculations. These types of cases can range from personal injury to business disputes, divorce or breach of contract, just to name a few.
As attorneys develop their strategy for these cases, the type of financial expert they retain to assist in the matter and the timing to get them involved can have a significant impact on the case’s outcome.
When an economic damage measure is involved, a forensic accountant can provide qualified support to attorneys in a variety of ways, including:
- Assist in the preparation of requests for essential discovery items and in planning important financial interrogatory queries.
- Help with organizing voluminous and disorganized records in an efficient way and determining which key records were received, as well as identifying those that were not provided.
- Calculating the damage or providing feedback on the strengths and weaknesses of the claim for damages. This can be done first at a high level, then by helping determine if a more detailed review of the claim is necessary. Forensic accountants’ background in accounting and financial matters allows them to offer different perspectives that can help attorneys on their cases.
- Assisting attorneys in preparing key questions prior to a deposition and by sitting in during the deposition, and/or reviewing transcripts after the fact, looking for inconsistencies in testimony.
Consider two examples of how a forensic accountant’s involvement can be helpful to the successful handling and outcome of a case:
Case 1: An unhappy partnership
Your client hired you because of a business dispute with one of his partners. Your client’s partner has not provided timely financial information and there is concern that there may be some embezzlement of company funds.
You immediately retain a forensic accountant to prepare a discovery request list for financial documentation necessary to determine whether any wrongdoing occurred. The forensic accountant compiles a list of items to request, including tax returns, company books and records, the partnership agreement and other items.
Once the requested items are produced, you instruct the forensic accountant to review the information. The accountant determines that the company’s books and records disagree with information on the company’s tax returns. Additionally, the forensic accountant determines that the partner in question has been running personal expenses through the business and that income and distributions were not made according to the partnership agreement, resulting in amounts due to your client. The forensic accountant computes the amount due based on the findings, resulting in over $1 million due to your client for underpaid distributions and reimbursements for personal expenses paid to the defendant.
As a result of these findings, the partners decide to terminate the partnership and the forensic accountant is asked to structure the dissolution of the partnership with a focus on mitigating taxes.
Case 2: Elder abuse
You are hired to represent an individual in a lawsuit brought forward against a sibling, alleging the defendant misappropriated monies while providing care for an elderly mother. The defendant alleges there was no wrongdoing on her behalf.
You immediately retain a forensic accountant to prepare a discovery request list for financial documentation to determine whether there was any wrongdoing. The forensic accountant compiles a list of items to request, including bank statements and records.
Once the requested items are produced, you instruct the forensic accountant to review the information received. The forensic accountant determines that the defendant opened various bank accounts and, unknown to her mother, made transfers (hundreds of thousands of dollars) from the mother’s account to her personal accounts over the years.
Per review of bank and other legal documents, the forensic accountant later determines that some of the larger transfers coincided with amounts used to purchase real estate properties by the defendant, all under the defendant’s name. The forensic accountant’s report and testimony help summarize and prove the transfers made by the defendant, ensuring a judgment for the plaintiff.
With a background in business, tax and financial matters, the experienced forensic accountant is an invaluable asset who can make difficult cases involving financial analysis much easier. An effective forensic accountant can provide helpful preliminary insight, requests, queries and advice to attorneys in all phases of litigation.
I have personally been involved in cases in which the attorneys initially were not going to retain a forensic accountant, as they did not believe their clients had a strong enough case, and/or they did not know the extent of the damages relating to their case. After some of those cases were resolved with the help of a forensic accountant, they resulted in significant variances from the party’s initial assessment of the damages.
Cesar Mejia, CPA, CFE is a Shareholder with Sol Schwartz & Associates and has been in public accounting since 1998. He is in charge of the Audit Department and holds the globally preferred Certified Fraud Examiner (CFE) credential. He uses his experience and analytical skills to provide attorneys with litigation support and forensic accounting expertise.
Mejia’s practice concentrates on financial statement audits, reviews and compilations, litigation support, consulting services and agreed-upon procedures. He also is experienced in auditing employee benefit plans, performing internal control reviews and working on due-diligence engagements.
Mejia previously worked for a Fortune 500 company as an internal auditor and has authored numerous published articles.