Silent Witness - A Forensic Accountant's Tale

Forensic accounting is neither glamorous norBeware of one- to two-page reports
nearly suspenseful enough to rate a Friday nightWe often encounter the simple one- to two-page
TV slot, however it is an exacting science in itsreport valuing a business or calculating damages.
own right and is often critical in the litigationThese reports often have little value and can be a
process. Few forensic accountants have thehindrance. The characteristics of a typical
spookily perceptive eyes of Silent Witness'one-page report are:o There is often little
Professor Sam Ryan, however many forensicevidence to support the opinions given.o There is
accountants would joke that their job is, like hers,insufficient detail to explain what tests or
about counting dead bodies.investigations have been made.o They often do
Bad jokes aside, good detective work andnot contain the Expert Witness Code of
accurate analysis are what it's all about, andConduct.o They often have significant errors in
attention to detail can obviously make or break amethodology.o The opinions put forward often
case. Silent Witness turns on expert witness incrumble under critical investigation and
the courtroom, and the analogy extends toexamination.o Initial opinions and views are often
Professor Ryan's examining decaying bodies whilstchanged following a more detailed examination of
forensic accountants examine decaying businessesthe issues.
and finances. But let's skip the moonlit nights, theBeware of complex financial models
owls in the forests and the spooky music and getOften forensic accountants will develop complex
down to the fundamentals of what is a forensicfinancial models of a business to illustrate the
accountant, when you might need one, and whateffects of an event of damage (personal injury,
to look out for in order to put your best casebreach of contract, fire etc). Upon initial
forward.examination, these models will often appear to be
What is forensic accounting?well argued and considered. Complex models
Forensic accounting is the use of investigativeoften have assumptions based on other
techniques, accounting skills and business skills toassumptions and it is often only necessary to
aid in the collection and formation of informationattack one or two assumptions based on logic or
to be used as evidence in court cases. As acommon sense and the model will show losses
discipline, it encompasses financial expertise, fraudrather than profits. The more complex the model,
knowledge, and a strong understanding ofthe easier it is to discredit.
business reality and the working of the legalIn one case, the plaintiff's accountant developed a
system.complex model showing the expected earnings
The process includes:o Reviewing the factualand actual post damage earnings in a wholesaling
situation.o Providing assistance in obtainingcompany. The company showed a significant
documentation necessary to support or refute adecline in turnover and profits in the month,
claim.o Reviewing the relevant documentation topost-accident. The company subsequently
form an initial assessment of the case andrecovered from its damage. The plaintiff's
identify areas of loss.o Providing assistance withsolicitors also allocated considerable resources to
examination for discovery, including thethe case on the basis of the expected losses as
formulation of questions to be asked regardingdetailed in the accountant's report. We were able
the financial evidence.o Co-ordination with otherto show that the loss was the result of a loss of
experts.o Reviewing the opposing expert'sa major client that happened pre-damage. The
damages report and reporting on both themassive losses put forward by the accountant
strengths and weaknesses of the positionswere significantly reduced and the report was
taken.o Providing attendance at trial while hearingdiscredited.
the testimony of the opposing expert and alsoComplex financial models will often produce results
providing assistance with the cross-examination.that deliver unexpected large damages claims. In
Forensic accountants become involved in thethe calculation of damages, there is a simple test
assessment of economic loss damages in personalthat can be applied. Add the loss to post-damage
injury; assessment of damages in commercialearnings and compare to pre-damage earnings. If
disputes; business valuations for family law andthere is a significant difference, then the reasons
commercial disputes; family law superannuationneed to be explained. A good, experienced
valuations; professional negligence claims; fraudforensic accountant should be able to show a
investigation and fraud risk assessment; andnumber of different ways to approach a problem.
business interruption claims.The simplest approach is often the best. A simple
When do I need a forensic accountant? As aapproach often examines the real drivers of the
general rule, you should get a forensic accountantbusiness and the principles are more easily
involved whenever there is an issue of value thatunderstood by all.
requires accounting analysis and expertise. AAsk where the weaknesses are
forensic accounting report should bring far moreEvery report will have some weaknesses. The
value to the case than its cost.weakness might be minor or significant. Ask the
Unraveling tax planning and corporate structuresforensic accountant where the weakness is in the
Tax planning often significantly complicates anreport. The accountant should know where the
understanding of a plaintiff's affairs. The plaintiffweaknesses are, which assumptions are solid and
may be saying that he was earning $100,000 perare supported by evidence and which will be
year but his personal tax returns are only showingsusceptible to critical examination. Examples include
$20,000 per year. Most people in business willbasing earnings on one year's trading or three to
employ a number of tax planning strategies tofour years' trading. The accountant may reason:
minimise the incidence of tax. These strategies"There is an argument that gross profit should be
include use of corporate structures, discretionarybased on the average of the last three years,
trusts and unit trusts, superannuation, salarywhich would reduce the claim, but the recent
packaging, fringe benefits such as motor vehicleschanges in the product mix support using the
and car repayments, and splitting of income withmost current data," or "The evidence supporting
other family members. In the assessment ofthis assumption is poor and will be dependent
damages and business valuations, it is necessaryupon the plaintiff's testimony."
to look through the corporate entities toGet accountants involved early
determine a plaintiff's true position. The plaintiffIn many instances we get involved too late.
claiming that he is earning $100,000 a year mayDamages may be assumed to be significant and
have a $20,000 salary for himself, $20,000 for hislegal resources are allocated accordingly, only to
wife, $20,000 in superannuation contributions,find that the actual damages are minimal and the
$20,000 in fringe benefits such as motor vehicleopportunity to recover a settlement or verdict in
and personal expenses and $20,000 in profit left inexcess of the legal fees is impossible. Getting
the company.forensic accountants involved early will also give
Independent assessment of the issues Peoplethe accountant the opportunity to request further
often have poor financial understanding either ofinformation and gather evidence such as witness
their business itself, accounting terminology, orstatements and property valuations.
both. Plaintiffs will often say that they are earning,Check for mathematical accuracy
say, $100,000 per year, but they are actuallyAlways ask the accountant if the mathematical
referring to turnover, not profit. They have notaccuracy of the report has been checked. A
considered the expenses incurred in operating thatmathematical error can substantially affect the
business.credibility of the report and the plaintiff's claim. We
A forensic accountant will independently examinewere asked to assess a personal injury claim for
the plaintiff's losses or claims based on thea professional footballer. The accountant's report
evidence presented. They will examine the issuesfor the plaintiff was well argued and the plaintiff's
based on the available evidence. A forensicearnings were supported by leading coaches and
accountant's investigation may include analysis ofagents. Whilst the question of probability is always
other companies associated with the plaintiff toan issue for professional sports people, the quality
ensure the income or expenses have not beenof statements and testimony of the coaches and
diverted to other entities.agents may have outweighed any statistical
How to find a forensic accountantanalysis of probability. We carried out a simple
One of the best ways to find a forensiccheck of the mathematics of the report and
accountant is to ask around. Ask your colleaguesfound that the plaintiff's gross loss rather than net
and other solicitors whom they use and why. Askloss was used to calculate future loss. The claim
barristers whom they would recommend.for future economic loss was halved. A simple
Forensic accounting requires a different set ofindependent check of the mathematical accuracy
skills and knowledge from general accounting.with a calculator by the accountant for the
Forensic accountants will have knowledge of theplaintiff would have prevented this error.
rules of evidence, common law, the relevantReports should be readable first time
legislation, the expert code of conduct andA forensic accountant's report should be able to
obligations. Forensic accountants will bebe understood and absorbed on the first reading.
experienced at giving evidence in court andIf you have to read a report three or four times
preparing reports for court.before you can understand what it is trying to
It is important to establish a relationship with thesay, judges and counsel will have the same
forensic accountant. An ongoing relationshipproblem. A good report will contain an executive
enables you to ask questions about a matter andsummary that introduces all the major issues and
get a feeling for the issues and reduces the timestates the conclusions so that the reader will
required to brief the accountant. The instructionsunderstand the direction and focus of the report.
that we receive are often one page, brieflyA business valuation that explains in the executive
detailing the important facts of the case, contactsummary the total valuation, the basis of valuation
details for the client and enclosing copies ofused, the main assumptions in that valuation (such
financial documentation available. Due to ouras capitalisation rate and future maintainable
ongoing relationship with the solicitor, we arrangeearnings) and a brief explanation of the important
a conference with the client, obtain furtherfactors behind the assumptions will provide an
financial details and in turn provide our expertexcellent introduction to the report.
report.Forensic accountants provide a valuable resource
Things for lawyers to look out forfor the solicitor in litigation. The investigative and
In providing critical review and analysis of otheranalytical ability to examine financial and business
accountants' reports, we have encountered amatters complements the legal skills of solicitors.
multitude of problems and errors. We haveMaybe one day there will be a gripping,
detailed below some of the most common errorssuspenseful TV show about forensic accountants.
that cause the most pain for lawyers.Maybe not.