Forensic Accounting

FORENSIC ACCOUNTING AND LITIGATION SUPPORT

Gary M. Barnbaum, CPA CMC
Professional Corporation
Types of “Forensic Accounting” Assignments

1. Litigation support for IRS Audits; Business & Personal
2. Litigation support for divorce actions
3. Preparation of cases involving embezzlement, for purposes of civil damages and criminal prosecution, including conducting all aspects of the fraud audit
4. Preparation of comprehensive reports for cases involving civil damages
5. Preparation of business plans and financial projections for new and existing businesses
6. Preparation of strategic plans for struggling businesses that need to be turned-around toward success
7. Assistance to businesses that need to prepare strategic plans for expansion
8. Preparation of loan proposals for SBA loans. The latest being for $1.75M
9. Preparation of Offers in Compromise to the IRS and FTB
10. Preparation of valuation reports for a business to assist the client to:
A. Sell the business (computer services company)
B. Sell the business (audio/lighting equipment rental & leasing company)
C. Sell the business (computer software company)
D. Purchase the business (plastics manufacturing company)
E. Purchase the business (night club/restaurant)
F. Buy/sell agreements between partners or stockholders

FORENSIC ACCOUNTING
DEFINITIONS AND EXAMPLES

Forensic accounting is the science that deals with the relation and application of finance, accounting, tax, and auditing knowledge to analyze, investigate, inquire, test and examine matters in civil law, criminal law, jurisprudence, and other business issues in an attempt to enumerate the facts, and then render an expert opinion based upon those facts. In legal matters, forensic accountants are often engaged to assist in various controversies and in investigations of theft, defalcation, or concealment of corporate and/or personal assets. Using their education and experience they analyze and determine the fact patterns of the theft or misappropriation.

Forensic accountants do not win or lose cases but seek only the truth in conducting their evaluations, examinations and inquiries, reporting the true results of their findings in an unbiased and objective manner.

Forensic accountants are also called upon to review business’ accounting systems and, based on their experience; they make recommendations as to how the system of internal control and internal check can be improved to prevent theft and fraud. Because of their education, background, and experience, forensic accountants add an additional dimension to this work.

To be effective as a forensic accountant, one needs to understand legal issues in addition to education and extensive experience in the fields of finance, accounting, taxes, and auditing. Since the work of the forensic accountant will many times be used in a court of law, expertise in litigation support and testimony in courts of law are also prerequisites of the forensic accountant. Knowledge of business valuation theory is most helpful because many times a forensic accountant is called upon to determine the damages, which have resulted from criminal or civil wrongdoing.

1. What is Forensic Accounting?

The integration of accounting, auditing, and investigative skills yields the specialty, known as forensic accounting.

“Forensic,” according to the Webster’s Dictionary means, “Belonging to, used in or suitable to courts of law or to public discussion and debate, pertaining to or used in legal proceedings.”

“Forensic Accounting” provides an accounting analysis, and a written report, that is suitable to the court, which will form the basis for discussion, debate, and ultimately dispute resolution.

Forensic Accounting encompasses both Litigation Support and Investigative Accounting.

As forensic accountants, we utilize accounting, auditing, and investigative skills when conducting an investigation. Equally critical is our ability to respond immediately and to communicate financial information clearly and concisely in a courtroom setting as well as a business setting. Forensic accountants are trained to look beyond the numbers and deal with the business reality of the situation.

Other Terminology

Forensic Investigation

The utilization of specialized investigative skills in carrying out an inquiry conducted in such a manner that the outcome will have application to a court of law. A forensic investigation may be grounded in accounting, medicine, engineering or some other discipline.

Forensic Audit

An examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in a manner suitable to the court. An example would be a forensic audit of sales records to determine the quantum of rent owing under a lease agreement, which is the subject of litigation.

Internal Audit

Audits performed by an employee who examines operational evidence to determine whether prescribed operating procedures have been followed.

External Audit

An audit performed by an auditor engaged in public practice leading to the expression of a professional opinion, which lends credibility to the assertion under examination.

2. What is Litigation Support?

“Litigation Support” provides assistance of an accounting, tax, or financial nature in a matter involving existing or pending litigation. It deals primarily with issues related to the quantification of economic issues such as damages. A typical litigation support assignment would be calculating the economic loss resulting from a breach of contract, or, providing detailed information from the books and records to the defense attorney in a case involving an IRS audit.
“Many, if not most civil cases are accounting problems.”

3. What is Investigative Accounting?

“Investigative Accounting” is often associated with investigations of civil or criminal matters. A typical investigative accounting assignment would be an investigation of theft from a business, by an employee, a partner, or a principal. Other examples include securities fraud, insurance fraud, kickbacks, concealment of assets, or proceeds from a crime.

4. What does a Forensic Accountant do?

A forensic accountant is often retained to analyze, interpret, summarize, and present, complex financial and business related issues in a manner, which is both understandable and properly supported by documentation, evidence, and back up workpapers.

Forensic accountants can be engaged in public practice or employed by businesses, insurance companies, banks, police forces, government agencies, and other organizations.

A forensic accountant is often involved in the following:

Investigation and analysis of financial evidence;

Development of computerized applications to assist in the analysis and presentation of financial evidence;

Communication of their findings in the form of reports, exhibits and collections of documents;

Assist in legal proceedings, including testifying in court as an expert witness and preparing visual aids to support trial evidence.

In order to properly perform these services a forensic accountant must be familiar with legal concepts and procedures. In addition, the forensic accountant must be able to identify substance over form when dealing with an issue.