Forensic Accountant in the United States
Forensic Accountant during Discovery
By Alan Lurie and Rich Holstrom, who are partners at RGL Forensics, an international forensic accounting firm. They are based in Los Angeles and San Diego, respectively.
Engaging a forensic accountant expert during discovery can make a big difference in a dispute.
Building a successful trial strategy hinges on an attorney’s thorough understanding of the context and implications of the financial issues at stake. This is true whether the attorney is presenting damages for an injured plaintiff or attacking them on behalf of a defendant.
Retaining a forensic damages consultant in the nascent stages of discovery can make a significant difference in the cost as well as the outcome of a dispute. For example, one attorney facing a $10 million damage claim was overwhelmed by documents and uncertain about which were pertinent. He hired a forensic economic consultant, who identified the key documents and ascertained that the case was worth a fraction of the amount claimed.
Although the results aren’t always so dramatic, counsel on both sides benefit when they have an expert by their side at the outset. Allowing a forensic economic professional to assist in determining the true value of a case helps to pinpoint discovery and formulate follow-up queries.
A damages expert is a critical resource throughout the discovery phase. In the early stages, an expert can focus the case by drawing on experience specific to the industry in question – for example, confirming the type of documentation that typically should be available. Once documents have been produced, the expert can help ferret through the piles of paper in search of crucial information.
In a dispute about a doctor’s lost profits, for instance, an industry-specific expert will know to assess daily production reports, monthly collections, and billing reports – all in an effort to ascertain what happened during the relevant time frame.
The Big Picture
A damages expert can help counsel appreciate that a document request should have a broad sweep. An expansive inquiry that probes beyond the precise period of claimed loss may be needed to fully place the case in context. Such an inquiry may shed light on otherwise overlooked variables such as seasonality, growth periods, competition, and post-impairment loss recovery.
Moreover, a forensic consultant will help legal counsel determine whether the client’s (or an opponent’s) claimed damages are on target, and offer important insights as to the defensibility of a proposed methodology. In the $10 million case example above, the expert was able to show that the damages claimed were artificially inflated due to an incorrect focus on lost sales instead of lost profits.
Identifying Outside Factors
As a case progresses, an expert can help prepare for deposition by crafting questions, anticipating inquiries from opposing counsel, and being on hand during the deposition itself to suggest additional clarifying questions and to analyze deponents.
When attorneys rely on financial records alone, they shortchange both themselves and their clients. Documentation by itself does not tell the complete story. For instance, although financial records may show a decline in sales, they do not reveal whether the decline was due to an outside factor, such as bad weather or the coincidental end of a contract with a significant customer. An experienced expert can provide this larger perspective.
The Right Time
Waiting until late in the case to retain an expert often results in wasted resources and backtracking. Attorneys may be forced to undertake additional discovery at the last minute to obtain information they could have unearthed long before. And if discovery is already closed when the expert is hired, he or she will be forced to work with the information provided – even if it’s insufficient.
Forensic economic analysis can be helpful to both sides. In fact, it may be productive to have the opposing experts confer between themselves to see if agreement can be reached regarding the economic effects at issue. Such a proactive approach will increase the likelihood that a case can be streamlined and resolved efficiently. It also minimizes the risk of that double whammy every client hates: expensive discovery battles followed by a lengthy trial.
But retaining an expert at the outset has advantages beyond cost control. It has the potential to turn a losing battle into a stunning victory. At the least, it will help a litigator make his or her case the best it can be.
Forensic Accountant as Witness
By Bruce A. Hughes. A partner at Hughes & Hughes in Tustin, he practices family law and also is a certified public accountant. (2013)
Cross examination is the most dramatic part of a case, and never more so than when the witness is a forensic accountant talking about money.
Cross-examination of an expert is among a litigator’s greatest challenges. And the stakes rise significantly when the expert is an adversary’s forensic accountant testifying about the damages your client will be asked to pay.
But don’t let the situation fray your nerves. Indeed, whether you are trying a case to a jury or a judge, the best approach lies in thorough preparation. The key is to know the numbers better than the witness does.
The first thing to do is have your own accounting expert review all reports prepared by the opposition. This means you must make certain you have obtained all of those reports in a timely fashion; once experts are disclosed, it is imperative to immediately demand disclosure of all reports and materials that were relied upon in forming the opposing expert’s opinion.
With those items in hand, sit down with your own expert and review them together. Make note of significant differences between the opposing views of the case. Have your expert explain them. Make sure you understand the opposition’s point of view. In addition, become so familiar with the terminology and methodology that you’ll be completely at ease in the courtroom.
Next, decide who will attack the weaknesses in the other side’s case. Will your expert do that work while on the stand? Or will you do it with cross-examination? Or will you and your expert split the task?
Before beginning your cross-examination, make a request of the court: Ask for permission to have your expert join you at the counsel table. That way, he or she may offer written critiques or questions, and prompt you – discreetly of course – to request further explanation from the opposing witness.
In terms of specific questioning, here are some basic points of entry. Start with qualifications. Is the witness a CPA? How many times did the expert take the CPA exam? If the answer is more than once, it will reflect poorly on the witness (unless your own expert is in the same position!). Does the witness have any competence designations relevant to the area of testimony? For example, is the expert a Certified Fraud Examiner? Is he or she accredited in business valuation, or in valuation analysis? (It’s best to know the answer before you ask the question; a thorough pretrial deposition is an invaluable discovery tool to examine an opposing expert’s background and work.)
Next, seek out bias. How many times has the person been retained as an expert? Is the accountant’s primary practice one of “expert witnessing”? Does the expert work exclusively (or primarily) for opposing counsel? Does he or she own any investments with the opposing attorney or client?
Move on to foundation. Many forensic accountants do a superficial review of the pertinent documents, reviewing only financial statements and tax returns. If they haven’t delved into accounting records, you may have a huge advantage. The true power of forensic analysis lies in examining the particulars of journal entries, the general ledger, the check register, the cancelled checks, and other items at that level of detail.
If your own accounting expert has reviewed these issues, make sure you know precisely what was discovered. In examining the cancelled checks, did your accountant review the endorsements so as to locate any unidentified bank accounts? Do the financial statements agree with the income tax returns? Do the descriptions in the check register match the payees on the checks? And is it possible the other side has unreported income? Your accountant ought to have reviewed this last issue closely since it is common – particularly in divorce cases where one side may be hiding assets from the other.
Only by looking deeply enough will your accountant discover these things – and it takes only one or two such “nuggets” to destroy the credibility of an opposing expert.
A final point that moves beyond the actual evidence: Make sure your own expert is able to explain accounting basics in a straightforward way that everyone in the courtroom can understand. If your side is the one that teaches the fact finder about the case, you are the party most likely to prevail.
- Forensic Science
- Accountant General
- Encyclopedia of Forensic Sciences
- Expert Witness
- Forensic Medicine
- Financial Accounting
- Uniform Financial Accounting And Reporting System
- Pretrial Discovery