Forensic Accountants Assisting the Arbitration Process
Article, Singapore Institute of Arbitrators Newsletter – April 2010
Legal / Disputes
In any arbitration process the arbitrator must address not only liability issues but also the financial impact suffered by a party. To accomplish that, parties will have at their disposal an accountant with experience in investigating and evaluating claims for damages. Tony Levitt, Partner in RGL's London office, examines the role of forensic accountants in arbitration.
Lawyers acting for parties may not be aware of the services that an experienced forensic accountant can offer. Such specialists can be valuable in helping to evaluating the damages claimable at the early stages of the arbitration. The services include consultation on disclosure of documents and records particularly electronic documents, and in reviewing the damages claimed.
The skills and experiences of forensic accountants differ significantly from those who primarily do conventional auditing and tax work. They are, or should be, comfortable in adversarial environments; creative in dealing with incomplete and/or disorganized records; and energetic in searching for alternative approaches. Most of all, they must be comfortable and familiar with the broad range of computer systems, business records and record-keeping practices beyond those used to satisfy financial reporting requirements. In other words, they must be investigators as well as accountants.
Production of records
Apart from knowing the records that are normally prepared by a company, forensic accountants will also know the records, returns and other documents which are available from all other sources and organisations. They will request for the disclosure of documents and records and management information used, as well as those created purely for accounting recording purposes.
The amount of electronically stored information in the form of financial information, documents or email that is held within any company can be vast. Thus, finding relevant information within this data is a constant battle for any investigator, litigator or forensic accountant. A forensic technologist working with a forensic accountant is able to bring the skills, knowledge and equipment to capture and help to make sense of what can sometimes amount to mill ions of files. Through automatic processes, the text and other information, known as 'metadata', of each file is extracted and added to a huge index. The index can then be easily interrogated with a list of search terms to uncover relevant documents. Other tools allow a contextual or even conceptual view of the entire document set which allows a very quick method of selecting large swathes of potentially relevant material for further review.
Besides satisfying the obvious objective of obtaining records, a well-drawn request for specific documents communications to the other side an understanding of the documents’ significance to the damages claimable and can help set the stage for discussions to achieve a reasonable settlement.
By way of example, in a case by a petrochemical company against an equipment manufacturer, the amount of damages turned on the length of time that the plaintiff's boilers were unavailable. Forensic accountants working with the manufacturer's lawyer obtained a publication from a trade association of the industry-wide boiler downtime. The plaintiff was listed amongst those contributing statistics to the trade association. The records they submitted were therefore known to exist and could now be specifically requested.
Review of damages claimed
A forensic accountant can conduct an accounting review to evaluate the damages and prepare a claim, attack a claim or develop a counterclaim. During the accounting review, the forensic accountant will become aware of the claims strengths and weaknesses, and the impact on quantum.
If there are serious deficiencies in the claim, the accountant will assist the lawyer with developing an alternative approach in ma king his claims. However, the lawyer may prefer merely to attack the claim and not incur the expense of an alternative claim calculation based on the existing claim methodology.
As an example, a plaintiff submitted a claim for SS1.5m for lost profits due to the alleged wrongdoing of the defendant. Whilst the claim was professionally prepared by a large and reputable firm of accountants, examination of the claim identified flaws in the assumptions used. Through a regression analysis prepared by the forensic accountant, sales were projected based on historical data. In this manner, a claim for lost profit of SS2S0.000 was developed. These calculations provided a basis for settlement between the parties.
Attending meetings of experts
Once a claim has been reviewed and the forensic accountant has produced a report for disclosure, it may be appropriate to have a meeting of experts to narrow the issues between them. This meeting can provide a valuable basis for eliminating unnecessary areas of argument and will provide an opportunity for the accounting experts to discuss their points of view. Such meetings would normally be on a “without prejudice” basis and the areas of discussion between the experts may be set out by instructing lawyers. The forensic accountant should be aware that there are strict limits beyond which he has no authority to discuss matters with the opposing expert.
Cross examination support
Accountants should be able to document any deficiencies, errors or duplications discovered in the damage claim. To the extent that this is not already included in the accounting expert's report, this information can be used by counsel during cross-examination. In addition, the forensic accountant will usually attend the hearing to listen to the evidence given by the opposing expert and to assist the parties with questions developed from the responses given by the opposing experts.
The use of forensic accountants in arbitration can be of assistance to the arbitrator, particularly in relation to evaluating the quantum of damages. The effective use of accountants can serve to clarify the amounts claimed. It should also be possible for the accountants to narrow the quantum issues in dispute, so as to leave only the differences in opinion between the parties for the arbitrator to determine.
As appeared in the Singapore Institute of Arbitrators Newsletter, April 2010.