The Role of a Forensic Accountant
Article, California Lawyer – June 2014
Insurance / Legal / Disputes
Partner Mary Furst writes about the forensic accountant's role in insurance litigation and how their financial expertise and industry knowledge can aide attorneys in formulating discovery and case strategy.
When a business claims to have suffered a loss, difficult questions often emerge about how to assess the damage. Regardless of the alleged cause of the damage—or issues of liability—all of the parties will need to know: How much money will it take to make the company whole?
In seeking the answer, prudent attorneys will turn to a forensic accounting expert, often one who has a breadth of knowledge about the subject industry.
In such cases, a forensic accountant likely will take center stage, largely because he or she will be able to help clients and counsel locate and analyze key source documents. In doing this, the expert will let the parties look beyond the surface numbers and dig their teeth into the real story, in order to present an accurate and compelling damage claim that stands up to scrutiny.
Segregating the Loss
In the early stages of formulating the claim, a forensic accounting consultant can help segregate the loss into various liability issues, aiding a party’s legal team to identify a liability-causing event and the damages that may have flowed from it. Part of this process includes assessing a client’s normal business operations and then comparing them to post-event operations. Doing so can allow the consultant to verify that the amount claimed in the dispute is actually part of the provable loss.
As an example, consider a company that regularly spends $50,000 per month on advertising, but is forced to spend $75,000 in the month following a crisis event. If the company tries to claim the full $75,000 as part of its claim, a forensic accounting expert may well be able to demonstrate that the triggering event really caused only the short-term increase of $25,000 in the monthly expense. It is far better to know this before the claim is filed, as an accurate claim enhances credibility.
A forensic financial expert can also help legal counsel identify hot spots— issues that may become points of contention in determining the financial impact or items likely to trigger insurance coverage. For example, consider an interruption to a manufacturer’s business that occurs after an insurable event. If an insurance claim is based solely on the value of lost production, the parties may overlook the fact that the company could conclude some short-term sales due to excess inventory on hand. Identifying such conditions is necessary to determine the true extent of the financial loss.
As noted above, industry knowledge is crucial. An expert’s understanding of the business systems involved in the case, as well as familiarity with common trade terminology, will assist the parties in moving toward resolution of the controversy.
Moreover, when working with specialized manufacturers, familiarity with the industry (as well as its production processes) can help uncover information early in discovery, thus saving time and money and setting the expectation that an appropriate measure of damages will be forthcoming. And don’t forget: When an expert helps lawyers conduct discovery with a laser focus, as opposed to a scatter shotgun, it conveys a persuasive message to the other side: namely, that the client is serious about the claim and well prepared to present it at trial, should that become necessary.
Depositions and Pretrial Motions
With relevant industry knowledge, a forensic accountant can go beyond simply assisting with the framing of document requests. The expert can also help prepare deposition questions—and identify who the key witnesses may be. Knowing where to look and whom to subpoena and examine in quantifying the loss can be a game changer.
California businesses, many of which rely on both imports and exports, play a critical role in global supply chains, and therefore are easily affected by crises in different parts of the world. When disputes arise, thoughtful deployment of an experienced forensic accounting expert will enable lawyers and clients to successfully present a claim so the client can quickly return to what it does best: compete in a challenging economy.
Mary E. Furst is a partner in the San Francisco office of RGL Forensics, an international forensic accounting and consulting firm.
As appeared in California Lawyer, June 2014.