The rudimentary definition of forensic accounting is the application of accounting procedures or practices to a matter that may be litigated. Forensic accounting involves the use of intelligence gathering techniques and accounting/business skills to analyze past financial data. It also utilizes other accounting related activities to develop useful information and opinion for use by attorneys involved in litigation; and if necessary information and opinion that can also be used as trial testimony. This area of expertise requires forensic accounting professionals to have specialized knowledge and investigative skills used to collect, analyze and evaluate all financial data. This data could be evidentiary and the forensic accountant will interpret and communicate their findings in a meaningful way to litigation teams. These litigation teams will determine if there is a need to use this information in the courtroom.
There are many direct and indirect roles forensic accounting plays in litigation cases. Typical roles of a forensic accountant include: expert witness, consultant and masters or special masters. A forensic accountant can also provide many auxiliary litigation services, such as: fraud examination, valuation of business or intellectual property, discovery assistance, computation of damages and development of strategy.
Forensic Accountants also hold many different certifications and licenses that allow them to practice in several different areas. These certifications designate that a forensic accountant has demonstrated key competencies and expert knowledge through educational achievements. Many certifying boards require continuing education regarding the particular subject matter studied. Thus ensuring that the professional maintains relevant knowledge in the field.
Typical Roles of Forensic Accountants and the Purpose in Litigation
• Consulting Expert: A forensic accountant may be hired as a consultant to advise a disputing party and their legal team regarding facts, issues and strategy pertaining to a case. As a consultant, a forensic accountant analyzes and advises the litigation team on how best to discredit an opposing expert's work. Often times, forensic accountants hired as consultants examine the case for strengths and weakness to advise how best to represent the facts at trial. Should the case necessitate, a consulting expert may be retained and used as an expert witness.
• Expert witness: According to Black's Law Dictionary, an expert witness is one who is qualified by knowledge, skill, expertise, training or education to provide a scientific, technical or other specialized opinion about evidence or fact issues. As part of an expert witness's role in litigation they may be asked to provide expert testimony on a case. This would result in the expert witness testifying in court. However, a party using an expert witness to testify must provide this information to all parties including the expert witness's qualifications and opinion, as well as the information that was used in forming said opinion.
• Master and Special Master: Forensic accountants may also be called upon by the court and appointed as a financial expert to evaluate materials as a special master. This involves deciding certain facts of a case that are in dispute. The expertise of a forensic accountant is sought in these instances because case material may be highly technical accounting or financial matters that only a specialized accountant could understand.
Supportive Forensic Accounting Roles in a Litigation Environment
Not all work prepared by a forensic accountant ends in litigation. However, forensic accountants are taught to assume that all cases will end in litigation.
• Discovery Assistance: It is important to involve a forensic accountant early in case development. Business litigation depends on proving or disproving a particular matter through the use of evidentiary documentation. Often, document production is massive and contains business records and financial data imperative to many cases. Forensic accountants are financial experts capable of assisting litigation teams in finding, understanding and explaining pertinent information provided within these document productions. Also important to discovery are depositions of financial and management personnel. Having a financial expert such as a forensic accountant present helps litigation teams better understand the information provided by personnel. Forensic accountants can assist in formulating more meaningful follow up questions, as well as request the correct documents necessary to perform comprehensive analyses for a case.
• Development of Strategy: As discussed above, a forensic accountant may provide consulting services for litigation. If a party has a case or there is a case against the party, then an early case assessment should be part of that consulting. A forensic accountant is able to suggest approaches to take regarding any business issues the case might present. Forensic accountants can assist in discerning any errors, flaws or weaknesses within the financial information being presented in the case and suggest alternatives using better or different analyses.
• Fraud Examination: During fraud examination forensic accountants interpret causes of fraud and work to prevent or deter future frauds by determining red flags. Fraud examinations require a forensic accountant to be able to: understand legal issues that could affect the fraud examination, analyze and manage financial information and recognize financial statement fraud, be able to recognize occupational fraud schemes, detect fraudulent financial transactions and conduct fraud risk assessments. Part of fraud examination involves conducting an investigation. The responsibilities of an investigation include; planning, interviewing and report writing. Since the forensic accountant must assume their case will end in litigation, the nature of their work products will be prepared with litigation in mind regardless if litigation ensues.
• Business and Intellectual Property Valuation: Forensic accountants can be called in to assist in resolving business valuation disputes. The need for a forensic accountant occurs when the value of a business has been purposefully damaged due to fraud. Litigation of these cases revolves around minority/oppressed shareholder disputes, damages to the value of the business, eminent domain, and failed business. The forensic accountant can analyze financial records and economic value to help litigants determine how to properly value a business that might be tied in dispute. As with business valuation, intellectual property may have been purposefully devalued in a fraud related activity. Forensic accountants are able to analyze financial information related to this property and determine if fraudulent transactions took place. A detailed report can be provided by a forensic accountant detailing the fraudulent activity and its negative impact on the property involve in litigation.
• Computation of Damages: In commercial litigation, it may be necessary to calculate damages. Damages could be a loss of cash or equivalents, property, or expected profits. Forensic accountants should communicate with the litigation team the type of damage calculation that is appropriate for their type of case, including whether the damages to compute are a question of fact or opinion. Actual loss incurred and expected profit loss are two types of damage recovery most often found in fraud cases. When computing a damage analysis forensic accountants rely on assumptions and projections about what would have or could have happened if a particular party had behaved differently.
Important Certifications and Licenses for Forensic Accountants
There are many important certifications or licenses that a forensic accountant may obtain as a means of showing their expertise in particular subject areas. Many of these credentials are important when a forensic accountant is serving as an expert witness who may testify as it speaks to their ability to opine upon the subject matter being litigated. Having the proper and relevant certifications and licenses gives an expert credibility in the eyes of judges, arbitrators and mediators.
There are several organizations that provide oversight to candidates seeking certifications or licenses. These organizations work to uphold the integrity of the credentials and provide support to business professionals who earn them making sure they have the tools they need to excel in their field.
• Certified Public Accountant (CPA): This license is issued by individual State Boards of Accountancy. The National Association of State Boards of Accountancy (NASBA) offers a plethora of resources for individuals seeking to obtain their CPA license. A CPA license is the accounting professions highest standard of proficiency and a symbol of achievement within the profession. This is a standard designation any forensic accountant should achieve. Having a CPA signifies a great deal of expertise in the accounting field, and is a stepping stone to other professional designations.
• Certified in Financial Forensics (CFF): This credential is issued by the Association of International Certified Professional Accountants. The credential is offered exclusively to Certified Public Accountants (CPAs) who are able to exhibit superior expertise in forensic accounting though knowledge, skills and experience.
• Certified Fraud Examiner (CFE): The Association of Certified Fraud Examiners (ACFE) issues this credential. Forensic accountants may obtain this credential to demonstrate aptitude in preventing, detecting and deterring fraud. As a member of the ACFE, forensic accountants have access to anti-fraud training, education and resources.
• Master Analyst in Financial Forensics (MAFF): The MAFF credential is utilized by forensic accountants to provide assurance to the legal and business sectors. This credential provides assurance of aptitude and professionalism for forensic accountants working it a litigation environment. The National Association of Certified Valuators and Analysts is the organization responsible for provided training, education and certification. Training offered by NACVA allows holders of the MAFF to specialize in business valuation for litigation purposes.
Litigation cases involving business and financial documents can benefit greatly from forensic accounting professionals knowledge and expertise. Since forensic accountants offer a broad scope of knowledge in their field and understand certain caveats of litigation adding them to a litigation team early in case development can be vital to a successful outcome. There are many primary and supportive roles they can serve throughout case development providing client peace of mind and credibility in the courtroom.
Brittni Langel is a Certified Fraud Examiner and is currently employed as a forensic accountant with McGovern & Greene LLP. She received her undergraduate degree in accounting from Purdue University and has provided analysis and rebuttal work on cases involving embezzlement, bank fraud and breach of fiduciary duty. Prior to joining the McGovern & Greene firm, Ms. Langel's work experience had been in municipal government as well as various auditing assignments. Her clients include businesses in the manufacturing, sales and services, real estate and construction industries.
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