Business Litigation Consulting
Forensic accounting often plays a key role in resolving business disputes and frauds, if the business accounts show discrepancies.
A forensic accountant is trained to analyze and investigate the financial activities of a business partner, director, employee or a company to determine whether there has been fraud or unintentional business malpractice.
In business litigation, forensic accountants will help determine:
- What: Whether the accounting discrepancy or divergence is intentional.
- Where: At which point in the chain of the business procedure the divergence has taken place.
- Why: The motive behind the accounting divergence, particularly when it is found to be intentional.
- How: The technique or methodology adopted to carry out the divergence.
- Who: The individual, group or organization that has committed the divergence.
In addition to business fraud, the forensic accounting expert can also help determine a complete picture of the intricate financial transactions even in non-fraud matters.
Common Examples of Business Fraud where Forensics can Help
Abuse of position by an employee
An employee could hide or alter vital business information in order to profit from the situation. For instance, in an investment firm, an employee may hide complex stock market transactions conducted in violation of rules with an aim to earn commissions (which endanger the funds of the firm and its clients).
Business partners or third party vendors taking undue advantage
Business partners could misuse the company’s guarantee to take a loan or carry on a side business on credit, and fail to repay. Business frauds can also be external when a vendor (in connivance with a company purchase officer) falsifies the amount of material they are shipping to the company.
Internal or external theft of sensitive business information or data
Confidential business information such as the internal costing or pricing strategy could be stolen by an insider or by an external computer hacker to sell it to competitors.
Misappropriation of Assets
The company’s accounting team may identify that the business accounts are not adding up and cash or assets may have been misappropriated. The possibility of misappropriation could also be flagged during an annual tax filing or at the time of a random audit.
The business litigation counsel will make a judgment on whether asset misappropriation or another fraud has been committed. At this point, they may call in a forensic accountant to investigate the matter and establish the evidence to support the legal case in a court of law.
Other Business Areas where Forensic Accountants can offer Support Services
A client may need to determine the exact quantum of loss occurring due to a catastrophic event (to make an insurance claim), determine the value of a pension plan, computing royalty payments, wage and hour disputes, and employee benefit contributions that may have gone unreported.
Typical areas where specialized forensic accounting services may be useful in business litigation include:
- Mergers and Acquisitions (M&A)
- Business valuation
- Loss occurring due to a breach of contract
- Insolvency or bankruptcy proceeding
- Business interruption
- Delinquent employee benefit contributions
- Embezzlement of funds
- Insurance claim in a catastrophic event
- Class action cases
- Investigation of hidden assets
- Fraud detection in financial statements
- Investigation of commercial frauds
- Wage and hour disputes
- Insider stock trading
- Partnership and corporate dissolution
- Testimony in litigation as a financial expert
Techniques Used in Forensic Accounting to Detect Financial Divergence or Fraud
Computer Data Mining
The advanced computer data mining may be performed by a forensic accountant to identify anomalies, patterns and trends in the business and financial data of the company.
For instance, if the accounting data is false or erroneous, the forensic expert can use data mining to determine whether it was wrong from the beginning (which could an unintentional error of data input), or whether the figures were tampered with or manipulated at a later stage (such as showing false profits to mislead the investors or shareholders).
Apart from evaluating the metadata, the forensic accountant will also use data mining to perform actions such as:
- Evaluation of the consistency of accounting principles used
- Frequency and scale of payments made to third parties
- Spotting ledger mismatch or missing files and data
- Verification of supplier and vendor details (to rule out any false or shell entities)
The forensic accountant and their team may perform data mining on the company’s computer systems, network servers, facsimile machines, digital storage discs, answer machines, and GPS systems, among others.
Examining Physical Documentation
Close coordination between the lawyer and the forensic accountant may be required to ensure that a review of physical (non-digital) documents is performed in conformance to the law. Appropriate legal procedures must be followed to access and manage these documents.
For instance, the forensic accountant cannot first get hold of authorized business documents illegally and then examine them to find out divergence. The correct legal route must be followed.
The right way in most cases would be that the lawyer (in consultation with the client) should invite the forensic accountants to carry out the investigation. A proper legal contract should be entered into between the client and the forensic accountant firm specifying the rights and responsibilities related to business documents.
Conducting Personal Interviews
In addition to investigating the available business data and documents, the forensic accountant may also engage in direct conversations and interviews with employees and other involved parties.
For instance, when the forensic accountant interviews an external vendor and the employees of the company’s own purchase department, they may hear different versions of the invoicing procedure.
In some cases, merely the possibility of a forensic investigation can make individuals spill the beans or admit fraud – enabling the forensic team to get answers to the missing pieces in the puzzle.
The interview process should be conducted with the legal limits and should be coordinated with the attorney. Interview records should be maintained, which later be used as evidence in a court of law.