INFocus: Guess who’s coming for dinner? Make room for the forensic accountant

Date: April, 2013 man behind bars

Originally published in the Spring 2013 issue of Comments.

When you think about accounting, what may first come to mind may be number crunching, expense reporting or tax season. Admittedly, these are generally all true; however, I would like to introduce you to another side of accounting.

As some people may think of it, “accounting” may be little more engaging than tediously counting widgets or searching through endless paperwork to find journal entries to explain a one hundred dollar discrepancy. “Accounting,” as it relates to financial loss or damages quantification, might use the same boxes of paperwork, in conjunction with external information to build a case. This change in approach and our intentions makes what we do an entirely different discipline. In the accounting family, we like to think of ourselves as the intriguing distant cousins who are invited occasionally to social functions because everyone at the table is afraid of what we will say next…

In our world, we go by the name forensic accountants. Forensic accounting engagements are defined in the Standard Practices for Investigative and Forensic Accounting Engagements as those that “require the application of professional accounting skills, investigative skills, and an investigative mindset” (Investigative & Forensic Accounting, 2006, pg.8). Combining accounting techniques with investigative research, forensic accountants can identify financial criminal and other suspicious activity like white-collar crimes or fraud. As well, within the “loss quantification” field in which I spend most of my time, forensic accountants provide estimates of losses and damages to our legal counterparts that may relate to shareholders disputes, breaches of contract, or personal injury.

For loss quantification engagements, typically we research specific industries, economic indicators and statistical trends. Our research then acts as the building blocks to either support or bring into question the information, or the lack thereof, provided to us. Combining accounting skills with investigative research, forensic accountants can identify issues that may be present in the financial problem we have been engaged to solve, such as commercial disputes or personal economic losses.

In completing our work, we rely on documentation provided by clients, conduct interviews and perform external research to develop reasonable “but for” scenarios had the issue not occurred. We are trained to draw calculated conclusions for court purposes and provide expert accounting evidence at trial.

Therefore, it is critical that we examine every detail on every case. Forensic accountants are responsible to the public for ensuring that all the information we use is accurate and, when required, is supported by research. This accountability increases the demand for quality research.

Now, you may suppose that anyone can search the internet and find volumes of information on just about anything. This is true, but how reliable is the information? Certain sites on the internet, although easily accessible and user friendly, are in the public domain and are updated by the public. Some of these popular sites employ expert reviewers as well as electronic systems to catch substandard edits and articles. Nevertheless, the information is editable in real time, which potentially can result in downloading unreliable or inaccurate information.

While trusted sites like Statistics Canada hold valuable information, they may be more difficult to navigate. Forensic accountants can research government, professional associations, and business journal and newspaper sites, gleaning valuable information that helps build the credibility of our expert reports and your case.

You might ask why this is important. Suppose, for example, your business was to experience a flood, which shuts down operations for a few months. How would your lost sales (and resulting lost profits) be calculated for your insurance claim? Is it more reasonable to use sales from last year, or are there industry-specific economic factors or business seasonal trends that need to be considered? A forensic accountant can assist with the preparation of your claim by using your financial information and supporting it with relevant statistical data.

By way of example, Statistics Canada publishes data regarding the average revenues earned by manufacturers in various industries. Did you know that – according to Statistics Canada – annual sales by Canadian manufacturers of tobacco products declined by almost two-thirds between 2001 and 2008, from $3.0 billion to $1.1 billion, but have since increased to $1.6 billion in 2012? (Data is obtained from CANSIM Table 304-0014.)

When quantifying an injured person’s earnings loss due to an accident, we must consider that their current employment position may not be their intended long-term career. It may also be unclear, based on their aspirations, at what age they would have retired. The courts may have referred to this type of issue in forensic accounting as “crystal ball gazing.” While we are trained to have special skills, being clairvoyant is not one of them. Historical and forecast statistical data on careers and workforce participation rates are the tools we use in place of a crystal ball. Consider a foreign-trained professional who is a recent immigrant to Canada and who was injured in an accident. What if that person was not working in a job related to their training at the time of the accident, but held a position in order to earn some level of income?

The breadth of the data compiled by Statistics Canada is extensive. For example, from the 2006 census, we can determine that less than 25% of the Canadian labour force were immigrants (defined as persons who have been or are landed immigrants) Although, more than half of those within the occupation “taxi and limousine drivers or chauffers” were immigrants (Source: Statistics Canada Catalogue no. 97-564-XCB2006005). Of course, this observation may already be apparent to those who take taxis and engage their drivers in conversation!

When relying on an accounting auditor, you trust that they will perform the necessary checks and balances on each engagement. In a similar way, when you engage a forensic accountant to assist in a loss quantification or any other financial dispute matter, you trust that checks and balances are also used to support our conclusions. Our investigative training demands that our clients, other relevant parties and the courts consider our opinions trustworthy.

Although we may not be invited to every “family function” because of our perceived skepticism, we are there when we are needed. Rest assured we won’t leave until dinner, along with any accounting challenge, has been properly digested!

Reference:

Investigative & Forensic Accounting. (2006, November). Standard Practices for Investigative and Forensic Accounting Engagements. Retrieved March 21, 2013, from Chartered Accountants of Canada: http://www.cica.ca/focus-on-practice-areas/forensic-accounting/item61477.pdf

Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article.

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