Forensic Accounting

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Forensic Accounting / Legal
Fiona Bateman  B. BUS  CA
Dolman Bateman is situated in Chatsward, Sydney
02 9411 5422

Fiona_Bateman

If one or more of the parties operates a business which has current and ongoing value -  there is a strong possibility you will need the assistance of a Forensic Accountant to determine the value of your asset pool.

 Forensic Accountants use accounting and investigative skills - they know what to look for and where to start - in determining exactly how much a business might be worth.

 " An ordinary accountant, has a relationship with - and a duty - to the directors and the company which has retained him. They are not able to act in an independent manner in a Court case. Usually, they have a stronger relatonship with one of the parties, particularly the party paying the bill. "

 Fiona Bateman has worked in the accounting sector for over 29 years. Her firm, Dolman Bateman, was one of the first chartered accounting firms in Sydney to develop a specialisation in this field. Fiona's role in litigation support includes the provision of expert evidence before various state and federal courts and assistance with cross-examination of other accountants.

 She is a Chartered Accountant and Certified Practising Accountant  with a Bachelor of Business Degree and a member of the Forensic Accountant's Special Interest Group. Fiona advises clients throughout Australia.

 She discusses:
        what forensic accounting is
        how it applies to Family Law
        questions to ask if you need to employ their services
        idea of costs 

Q. Fiona, what is forensic accounting?
Forensic accountants use accounting and investigative skills to assist in legal matters. They provide litigation support by presenting the facts of the economic issues to Court. 
 
Q. So what does this mean to a divorcing couple?
  Two of the major areas of dispute in Family Law are

· agreeing to the valuation of a family business
· and the true income generated by that business.

A forensic accountant can be used in two ways
 
1. as an expert witness, in preparing a business valuation or undertaking any investigations required to present facts to the Courts

2. acting as a consultant to assist either party – as an advocate to protect their interests.

Currently I am assisting a party - who was a shareholder and director of a company - to protect her interest. Her husband is intimidating her. 
My years of experience, as well as first hand knowledge, have given me an understanding of the intimidation tactics being used, which tend to follow a pattern.

During and following a separation, a party can feel overwhelmed and unable to cope but, in the long term, self-protection is required.
Having someone on your side - who is not intimidated or emotionally involved and who has the knowledge to assist - can help the party to get through a very painful time.

In one case, the wife was told by the husband that

· if she got rid of her expert accountant and lawyers, he would give her a much better settlement.
· he stated a salary and company car for life, the family home and holidays
· he also indicated he wanted custody of the children – giving her access every second weekend and school holidays.

She trusted him and agreed to his terms.

· the salary stopped after 12 months
· the car was re-possessed as he had ceased making payments
· she rarely saw the children because he sends them overseas every school holidays, with his new wife.

I understand the need to get the divorce over with amicably, but I have found the trusting nature of women is generally not in their best interests. 
  The weaker party needs a strong team to carry them through when times are tough. A professional team is very important

· as independent and accurate information may result in minimising the pain and suffering to the parties.
  
Q. Does an accountant require special training to become a “forensic accountant”?
Yes. Historically, it has evolved. A Certificate of Forensic Accounting is now available but the training comes through

· years of experience
· working in the field and the Courts
· reading legislation and cases
· dealing with the barristers and the lawyers

So, while there’s not a lot of formal training, there is certainly in-house training.
 
Q. How is a forensic accountant different to other accountants?

An ordinary accountant has a relationship with, and a duty to, the directors, as well as the company which has retained him. They are not able to act in an independent manner and usually have a stronger relationship with one of the parties – in particular, the party paying the account.

The accountant for the business is unable to be an expert witness for the Courts. He is unable to pass the independence test. 
We find the normal accountant has little or no knowledge of the Court’s requirements - and does not have the necessary knowledge of Family Law cases and Court procedures.

Many accountants act as an advocate for one party - leading to unrealistic expectations and expensive and lengthy Court procedures.

One of my clients, a building company, was

· valued by the wife’s accountant at $900,000-00.
· the company made profits in some years and losses in others
· and the parties made a reasonable living from it, but by no means was it a gold mine.

Our valuation - the one accepted by the Courts - was approximately $90,000-00.
There were two costly weeks in court. The wife later said

· she knew the company’s value but thought she had a chance of getting more.

The Courts are not stupid and they rely on facts. The accountant - instead of using historical data - had used a very short period with an extraordinary profit. This is inaccurate and misleading. 
The effect on the family of using this accountant has been horrendous.

· there is no longer any relationship between the parties.
· the emotional and financial costs were enormous.

Sometimes consulting your own accountant in Family Law matters is a good idea, but get an expert in to do the work.
 
Q. How does forensic accounting actually work?

We get a brief and take instructions as to what is required from us. From that brief

· we investigate all the data
· undertake interviews
· and prepare a report.
 
Q. Do you investigate the business’s various accounts and tax records...

Yes, and some of the things we are asked to do - in some ways - even verge on fraud investigation, e.g.

· the spouse may be paying monies out to a friend
· hiding monies
· sending monies overseas
· starting up new companies in the new spouse’s name

We do all types of investigative work, e.g.

· company searches
· names searches on related parties
· fraud investigations, etc.
  
Q. Sounds like you actually look for money - or hidden money?

We can - if that is part of our brief.
  
Q. Would you take a brief from either the husband or the wife?

We are usually instructed by the lawyers acting for the husband or the wife. Sometimes we act for both parties.
  
Q. What would your position be if someone was hiding money and wanted to continue doing so?

We would not be involved in anything unethical. One of the training courses I have attended was on how to retain assets in the event of bankruptcy and family break-ups.
 
Q. Attending a course on hiding money, does that help you find money?

The purpose is to make sure that I’m aware of, and up to date with, any schemes.
 
Q. Do forensic accountants cost more?

A forensic accountant would not charge any more than a good normal accountant. Therefore, there is no excuse not to use a forensic accountant with the special training. 
Often I find a client’s own accountant can hinder the process.

I am involved in a matter at present

· where the client’s accountant prepared a report
· this was used by the solicitors in the first instance.

The report was nonsense. He did not realise he would have to provide evidence to back up his conclusions. We were then retained to re-assess the dollars based on the facts.
We have occasionally been the second or third accountant retained by solicitors acting for the party.

Their own accountant may not know what he is doing and – wanting to please the client – may do something that will make it look good.

In another case I’m working on at the moment - a commercial dispute - the accountant advised that the business had made about a $500,000 loss in a very short period of time.   The solicitors called us in – they knew that one of the requirements of the Court is that the expert must be independent – and our investigations showed that loss was negligible. The client then advised that he wouldn’t have litigated if he had known the very small amount of the dispute.

Another case came to me after nine years of litigation. There was never any provable loss and the case would never have been commenced but for the eager-to-please accountant who had written an unsupportable report exaggerating the claim.
  
Q. Nine years is a long time?

Very expensive … very upsetting for that client. I do think that sometimes accountants, as well as pride and emotions, are the cause of some very expensive litigation.
 
Q. This doesn’t sound good for the accountants?

I think some accountants want to please. 
  
Q. Wouldn’t the accountant see the same books as you?

Yes and no – they might not be as thorough. They might choose a very short period - say a three month period over Christmas when business is running well – and use this isolated period to project for the future. Or, conversely, they might similarly use a ‘slow’ period to show that the business was not doing well.
  
Q. What period should be used when valuing a business?

A fairly recent period - not less than the last three years. It should always look at the future
· markets change & disappear
· or new markets may have opened up for the product

Each case needs to be assessed for the appropriate information required.

Q. Would they also need to look at the company’s projected profit and loss?

Certainly, anything which will indicate where it is going. The basis of a business valuation is the future maintainable earnings. 
The past is often an indication of what is going to happen in the future but by no means the only indication. Knowledge of the future is of great value.

Q. Fiona, what else should divorcing couples be aware of when having their company valued?

The emotional state of the parties. The company’s performance may be affected - around the period of separation or litigation - by the parties not being able to perform as well as normal.
Suddenly, you have a lousy year of trading - the year of the divorce - and that might be quite real because of the emotional upheaval in the family, but it also could be that one party is trying to hide things … so it is very important to understand what is happening to the company.
 
Q. So a loss would alert you?

Our job is to look at the future maintainable earnings of that company. We look at everything that is available.
Sometimes we may notice that money appears to have been siphoned off, or that some very strange accounting has occurred. Some amazing accounting can occur.

We find things lost between different companies, or different entities are charging each other for things that did not happen. We find a whole bunch of interesting things.
Then we have to do a thorough job of looking at the reality of the accounts.
 
Q. How long would that take?

It can be a simple process but sometimes our brief does include looking at specific items. Or alternatively, if we notice anything that is just not quite normal – things like over-inflated expenses - it may require more lengthy investigation. 
  
Q. Are we talking about fairly large companies?

We are talking about any size company.
 
Q. What about someone who may be an electrician, a builder or plumber – a small business….?

Anyone who has only a few employees, including themselves, is often only returning a wage to the owner. The company is not worth anything - other than the fixed assets of the business.

However, with a plumber who may have, say
· 10 employees
· a quantity of trucks and equipment
· and big jobs

then it’s possible that the business will have a value in excess of net assets. 
  
Q. What about a senior executive in an organisation who is paid a salary or has a salary package – would forensic accounting apply to someone in that position?

I would not spend the money. The employer would provide that sort of information.
 
Q. What if shares were part of a salary package?

That would be documented by the employer – or, alternatively, the shares may need to be valued.
  
Q. So forensic accountants are only used when a case gets to court?

No, definitely not. You need a forensic accountant in many areas of the dispute. Resolution can be ironed out well before Court or mediation. 
In another family law matter I am doing at the moment, the parties are expecting to settle – but they want us to make sure that what is being offered is reasonable.

There doesn’t even have to be a dispute. The husband or the wife may make a decent settlement offer, but it is important that the spouse is happy and knows the offer is fair. 
Another reason we would get involved is when there is a fear that the spouse is hiding things. We can go in there in a consultative role and work on behalf of the other spouse.
 
Q. What about in a partnership, eg a legal firm, medical practice or firm of accountants?

We are certainly involved in valuing professional partnerships. It is the same process no matter what sort of firm it is.

· we analyse the data.
· we then request documents for anything that needs analysis
· we look at the future
· obtain profit forecasts
· undertake interviews.
· often there are other entities involved, so we look at the whole structure, eg trusts, partnerships, etc.

Where do you find a forensic accountant?

· The Institute of Chartered Accountants
· Certified Practising Accountants
· ask anyone who has been involved with a forensic accountant
· the parties’ lawyers should know one.
· barristers would also be able to make recommendations.

It is important to

· have an experienced forensic accountant
· interview prospective candidates.

You have to feel confident they will do the right thing. Looking for someone who will be a “hired gun” won’t work in the long run. It may be very expensive and cause a lot of problems.
You need to hear the facts. Sometimes a business is worth nothing - but it has been supporting the family for a long time and supporting them very well.

One of the things we have found – and maybe it is even a reason for the divorce - is that sometimes the business starts losing money. The spouse doesn’t know how to tell the family - so continues the lifestyle by increasing borrowings.

When we report that there is no value in the business, the wife may not be able to come to grips with it. She may think that we are “working for the husband”
 
Q. Could you give an idea of how much it might cost to use the services of a forensic accountant?

We charge the same fees as normal accountants - so in fact we should be involved right from the beginning. 

It is impossible to give an estimate of overall costs - no two cases are the same. If the spouse is holding out on funds and not providing any income - which we know happens - then some accountants would wait until settlement for payout. It is our custom to do this - quite simply because we have to if there is no money available.

Q. Are there any ways clients can reduce costs?

In order to minimise costs, it’s best to prepare before your meeting.

Obtain full financial accounts of all business entities and provide these to the accountant - prior to the meeting - to allow them time to analyse and understand the business, and if you can, provide a short synopsis of the business and its associates.

Prepare a list of everything you wish to discuss as this will provide a focus for the first meeting.

Try to remain focused on the business matters and not on the personal issues between you and your spouse, depending on the role the accountant is to play – eg a valuation of the business requires them to act impartially and as an independent

It is not in anyone’s interest to involve the accountant in lengthy discussions about the spouse’s personal habits.
It is also important to ensure that all the issues you have regarding the business have been made known to the accountant so that they are aware of anything that needs to be 
 
Q. What about people living in the country Fiona, what could they do about employing a forensic accountant?

I don’t know of any country forensic accounting firms, however country residents can undertake most of the work with a city firm - using email, phones and fax.

We do work all around Australia. Most documents can be uplifted and sent to Sydney.
  
Q. What if all the relevant information is not supplied?

Very often documents are missing or else provided in a very messy fashion. We then go back to the courts and request further documents. The courts are then aware of what‘s happening. Very often you actually have to go to third parties to get independent verification.
  
Q. From your experience, what would your advice be to other husbands and wives who may be considering or in the process of divorce?

I think, in many ways, they need a total severance of their financial issues – eg, in the case I mentioned earlier where the wife was expecting a salary for life, along with other benefits – but ended up with nothing. It is very unwise to have a continuing financial relationship if you can avoid it – apart from spouse and child maintenance.
 
 Fiona, thanks for your time.

Dolman Bateman is located at Chatswood, Sydney Tel. 02 - 9411 5422

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