by Larry Goldsmith, CPA, JD, CFF, MAFF
I just hung up the telephone with a tire kicker — someone who is shopping for a financial forensic expert to use their expertise to confirm or deny the existence of damages. And, like all tire kickers, this person intends to make their decision primarily based on price; in this case, the forensic expert’s fees.
It reminds me of the true story of a doctor client of mine who was building a medical center for his practice and was outraged by the fees being charged by the general contractor. The doctor, believing himself to be smarter than the contractor, decided he would save money by overseeing the construction himself. Obviously, the doctor did not possess the skills learned through experience that the general contractor possessed. The building’s completion was delayed by two years and suffered a 100% increase in overrun costs as the subcontractors played the doctor for the fool that he was. The project ultimately went into bank foreclosure and the unfinished building was sold at auction. The moral: experience and training are key elements when considering the retention of an expert. Price can be a factor but it should not be the primary factor.
The practice of forensic accounting has recently become a hot service. Both CPA firms and non-CPA financial accounting companies are claiming “expertise” in this area and clamoring for business. I regularly meet with CPA’s and non-CPA’s who claim to be financial forensic experts, and I generally find that their claim to be an expert is based on one of the following:
- They are a CPA and have worked in auditing companies
- They are a CPA who was grandfathered the designation of a Certified Financial Forensics (CFF) because they had a CPA license for 10 years and paid a fee.
- They have a keen eye and were self taught.
Here’s an example of what can happen when a person involved in a legal action does not verify the credentials of their accounting team:
Awhile back I received a call from a woman sobbing on the phone. She said that she was in the middle of a divorce, her husband of several years had stolen her premarital money, and she needed to hire a forensic CPA immediately. After calming her down I asked her where she was in the divorce process. She said that she had just left the courtroom having learned that her “expert witness” lacked the credentials of an expert, had never testified before, and was not even a CPA. Apparently, her so-called expert’s only credentials were that she was a self-taught bookkeeper for 10 years. The Court refused to accept the presented witness as an expert.
In this case, the woman who called me suffered because her “expert’s” findings and opinion were excluded and never heard or read by the court. Her husband’s expert, however, was permitted to present his opinion. Sadly, I had to explain to her that an expert can only be retained in the window of time permitted by the Court. Once that time ends, only the court can grant a party the authority to retain an expert. Her attorney recommended the attorney’s friend as an expert, the attorney and the expert failed to provide the expert’s credentials to the client.
Forensics is the science of investigating people and money. As a science there is methodology, there is testing and there is specific analysis that an experienced financial forensic expert will use. The methods may differ but results should be constant given the similarity of assumptions.
Everyone on my staff at CJBS, including myself, are CPAs who have received at least 40 hours of class room instruction before taking a test in financial forensics. All of us were required to work on engagements to gain experience, and write an actual expert opinion report that was then graded by the National Association of Certified Valuators and Analysts before we received our Masters Analyst in Financial Forensics designation (MAFF). Our expertise in forensic accounting is not wishful thinking; it’s the result of hard work and experience.
CPA’s and other professionals who have not been schooled in forensics may have professional skills but those skills may not be forensic skills. It is important to remember that there is a difference between an auditor and a financial forensic expert: the job of an auditor is NOT to detect fraud but rather is to verify the accuracy and correctness of financial reporting.
The financial forensic expert may be retained to determine if there is a misstatement of financial information, calculate damages, or detect financial misappropriations. They begin studying the people involved before analyzing the data. They keep an open mind in their investigation and let the facts dictate the findings. In my view the forensic expert tries to look at a larger view of a given situation; the auditor only looks at a narrow section of the financial picture.
Last year I was retained to analyze an expert’s report as to damages. The expert retained by the other side of the case calculated damages using an accounting definition of damages; standards that would have been acceptable by the court. For example, he excluded from profits the salaries and benefits of the business shareholders. When my report called attention to the numerous errors in the report and the miscalculations by the other side’s expert, the opposing side conceded rather than risk an embarrassment.
Your financial expert does matter. Your expert has to be able to investigate and to communicate the findings to your attorney, and to be able to communicate the findings to a judge and write a convincing opinion. Your expert must be able to educate the client and their attorney as to the findings and be objective in interpreting the results.
If I retain an expert, such as a medical specialist, I want to know their successes and failures; I want to know their experience handling cases like mine. Is the expert a “part time” expert, accepting engagements during slow periods, or does the expert specialize in my type of case? Is the person able to communicate and appear professional? Finally is the expert a good listener and are they paying attention to my issues and concerns? My last concern will be the cost. “Pennywise and pound foolish” is never more appropriate than when it is applied to choosing a forensic expert.
Questions or comments? E-mail me at firstname.lastname@example.org if you have any questions about this posting or if I may be of assistance in any way.
Larry Goldsmith is an experienced Financial Forensic expert and CPA who investigates and verifies financial income and assets in matrimonial matters. CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies.