A Forensic Accountant’s job often resembles that of a detective.

The expert must sort through reams of documents, searching for key pieces of data that, when put together like puzzle pieces, form a financial picture.  This article will explain the types of data the Forensic Accountant may utilize when on a divorce case.

Client Information

At the very least, the Forensic Accountant needs information on his or her client’s business finances.  This information will be obtained through personal interviews with the client and his or her accountants and attorneys, as well as by examining the client’s balance sheet and financial statements.

Balance sheets will disclose:
  • Liquid position (ratio of current assets to current liabilities)
  • Gross and net book value of principal classes of fixed assets
  • Working capital
  • Long-term indebtedness
  • Capital structure, and
  • Net worth

In addition, the accountant will likely obtain detailed profit and loss statements for a representative period, preferably five or more years.

Such statements show:
  • Gross income by principal items
  • Principal deductions from gross income; officers’ salaries; contributions (whether or not deductible for tax purposes); and taxes by principal items, including income and excess profits taxes
  • Net income available for dividends
  • Rates and amounts of dividends paid on each class of stock
  • Remaining amount carried to surplus, and
  • Adjustments to, and reconciliation with, surplus as stated on the balance sheet.

Industry Data

Financial Analysis imageOnce the above information is gathered, the accountant may research the client’s business’ industry.  An understanding of the industry outlook will provide the accountant with reasonable expectations regarding his or her client’s company’s prospects.  In addition, for business valuation cases, Revenue Ruling 59-60 requires consideration of “the economic outlook in general and the condition and outlook of the specific industry in particular.”  It’s important to know if the company is more or less successful than its competitors in the same industry, or that it is maintaining a stable position with respect to competitors.  It’s also important to look at possible competition for the company in other publications, and associations’ and industries’ regulatory agencies.

There are numerous sources the accountant might use to obtain this data.  These include reference books, industry surveys and reviews, the business press, trade publications and associations and industries’ regulatory agencies.

Economic Outlook

Because all businesses are affected by the economy, the accountant will also accumulate economic information along with that of the client’s company and industry.  Basically, the data he or she will compile are figures pertaining to current economic growth, available rates such as inflation, employment, consumer spending and interest, and the most relevant national economic issues at the time of the case.

The accountant will want to acquire data on both national and local economic factors.  In addition to obtaining data from governmental publications, regional newspapers and periodicals, the accountant will also contact bank economics departments, public utilities, chambers of commerce and various state agencies, such as Departments of Economic Development and Bureaus of Labor Statistics.

This list is by no means all-inclusive, nor will all of these areas of information be required for every case.  However, it does provide a snapshot of the pieces the Forensic Accountant will need in order to solve his or her case.