The Forensic Accountant's Role in Litigation

by Noel J. Capuano, CPA, Friedman LLP – January 19, 2018
The Forensic Accountant

The accounting profession is a dynamic and constantly changing field that opens the door to vast opportunities.The specialized field of forensic accounting in particular provides those who possess the proper skill set the opportunity to be an integral part of a team of professionals in both criminal and civil law engagements.

Forensic accountants are often called upon to assist in fraud and embezzlement investigations. As such, a forensic accountant’s client base is very often comprised primarily of attorneys. The forensic accountant’s role within the context of a fraud investigation may include assistance with the formulation of deposition questions, interviews with various individuals, investigation of various financial documents, communication of findings in both oral and written form, and potential testimony at depositions, arbitration and/or trial. While many of these skills are enhanced by an accountant’s audit and/or tax experience, additional training and certifications are typically desirable and provide the forensic accountant with specialized knowledge.

Communication among members of the professional team is critical to the success of any investigation.  While the attorneys are well versed in the legal aspects of their client’s case, the forensic accountant must be cognizant of both the legal and accounting aspects of the case, as the former may have an impact on the methods and assumptions used in the investigative process.

Publicity surrounding corporate malfea­sance and high profile cases such as Enron, Worldcom, Tyco and Bernie Madoff certainly helped the field of forensic ac­counting to be viewed as a more inter­esting and dynamic profession, however, these cases are more the exception than the norm. In reality, a forensic accoun­tant will more than likely be involved in engagements such as economic damages, bankruptcy, shareholder disputes and very often divorce. Depending on the demand for these types of services, many forensic accountants will actually specialize further and focus their practice on one of these types of engagements. Divorce work, for example, is a popular specialization, as the demand tends to be steady.

Within the context of a divorce engagement, there are numerous ways that a forensic accountant can assist the parties to reach a mutually agreeable settlement. Many forensic accountants are skilled business valuation professionals, with credentials such as an ABV (Accredited in Business Valuation) or CVA (Certified Valuation Analyst). In cases involving ownership in a closely held business, it is typically advisable for a forensic accoun­tant to review the financial records to ascertain whether the business represents a marital asset subject to distribution. A review of the business records will also be necessary for purposes of determining the business owner’s cash flow available for support purposes. The form of business can often cause confusion with regard to an owner’s true cash flow. In the case of a pass-through entity, such as a partnership or S corporation, an owner is taxed on his or her proportionate share of the entities’ income. That income may bear no relation, however, to his or her true cash flow, which is more accurately determined by the distributions paid. That said, the forensic accountant will also look at the entity’s cash flows to determine whether distributions may have been unnecessarily withheld.

Another common request of forensic accountants involved in divorce work is the preparation of a spending, or lifestyle, analysis. This service helps to establish the marital standard of living and is also used to determine support. In cases where one or both spouses hold an ownership interest in a business, a lifestyle analysis can prove to be critical in establishing the existence and amount of unreported income and/or perquisites paid by the business.

This is the tip of the iceberg in terms of what the forensic accountant can offer in a divorce engagement.  There are tax implications of settlements, identification of hidden assets and liabilities, quantification of dissipation, and the list goes on. Experienced experts add value not only with their analysis, but in their ability to assist attorneys to help their clients understand and negotiate their issues. 

Whether in a divorce setting, fraud investigation, bankruptcy or damage assessment, forensic accountants possess the knowledge and skills that enhance the team of professionals’ ability to resolve their cases and, ultimately, achieve closure for their clients. 


Noel J. Capuano

Noel J. Capuano, CPA, CVA, CFF, is a senior manager with Friedman LLP. She is a member of the NJCPA Business Valuation Forensic Litigation Services Interest Group and can be reached at ncapuano@friedmanllp.com.

This article appeared in the Jarnuary/February 2018 issue of New Jersey CPA magazine. Read the full issue.