When valuation analysts dig into the numbers, they often rely on financial information provided by the target company. As the engagement proceeds, sometimes the numbers do not seem quite right. Maybe expenses seem too high or owner’s compensation seems too low. Perhaps sales or benchmarks seem questionable given the business’ industry, size, or location.
If the numbers look substantially off, the analysts might call in a forensic accountant — a CPA with specialized training in unraveling financial and compliance puzzles. In a valuation, a forensic accountant can help identify hidden assets and income sources or uncover employee fraud, which can significantly affect the company’s value.
Follow the Money
Forensic accountants use several tried-and-true methods to “follow the money” and find hidden assets or uncover financial misrepresentations. The following provides a few of the techniques forensic accountants use in their work.
Bank account analysis: For cash-based or cash-heavy target businesses, such as a bar or restaurant, convenience store, laundromat, or lawn service, starting by hunting for missing cash frequently makes the most sense.
A look at the company’s bank accounts can reveal a lot about the company’s funds and cash flows. Do deposits reflect receipts, loans, insurance proceeds, and other payments? If not, where is the missing money?
Are there assets hidden in other accounts, maybe even overseas? Does the owner take cash home or live above his or her means? Scenarios like these merit investigations.
Fraud investigation: Another area to search for missing assets involves occupational fraud. If an employee embezzles or misappropriates business assets, a forensic accountant can examine internal documents to uncover fictitious accounts, contracts and invoices, kickbacks, ghost employees and fake vendors, personal expenses, and fraudulent expense reimbursements.
Forensic accountants can also look behind the financial statements to uncover misstated revenues, expenses, net income, liabilities, and asset valuations or misclassified cash flows and inaccurate financial statement notes.
Inventory assessment: Forensic accountants can also uncover assets by examining the company’s inventory. Understating the company’s inventory and cost of goods can make it appear more profitable. Forensic accountants can determine how the company tracks and accounts for inventory and illuminate discrepancies to help valuation analysts determine true inventory costs and realign margins.
Getting the Right Help
Forensic accountants and valuation analysts frequently work closely together to get to the bottom of complex financial matters — and some valuation analysts are also credentialed forensic accountants.
Specific forensic accounting credentials include the Certified Fraud Examiner (CFE) designation, issued by the Association of Certified Fraud Examiners or the Certified in Financial Forensics (CFF) designation, issued by the American Institute of Certified Public Accountants.
Like valuation credentials, accountants achieve and maintain forensic accounting credentials through rigorous and continued education and training. They are backed by professional standards that include the requirement to maintain integrity and objectivity in every engagement.
Next Step
Each valuation engagement is unique. Regardless of the purpose of the valuation — whether relative to a divorce, damages, shareholder dispute, merger or acquisition, or other circumstances — a seasoned, professional team can make sense of complex financials.
Our experienced forensic accounting and valuation professionals work closely together for your benefit. Let us know how we can help.
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