FRAUD FILES: Behind the Numbers: Critical Financial Analysis in Litigation

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The financial portion of a lawsuit is often high-stakes. This is especially true in cases of divorce, breach of contract, securities fraud, tax fraud, money laundering, and white collar criminal defense. Whether the other side is an individual, a company, or the government, you need an accurate analysis of the numbers for the benefit of your client.

There is almost always a story behind the numbers. Things are not always as they appear, and it is unwise to take the financial story at face value. A case can be won or lost based on your ability to find out the hidden truth about the numbers.

Finding the data

Getting your hands on the right financial data depends on knowing what to ask for. The financial statements and tax returns are the obvious places to start. While they may not always be truthful, they still hold many clues to the financial story.

Manipulated financial statements may be unreliable, but they are often still useful because they may inadvertently provide clues about a company’s true income and expenses. Tax returns could provide information on property owned, new lines of business, and related companies.

We can verify the authenticity of tax returns provided in discovery by getting data directly from the government. This doesn’t mean that the income and expenses were reported correctly on tax returns, but it does offer us one way to check whether the data we receive was actually filed with the government.

Other data sources

Analyzing the numbers can include inspecting source documents such as invoices, receipts, contracts, and other financial documents. By examining these documents which are used in the accounting process, we are able to learn more about the detail behind the reported income and expenses.

This type of analysis helps identify customers, vendors, payment terms, and other details of transactions. While these documents can be fabricated or manipulated, a seasoned expert should be on the lookout for the signs of fraudulent documents and should be skeptical when examining documents.

The best, most reliable documentation in a financial investigation is provided by an unrelated third party. A great example of reliable third party data is that contained in bank statements, deposit slip copies, and check copies. Except in the rare case in which there might be collusion between a bank employee and a party under investigation, bank documents are very reliable. They show exactly where money has flowed to and from, reliably reporting the truth about the funds.

Banks may also provide helpful data from loan applications and credit card applications. While an applicant may misrepresent information while applying for credit, there is often valuable information contained in the application. At the very least, manipulated figures on a loan application may confirm that the target of the investigation is dishonest.

Other third parties that may provide information and documentation include customers, suppliers, business partners, and former spouses. The accessibility and reliability of this documentation varies, and subpoenas might be needed to get the information.

Digging deeper

After the right financial documentation is gathered, the heart of the investigation can begin. The analysis is often very labor-intensive, especially in cases of money laundering or Ponzi schemes, in which many accounts, entities, and transactions are deliberately used to create a web of confusion. The financial investigator must harvest the data and put it into a format that allows for verification of accuracy, tracing of funds, and connection of people, organizations and money.

People lie about money, so it is important to have the assistance of a financial investigator who can get behind the numbers to find the truth. Finding this truth creates an advantage for the client in litigation. It can take considerable time and expense to find the truth, especially if other parties to the litigation have deliberately attempted to conceal things. However, with the right expert and the right documents, it is possible to determine where the money went. That knowledge can be used to win cases for clients.

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, securities fraud, investment fraud, bankruptcy and receivership, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at [email protected] 414.727.2361.