Preparation for litigation (whether settlements or full trials) is based on a systematic series of steps. Discovery is the chapter in the process in which attorneys and CPAs turn into bloodhounds, skillfully piecing together the financial jigsaw puzzle.
Attorneys, putting together a case, turn to a CPA for help in following the money. Working together as a forensic team, they may sleuth out hidden assets or unreported income through journal entries and financial statements. The role of the CPA involves many key discovery functions such as:
- Defining the financial framework of the case.
- Assessing the quality and relevance of documentary evidence.
- Determining an appropriate data set to investigate.
- Identifying which documents to subpoena.
- Noting inconsistencies.
The CPA’s contribution
The attorneys’ overarching goal is to achieve the most favorable possible outcome for the case. A CPA can provide critical support to the legal team, combining professional skills such as accounting and audit with a practical approach based on creativity, judgment and persistence. The legal team, immersed in their own process, may be able to leverage the CPA’s expertise and add additional benefits of an outsider’s perspective.
It is often advisable to bring the CPA into the discovery process early, first to weigh the merits of the case, then to coordinate strategy and plan the end goals. In particular, you want to avoid mistakes, which can be costly. You must also calculate the cost/benefits of discovery, which can be a lengthy and painful exercise.
Once on board, a CPA can add value in managing copious records and documents that must later be extracted and filtered into clear and comprehensible reports. It takes a defined skill to summarize findings from complex and voluminous data into simple terms. Parlaying this skill set, the CPA may be called on to unravel evidence in various types of litigation such as:
- Breach of contract.
- Employee fraud.
- Trusts and estates.
- Shareholder and partnership disputes.
- Marital disputes.
Secrets of a marriage
Divorce cases provide an example of how a CPA can identify and value marital property while the attorneys are busy constructing a complete, cross-referenced picture for the division of assets, alimony or child support. The lawyers will work from records and written questions (interrogatories) in the hunt for assets, liabilities, income and expenses, any of which may be hidden or at least undisclosed.
A deep dive will likely include a trove of documents such as:
- Bank, brokerage and credit card statements.
- Tax returns (federal, state, property, corporate, trust or partnership).
- Loan applications.
- Sales of assets.
A labyrinth of asset movement, which might date back years, sometimes reveals a trail or a pattern of inconsistences. Forensic accounting may deter some spouses from hiding assets or other bad behavior and can also be helpful for establishing the values of jointly owned businesses or avoiding conflict over property division.
Consider all the backup a CPA can provide before you embark on long or expensive litigation. You may gain from the specialized support of a good financial Sherlock on your side to help build and communicate the strongest possible case.
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