A Forensic Accountant's 2019 Wishlist
Monday, February 4, 2019
by: Mark R. Newton CPA/ABV, CFF

Section: Winter 2019

Author Bio

Mark Newton is a partner with the accounting, economics and consulting Hagen, Streiff, Newton& Oshiro, Accountants, P.C. Mark was COO from 2009 to 2015. He specializes in the measurement of Forensic Accounting, economic damages and business valuation. He has testified ass an expert witness in State and Federal Court as well as arbitrations. He has also testified before the International Trade Commission regarding patent infringement.
It is a common practice for attorneys to hire forensic accountants to assist in analyzing both simple and complex records relating to claims of lost income.  But how many of us know what records to obtain to assist the accountants with their job?  The following article lists accounting records and information that are often required, necessary or at least very desirable (only an accountant would say accounting records are desirable), when they are faced with a case involving economic or accounting issues.

To properly forecast income, one typically needs past historical records that can be used as guides in the development of a forecast.

In many cases an accountant or economist is required to “forecast” the wages or income that would have been earned “but for” the injury. To properly forecast income, one typically needs past historical records that can be used as guides in the development of a forecast. The past is not always representative of expected future results but in every case such information helps the analyst to understand the nature of the business over time.
A couple of notes:
  • I use the term “income” above somewhat loosely. Lost income for a wage earner is typically wages plus benefits. Lost income for a business refers to loss of net income or profit which involves the interplay of decreased revenues and the impact on operating expenses of the business from the injury or event.
  • My lists request five years of historical records but this time frame can be modified to fit the circumstances of the case.
Personal Injury/Wrongful Death
Personal injury and wrongful death essentially the same records related to economic loss. A critical factor is whether the injured party was an employee, self-employed or owned his/her own business. Generally, economists need the following common information in all cases:
1)Date of birth of injured party.
2)Highest education level attained of injured party.
3)Gender of injured party.
4)Date of incident causing loss.
5)Health of injured party prior to incident.
6)Marital/relationship status.
7)Date of birth of spouse and children.
8)Dependents; especially those living with the plaintiff.
A wage earner claim in most cases is relatively easy to determine from past wage records. In fact, in most cases counsel could estimate such losses without the aid of an accountant. In larger cases with complicated issues, an economist or accountant may be needed and the following financial records should be requested:
Wage Earner:
1)Income tax returns for the past 5 years. (These show annual pay totals)
2)W2 tax forms for all employers for the past 5 years (These show annual pay from each employer)
3)Year-end check stubs (These show various benefits as well as pay)
4)Annual union summaries for 5 years (These show benefits and dues paid)
5)Identify pension plan benefits and details.
6)COBRA letter showing cost of lost health care benefits.
Other Considerations for Personal Injury/Wrongful Death
Depending on the severity of injury and personal relationships of the injured party, the following information may be required:
1)Opinion from Vocational Rehabilitation Expert regarding earning capacity of plaintiff post-injury. (Identify mitigation)
2)Opinion from Life Care Planner or similar expert regarding a life care plan.
3)Identification of household services typically performed by the injured party and by others in the household. (Who did what type of work around the house, shopping, finances, etc.)
4)Income of surviving spouse. (Bears on personal consumption in wrongful death)
5)Medical professional opinion of health impairment unrelated to injury that may shorten normal life expectancy.
6)Data from Labor & Industries regarding the injured party. (This could show other issues unrelated to the claim)
Commercial or Business Losses:
A business loss may be involved in a personal injury or wrongful death case when the injured party owns a business. We find many other types of cases with claims of business loss such as breach of contract, unfair business practice, theft of intellectual property, physical damages among many other situations. In all such cases, the following basic accounting records are required.:
Basic Accounting Requirements:
1)Income tax returns for the past 5 years. (These show annual pay totals)
2)W2 tax forms the past 5 years (Plaintiff receives W2 forms if his/her company is a corporation)
3)Year-end check stubs (These show various benefits as well as pay)
4)If the business is a sole-proprietorship, Schedule C of the federal tax return for 5 years. (Schedule C is a tax version of an income statement)
5)If the business is a Corporation, a Limited Liability Company (LLC), a Partnership or a Subchapter S Corporation, federal income tax form 1065 for the past 5 years (Form 1120 is a corporate tax return and Form 1065 is a partnership tax version of income statements and includes the balance sheet, too)
6)K-1 federal income tax forms for 5 years received by the injured party (K-1 forms are prepared if the business is a Partnership, LLC or Subchapter S Corporation and show the annual income and distributions paid to the person)
7)Income statements for the past 5 years – monthly or quarterly if available; annual at minimum. (Most small businesses do not have audited or reviewed statements by a CPA. Larger businesses may have audited or reviewed statements which include notes to the financial statements)
9)Promissory notes or mortgage contracts.
10)Important contracts. (Large customers or large suppliers)
In most small or medium size cases, the business records listed above will be sufficient for an economic loss analysis. In larger and more complicated cases or cases requiring a more investigative approach, the following records may be important:
Detailed Accounting Requests
1)General ledger for 5 years. (General ledger should show the detail of all transactions of the business)
2)Sales journals or sales data. (Most businesses have computerized sales data for each sale that allow identification of specific customers and products sold)
3)Bank statements and access to cleared checks and deposits details for 5 years.
4)All loan applications and all documents submitted to lenders related to such applications for the past 5 years. (Loan applications provide balance sheets and income information reported by the business to a lender typically under penalty of perjury)
5)Articles of Incorporation.
6)Shareholder/partnership meeting minutes.
7)Board of director meeting minutes.
8)Identification of major competitors.
9)NAICS code – North American Industry Classification System (This allows the accountant to identify the plaintiff’s industry and possibly obtain useful government statistics)
10)Trade organizations representative of the plaintiff’s industry.
As some wise person once said, “an economist's guess is liable to be as good as anybody else's.” Hopefully, with the lists I have provided, your economist’s or accountant’s opinion will be better than a guess!