Intersection of Business Valuation and Forensic Accounting

Posted by Fred Lundin on Feb 11, 2020 9:00:00 AM
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Business Valuation and Forensic Accounting frequently overlap, and as a result, the two fields complement each other. The intersection of these two fields is often instrumental in providing high value services to clients.

  • Business Valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. The determination of an accurate value of a business ownership interest is critical to mergers, acquisitions, estate planning and many other matters.
  • Forensic Accounting is a specialty area in the practice of accounting. It is the application of accounting procedures and methods to investigate and solve unique problems. The methods and procedures employed are executed in a fashion suitable for use in Court, and forensic accounts generally work with these high standards and potential outcomes in mind.

The processes applied in a forensic matter are often applicable, and very useful, in business valuations. In considering the value of a business, we evaluate internal as well as external conditions influencing business activity. Understanding these conditions entails performing economic and industry research, and considering the implication of other external factors, dependent on the nature of the business.

The analysis of external factors influencing a business may include understanding critical aspects of competition facing the subject business, changes in technology impacting the company, and labor relations affecting business operations – even the impact of such unique factors as the weather. Understanding how and where to obtain relevant data related to external factors and projecting the influence of these factors on a business valuation is a skill enhanced by the understanding and application of forensic accounting procedures.

Whenever the business valuation field involves litigation or some other area of dispute resolution where information may not be forthcoming, there is an intersection with Forensic Accounting. Analyzing and relying on financial records, where the accessibility or reliability of those records could be in question, is also a condition frequently encountered in the business valuation litigation environment. An understanding of the legal process referred to as “discovery” in litigation is a skill frequently applied by a forensic accountant, and this insight also proves to be a benefit to the business valuation process.

Business valuation methods are frequently applied in litigation matters. Some examples of the need for forensic procedures in the business valuation process include:

  • In business valuation analysis, there is a procedure referred to as the normalization of historical net income. This procedure requires the valuator to perform an analysis of historical financial information and determine as to whether an item of income or expense is non-recurring, unusual, or discretionary. Forensic procedures are beneficial in making such a determination.
  • The decline in value of a company may be one measure of the financial damages incurred in a breach of contract case. For example, KerberRose has consulted on cases involving the financial implications of equipment purchased not performing as advertised, the cost related to the postponed opening of a hotel due to construction delays, projecting lost profits from a weather related failure of a product, and financial damages incurred due to an alleged engineering failure of a specialty product to be developed and sold.
  • The value of a company may also be extremely important in a divorce case to facilitate the equitable dissolution of a marital estate and distribution of assets. Such a matter may require submission of a report, attending a deposition and eventually providing a testimony in court.
  • Business ownership disputes, such as minority shareholder oppression actions, also may require a determination of the value of a business to facilitate a buy-out of an ownership interest. An understanding of the premise of value and the standards imposed by the legislation related to this area is critical to success.

In each of the matters noted, there is an intersection between the business valuation and forensic accounting fields allowing these professional disciplines to complement each other, ensuring a successful outcome.

In conclusion, an understanding of all factors impacting the value of a business is critical to providing the highest level of business valuation service to our clients. Recognition and application of the appropriate resources in the business valuation process is key to determining the appropriate value of a business ownership interest, and success in this process is complimented by an understanding of the forensic accounting discipline. As seen in the examples described here, there are many times when the intersection between business valuation and forensic accounting is critical to successfully fulfilling the needs of our clients.

KerberRose strives to be vigilant in identifying situations which take advantage of the intersection of business valuation and forensic accounting processes so as to provide the maximum benefit to our clients. KerberRose hopes to create added value as a Firm offering both certified business valuation and forensic accounting professionals. For all your Business Valuation and Forensic Accounting needs, contact a Trusted Advisor today.


Topics: Business Valuation, Forensic Accounting, Advisory Services