A forensic accounting update
If you’ve heard the saying once, you’ve heard it a thousand times: the current global pandemic is ‘unprecedented’. As such, there is no well-trodden path showing us how to proceed and many, whether running a business, advising on litigation or even running a country, are sailing in uncharted waters.
Your forensic accounting expert is no exception.
We have discussed the impact of COVID-19 with our counterparts at many different firms and undertaken shadow expert appointments which has given us yet further access to different viewpoints. And that is what we have discovered.
There are numerous differing opinions as to the impact of COVID-19 from the astoundingly optimistic “ignore COVID-19, there will be no long lasting impact” to the overwhelmingly pessimistic “all businesses are currently worthless”. Where your expert stands on this scale could have a significant impact on the quantum of a claim.
An expert will need to try to estimate the impact of COVID-19 on the business valuation in an environment where limited information is available
In the absence of any precedence, in theory all viewpoints are plausible, provided they can be argued convincingly (and by argued we mean supported). With such a broad spectrum of opinion it is important to understand where your expert stands, either prior to appointing them or as early as possible after instruction.
The impact of the COVID-19 pandemic is in reality unknown. Any expert will therefore need to try to estimate this impact (including the length of any period of impact) on the quantum of future losses being calculated or on business valuation. That’s because, whilst it may already feel like the outbreak has lasted an age, the financial information on which the quantum of a claim may be based is likely to be backwards looking.
At best robust information is prepared on a monthly basis. That means at the date of this newsletter there will probably be only two months of financial information showing the impact of COVID-19 – and probably only the knee-jerk reaction.
Considering the loss of profits suffered by a cinema chain as a result of damage to one of their properties, an optimistic expert may assume that things will be back to normal in the relatively short term whereas a pessimistic expert may be far more cautious. There is unlikely to be a significant amount of independent third party information as to the impact of COVID-19 on the industry (and most of it will be conjecture) so the impact will significantly influence quantum.
Taking the example of a shareholder dispute, where business valuation is the focus, an optimistic expert who believes the business will recover quickly (if it has even been impacted at all – yes we have seen experts concluding on the current value of a business without even mentioning the words COVID-19 or coronavirus) will conclude on a higher valuation than a pessimistic expert who believes the world is on the verge of another financial crisis.
Obviously the parties to the dispute will want be seeking a high or low valuation and will want an expert who supports their position.
So, how does the COVID-19 outbreak impact the selection of your expert? Ask them!
Ask your potential expert how they think COVID-19 will impact the matters they are likely to be instructed to address. A brief conversation should enable you to determine where they stand and whether they will be a help or a hindrance to your case. Ultimately, however, you want your expert to be credible. Even if they are saying what you want to hear, therefore, it is important to consider the challenges that they are likely to face in respect of their views as the case progresses.
This article was originally published in Forensis Summer 2020