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Forensic Insight - July/August 2006
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A Forensic Accountant’s Role in Determining
Reported Values
By William J.
Bradshaw
MD&D, Chicago
During the aftermath
of a major property loss, it is often realized that the reported property
and business interruption insurance values are inaccurate. This
realization often surfaces when the insurance company adjuster provides an
initial loss estimate for reserve purposes that makes it apparent that
total insurable values are incorrect. Typically, the problem occurs not
out of an intent to defraud, but simply because of a disconnect in the
process of converting current accounting information into the reported
values submitted to the insurance carriers by the risk management
department. In fact, the cause may be due to something as simple as a lack
of knowledge by internal accounting personnel about the difference between
accounting valuations versus insurance valuations.
Reported
property insurance values typically consist of replacement costs for
buildings, machinery and equipment, replacement cost or selling price less
unincurred expenses for stock as well as twelve months of business
interruption value.
When bringing in a forensic accounting firm to
get to the core of the reported values issue, it’s important that the
professionals engaged have:
- A strong understanding of the basis of valuation in the insurance
policy
- Experience interviewing risk management, operations and corporate
accounting personnel
- Knowledge of the process utilized in determining the reported
values.
These professionals will be called on to analyze all
documentation used to verify the values and may even be asked to work with
other consultants regarding building and equipment replacement values as
well as the computation of values that should be reported.
With
agreed value policies being universally utilized, it causes co-insurance
to rarely be applied in large property insurance programs. As such, it
becomes even more important to insurance companies that the values upon
which the insurance premiums are based are properly reported. It is also
imperative that insurance underwriters and corporate management have an
accurate picture of values at risk of loss at all locations.
Though
it seems to be a basic insurance concept, it can become complex when
dealing with multi-national businesses that have multiple locations, a
lack of understanding of asset insurable value compared to recorded book
values at original cost, failure to update asset values for new
construction, assets placed into or taken out of service, price inflation
and/or changes in foreign exchange rates, and, most importantly, business
interruption values at risk along with any interdependencies between
locations.
William J. Bradshaw is a partner in Matson, Driscoll
& Damico’s Chicago office. Bill has more than 30 years experience in
forensic accounting. For more information, please contact him at wbradshaw@mdd.com.
Forensic Accountants Bring Necessary Expertise to
Subrogation Matters
Whether dealing with a claim resulting from a defective part provided
by a manufacturer or faulty wiring installed by a sub-contractor, it is
important to have a forensic accountant involved when a subrogation matter
arises. Often, months or years after the incident, a claim will be filed
when one business feels there is actionable liability by a third
party.
"Forensic accountants can work with both insurers and
attorneys on a subrogation claim," said Neal Cason, partner in Matson,
Driscoll & Damico’s Atlanta office. "Following the settlement of the
first party property case, attorneys frequently just need a fresh set of
experienced eyes to provide them with an objective assessment of the total
damages - regardless of insurance coverage."
A forensic accounting
team will provide the depth of experience necessary to investigate the
facts and report findings in a concise manner. First, the team will assess
the situation, including accounting records, valuation of inventory, loss
of profits and other financial losses. By performing this assessment, the
forensic accountants can provide a comprehensive report and documentation
for the legal process.
"A forensic expert can help counsel in the
discovery process by supplying recommendations for interrogations,
requests for documents and deposition questions for financial witnesses,"
said Cason. "MD&D’s forensic accountants have considerable litigation
experience in various subrogation matters."
In the unlikely event
that a subrogation case goes to trial, the investigative professionals may
also provide trial graphics, rebuttals and surrebuttals in response to
expert reports offered by opposing consultants and potential witnesses.
Additionally, a forensic accountant will often be retained as an expert or
consulting witness and will provide the courts with summary calculations,
charts and graphs in straightforward terms that can be understood during
deliberations.
"MD&D’s expert reports and testimony withstand
the scrutiny of voir dire and cross examination," said Cason.
Subrogation cases are not a regular occurrence, but when an
insurance company or attorney finds itself in a subrogation situation,it
is in the best interest of all parties involved to hire a forensic
accounting team. These types of issues can arise in every industry, from
retail to manufacturing, and will often take several years to
resolve.
"It requires a diligent and accurate assessment of damages
and ability to understand diverse industries and situations quickly," said
Cason. "Forensic professionals have the knowledge, experience and
credentials to manage these complex situations and necessary
information."
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