Filed Under:Claims, Catastrophe & Restoration

A Forensic Accountant’s View of Business Interruption

Catastrophes and Expeditious Claims Evaluation

The Association of Certified Fraud Examiners (ACFE) explains that, “forensic accounting is the use of professional accounting skills in matters involving potential or actual civil litigation.” The word “forensic” is defined by Black’s Law Dictionary as “used in or suitable to courts of law or public debate.”

In the insurance claims world, a forensic accountant is typically engaged by an adjuster, or an attorney, to provide an understanding of an insured’s books and records, and to determine through an analysis of those books and records whether the policyholder has sustained a loss, as defined in the insurance policy.

In medium- to large-sized businesses, there may be a person or persons that have expertise in accounting—for example, the CFO or controller. However, in many smaller businesses, the owner of the business, who may have no formal accounting training, is also the “accountant.” Be it a small “mom and pop” operation or a large complex business, a forensic accountant will expedite the claims process by having the ability to translate the policyholder’s operating results, as reflected in its financial records, to its BI coverage.

The Time Element Component
One of the critical factors in determining the value of a BI loss is the “time element,” or duration of time the BI loss will be measured over. A claims adjuster may make a determination of the measurement period by melding his or her knowledge of BI coverage with assistance from knowledgeable consultants (construction, electrical, engineering, legal, and so forth).

Under both methods of calculating the BI value, analyses of sales, costs, and expenses are necessary. Regarding sales, a forensic accountant will project what the sales level should have been during the loss measurement period “but for” the loss incident. Some potential factors to consider when projecting sales are outlined in the sidebar.

Expenses and costs can be segregated into general categories: fixed, variable, and a combination of fixed and variable. Fixed costs are considered continuing expenses in the business interruption calculation. Examples of fixed/continuing expenses include: rent (unless the rent is abated in accordance with the insured’s lease terms), insurance, property taxes, interest expense, and other contractual obligations. Variable costs are considered non-continuing expenses. Variable/non-continuing expenses include: bad debt, sales discounts, merchant credit card fees, shipping and freight, raw materials, ordinary payroll expense and supplies. An example of an expense that has both a fixed and variable component is a telephone expense, where there is a base/fixed monthly charge with additional charges based on usage.

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