In 2005 alone, we have experienced a record number of devastating disasters, including the tsunami, floods, earthquakes, hurricanes, mudslides, and wild fires. According to the National Flood Insurance Program, hurricane-related claims could surpass $22 billion, the largest amount paid in the entire history of the organization. The Federal Emergency Management Agency expects $10 billion to $30 billion in total flood claim payments.
The graphic and ongoing media coverage has illustrated the need to rebuild, while the government, non-profit organizations, insurers, and construction companies have come to the front line during response and recovery. Recent events also have raised the profile of the forensic accountant as a much more necessary element in disaster recovery.
Forensic accounting is the practice of using accounting, auditing, and investigative skills to assist in legal, insurance, or criminal matters. When catastrophes occur, such as Katrina and Wilma, forensic accountants are called upon to assist insurance company representatives in doing their part to measure property and business losses under policy coverage.
After a storm passes, business owners begin a physical and mental accounting of potential losses to start the demanding process of business recovery. Actual losses sustained due to direct physical damage by a covered peril for property damage, stock losses, and business interruption and extra expenses, along with damage to financial data and valuable papers, can set a company back for months, sometimes even permanently, especially in the absence of a detailed recovery plan.
To substantiate property-related claims to insurers, business owners must be able to provide detailed financial records, such as inventory and asset listings, profit and loss statements, tax returns, contracts or lease agreements, and bank statements, that can help recreate the company's financial picture at the time of the loss and its prospects for the future.
Forensic accountants work with insurance company representatives to calculate both the physical and business losses under the policy coverage. Whether it is rebuilding a refinery after a hurricane, restoring a building following a fire, repairing machinery and equipment, or estimating the cargo losses when a container ship is lost at sea, catastrophe claims can be complex, and the recovery process always benefits from the early involvement of a forensic accounting team.
Anticipating the Storm
Experienced and prepared forensic accounting firms have named catastrophe directors and have organized regional catastrophe teams waiting to be deployed to affected areas immediately after natural or man-made disasters occur. Timing depends on the scope and impact, but forensic accountants usually are called upon shortly after insurance company representatives arrive in disaster areas.
In putting together a team to work on claims, it is essential to assemble a group that will complement one another throughout the entire adjustment process and see each assignment through to completion. These individuals need to have the skills and expertise to assess situations and provide clients with the financial information necessary for informed and timely decisions regarding loss reserves.
In major losses, adjusters are team leaders, and must be surrounded by experienced and competent professionals. The adjuster should have confidence in their abilities and confirm that they can provide the necessary time commitments, proper staffing resources, and written and oral reports to all interested and involved parties as required.
Once on-site, most forensic accounting teams will work side-by-side with adjusters, engineers, contractors, and other consultants during the rebuilding process, and will help to manage the project and protocols from the outset.
Relating to property damage, forensic accountants should be present on-site to monitor activities and receive pertinent information. They should help organize the paper flow, audit trails, and categorizations of damage into proper policy categories, and perform thorough and proper audits by analyzing invoices as they are received. Forensic accountants also should investigate each item, what it is and what it is used for, in order to help adjusters determine whether items are like-kind replacements, improvements, or maintenance items.
On behalf of both the insured and the carrier, the forensic accountants will interact with other consultants hired to review the insurance claim. It is the forensic accountants' responsibility to ask the tough questions needed in the field while the information is fresh. As a result, they can stay on top of projects to avoid last-minute surprises.
For example, accountants may assist in engineering reviews by providing, summarizing, and sorting detailed accounting records for comparison to claims and estimates prepared by engineers. This allows engineers to ascertain whether any repair work actually performed is in excess of the amount of the damage.
Most businesses affected by catastrophes want to be up and running as soon as possible to mitigate lost revenue. In business income and extra expense situations, forensic accounting teams will accumulate and analyze historical operating and accounting data prior to losses. Although much of this process can be conducted from the first day of the loss adjustment process, final covered amounts usually will not be known until after all repairs and replacements are complete and the business is operating normally again.
Throughout the adjustment and repair process, status meetings should take place among all parties involved. This allows insureds, experts, and insurance representatives to discuss the results to date, potential problems, and ongoing activities. It also provides opportunities to resolve as many issues as possible as the project proceeds, so that not everything is left until the end.
Uncovering Documentation
Forensic accountants are brought in to work on businesses of varying sizes, complexities, and industries. In ideal situations, back-up data has been stored off-site and is available for analysis. In general, companies large enough to experience multi-million dollar losses have sophisticated business enterprise and accounting systems. Oftentimes, they also will operate in paperless environments, which can present problems that require specialized technical accounting expertise.
The difficult part of dealing with complex businesses is in knowing what tasks to instruct their systems to perform. The forensic accounting team will need to have experience working with the business systems in order to elicit the correct information. This involves not only understanding the business system in use, but also the sub-systems and how they interact.
The sub-systems (time reporting, payroll, accounts payable, etc.) often serve as source documents in paperless environments. It then becomes necessary to perform accounting walk-throughs of procedures and processes. This would include reviews of internal audit reports and tests of transactions in order to become comfortable enough with the company's system so that reliance can be placed on the reports that it produces.
In the days and weeks after a catastrophe, a company's priority, after making sure that employees and their families are safe, is setting itself on the track to recovery. Having a strong forensic accounting team available for the rebuilding effort is one way to ensure that the claim process runs smoothly. An experienced team on-site goes beyond just receiving and reviewing purchase orders and invoices to becoming a critical part of the rebuilding process.
Roland Hoffman is a managing partner with Matson Driscoll & Damico, an international forensic and investigative accounting firm. Thomas Wilson also is a managing partner and the firm's catastrophe director.
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