Eric A. Kreuter, PhD, CPA, CGMA, CFE, CASAC-T, and Andre Roland Castillo, MBA, CPA, ABV, CFF, CFE, and Ryan Constantino

Finance-related disputes are inevitable in business. Disagreements can arise between enterprises of all sizes due to differing expectations, miscommunication, or outright misconduct. When disputes arise, forensic accountants provide an invaluable service, not only by providing expert opinions and assisting triers of fact, but also by directly assisting parties in settlement discussions.

When disagreements between parties arise over a contractual agreement or business relationship, whether due to miscommunication or malice, businesses may find themselves in an unforeseen and challenging situation. An organization might be compelled to file a claim against another organization, or an organization might need to defend itself from unfavorable accusations. To address disputes, the parties will likely need to take action beyond the scope of their standard operations. As a result, these businesses will lose significant time and productivity.

When such disputes arise, parties have the choice to reach a nonlitigated settlement or turn to litigation. Parties often “benefit from settling their disputes before going to court,” not only because this can be more cost-effective, but also because it saves time, relationships, and resources (Robert H. Mnookin, Scott R. Peppet, and Andrew S. Tulumello, Beyond Winning: Negotiating to Create Value in Deal and Disputes, Harvard University Press, 2000). Nevertheless, parties might never find a solution between themselves and require a third party to help resolve the matter. One third party could be a mediator or an arbitrator, if the parties would prefer to use mediation or arbitration to settle a dispute. Another third party could be a judge or jury in a court of law.

Another example of a third party that could be involved to resolve a dispute is a forensic accountant. Forensic accountants can play a crucial and valuable role in dispute resolution, providing objectivity and clarity, and distinguishing facts from disputed claims. Forensic accountants can be engaged during arbitration or litigation. Better yet, forensic accountants can be introduced into a matter before legal action is taken, which could be more efficient and economical for both parties.

Forensic accountants have the specialized knowledge to derive findings and insights from all types of business records to not only gain a clear understanding of a dispute, but also guide and strengthen settlement discussions and negotiations. The following real-world case studies demonstrate how forensic accountants can be instrumental in assisting businesses in finding dispute resolutions and settlements.

Reaching Settlement through Seeking Admissions

In one specific instance, the authors’ forensic team was hired by a biotechnology company that took issue with its vendor’s costs. The vendor was a clinical research organization that managed the clinical trials for our client’s new developing drug.

The client believed that the vendor had significantly overbilled the company, well above their agreed-upon budget, by more than $1 million.

To investigate this matter, our team reviewed contractual agreements, invoices, payment schedules, and communications between our client and its vendor. Upon reviewing these documents, we conducted interviews with personnel employed by our client and vendor.

Through our analysis of documents, we noticed patterns of inconsistencies communicated by the vendor to our client. For example, we reviewed an April 2022 email by the vendor stating that our client owed the vendor approximately $4 million for work performed; later, we reviewed an August 2022 document that stated that our client owed the vendor $3 million for the same exact work performed. In addition, we observed that the vendor double-counted approximately $100,000 in service costs to our client.

During our forensic interview of the finance director of the vendor, we highlighted these significant red flags and inconsistencies. The finance director admitted that vendor’s communication to our client was unreliable and confusing.

The authors’ team communicated all the information gathered and analyzed to both parties during a settlement negotiation meeting. This collection of evidence, especially the admissions by the vendor, contributed to the final settlement agreed upon between the client and vendor. This settlement concluded very favorably to our client, who ultimately saved over $1 million in disputed costs. Not only did our client save significant costs by leveraging our forensic work for negotiations, it also avoided substantial litigation costs.

Leveraging a Forensic Report for Settlement Negotiations

One of the most effective ways to communicate forensic findings for settlement negotiations is by having an independent third-party write a forensic report regarding a disputed matter. An objective forensic report presents an unbiased, nonpartisan depiction of factual understandings. This document can eliminate exchanges between disputing parties that are fueled with unfounded allegations and claims. A forensic report can help establish a venue in which the parties can have productive, logical, and evidence-based settlement negotiations.

The authors’ forensic team was able to facilitate settlement negotiations when we were hired by criminal defense attorneys that represented a client that allegedly misappropriated assets from a large organization.

The client and attorneys were ready to agree to a plea deal with the government; however, they did not agree with the government’s calculation of the restitution amount owed to the large organization. The authors were engaged to perform a forensic analysis to determine the appropriate restitution amount.

Through our analysis of the available evidence, we determined that the government’s restitution amount exceeded our calculated amount by $12.6 million. We completed a forensic report supporting our conclusion and findings, which the defense attorneys used to continue plea deal negotiations with the government. Fortunately, as negotiations continued, the government agreed to lower their original restitution amount owed to the large organization to match the amount we determined in our report.

Letting the Opposing Experts Settle the Matter

Typically, opposing attorneys can work together as advocates for their clients to help reach a settlement on a dispute. Alternatively, the authors’ team has been involved in a litigated matter in which the opposing experts worked together as objective observers to help the opposing parties negotiate a settlement.

In this matter, our team was hired as expert in a business dispute between two siblings. At issue was the value one brother should be fairly paid for his half of the business. Our lead partner had known the opposing expert from previous professional encounters. The opposing expert and our team suggested to respective counsel to give us an opportunity to perform our forensic analyses and discuss the merits of the facts amongst each other to propose a workable settlement to their clients. Counsel agreed.

We analyzed all available evidence and made preliminary conclusions, which we discussed with the opposing expert. We were able to discuss our findings and understand the opposing expert’s analyses and conclusions. Once we were able to collectively gather our objective observations on the matter, we discussed with the opposing expert what kind of resolution would be favorable to both parties. Not only did we share our objective observations on the matter, but also, we shared the perspectives of what our clients desired as solutions to the dispute. This required us to comprehend the humanistic aspects of our client along with the tangible aspects of the situation. We both pointed out the significant impact of protracted litigation each side would have to bear to bring this case to trial. The economics of the case did not warrant such cost. Both brothers agreed with this conclusion.

After several rounds of discussion between the authors’ team and the opposing expert, we agreed to a reasonable resolution to which both parties agreed. Ultimately, the brothers agreed that one would be bought out of the business for about $400,000 while the other would continue to operate the business. The cost-benefit analysis of litigation, plus the fact that the values reached by both experts were not far apart, led to the quick settlement. All parties, including the attorneys, were pleased with the outcome.

Using Forensic Accounting to Reach a Resolution

Forensic accounting can serve as a foundation for resolving financial matters in business disputes. Forensic investigative techniques and reporting, with its combination of quantitative data and qualitative insights, has proven to be an effective tool during settlement negotiations.

As the cases above demonstrate, an experienced forensic expert’s role is not confined to unearthing financial irregularities. Their analytical mindsets, combined with an extensive understanding of the nuances of business and of human nature, allow them to assist with much more. Forensic experts can translate complex data and human behavior into actionable strategies, significantly elevating the negotiation process.

Furthermore, as our experience suggests, incorporating a more humanistic approach could potentially transform the settlement landscape. Such a method could complement the rigorous fact-finding process, adding a new layer of understanding and resolution, particularly in cases involving family members or long-standing business partners.

Leveraging forensic findings and strategic advice from forensic experts can lead to a fair settlement for all parties involved and save time and money. As illustrated above, forensic experts offer much more than financial investigation; they offer strategic advice, invaluable guidance, and even the possibility of human connection, making them an essential part of any dispute resolution.

Eric A. Kreuter, PhD, CPA, CGMA, CFE, CASAC-T, is a managing director at CBIZ Forensic Consulting Group.
Andre Roland Castillo, MBA, CPA, ABV, CFF, CFE, is a senior manager at CBIZ Forensic Consulting Group.
Ryan Constantino is an undergraduate intern at CBIZ Forensic Consulting Group, studying accounting and business analytics at Fairfield University, Fairfield, Conn.