Disputes can arise between business partners or shareholders for a variety of reasons. They may be caused by simple misunderstandings or miscommunication. They may also occur when partners and shareholders have varying incentives, interests or motivations when difficult decisions must be made. Often, disputes will escalate if they are not resolved in a timely fashion, and when all attempts to resolve the situation are deemed to be futile. Claims of shareholder oppression, breach of contract, financial mismanagement or embezzlement may be made.

A forensic accountant can assist in resolving partnership or shareholder disputes by:

  • Investigating allegations of wrongdoing
  • Providing other litigation and dispute resolution support
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Investigations

Investigations

When one business partner or shareholder suspects another of misusing or defalcating company funds, it is imperative that expeditious and judicious action is taken. The role of a forensic accountant is one of immense value in these situations by taking the following steps:

  • Examining bank statements, general ledgers and other financial records
  • Tracing the inflows and outflows of funds
  • Reviewing communication records, including text messages and emails
  • Making inquiries of employees, partner, shareholders, vendors, customers and other third parties who have a vested interest in the matter at hand
  • Conducting investigative interviews of relevant parties, including possible suspects
  • Visiting company locations to conduct thorough and legal searches
  • Performing searches of land registries, corporate or business name registrations and other public record searches
  • Other investigative steps, as required

With knowledge and experience, nagel and associates –in concurrence with legal counsel – will determine which of the above steps make sense given the facts and circumstances of the matter at hand in order to map an appropriate plan of action. Based on the determined scope of this plan, the forensic accountant would then conduct an investigation which will confirm or dispel allegations of wrongdoing, by:

• Detecting suspicious or improper transactions
• Finding undisclosed or mischaracterized liabilities or expenses
• Flagging discrepancies that could be indicative of actions taken such as ‘skimmed’ revenue or overpaid management fees
• Identifying conflicts of interest, such a ‘self-dealing’ by another partner or shareholder, or uncovering evidence of kickbacks or bribes

Once irregularities or fraudulent activity is identified, the forensic accountant would then prepare reports, affidavits, and schedules to present the findings and quantify damages incurred.

Red Flags:

  • The shareholder is extremely motivated to close a deal as soon as possible
  • The shareholder frequently adjusts the terms of a deal
  • The shareholder insists that a proposed deal be a stock sale and not an asset sale, even though the asset sale would clearly be the fiscally sound choice

Resolution Support

Litigation and Dispute Resolution Support

A partnership or shareholder dispute does not always deteriorate into allegations of fraud or embezzlement. However, these disputes can still be fraught with financial complexities that may call for the expertise of a forensic accountant.

A qualified forensic accountant can help to resolve a partnership or shareholder dispute by:

  • Reviewing financial disclosure and other relevant documents or data
  • Reading and interpreting applicable contracts, particularly if there are terms which establish the manner in which certain amounts are to be calculated
  • Identifying relevant information and documentation, as well as preparing lists of outstanding items to be requested
  • Locating and confirming the existence of assets
  • Reconstructing financial records of those
  • Verifying assets, liabilities, income and expenses
  • Quantifying damages or losses, if any
  • Supporting settlement negotiations
  • Organizing and compiling records
  • Producing reports, affidavits, and schedules, which will clearly and accurately summarize findings
  • Testifying in court

Childhood friends Paul and Peter decided to go into business together, –they set up a limited company-, ‘NewCo’, where they were both registered as Directors and equal shareholders.

During the first five years that ‘NewCo’ was operational, the profits were sizeable, and the friendship did not seem to be hindering their ability to work effectively together. Recently, however, they were not in agreement in regards to the future strategy of NewCo. In addition, Peter felt that Paul was not fulfilling his obligations, and that the successes of the business could be attributed almost completely to his hard work and dedication. It appeared as though the partnership had become fractured and was no longer sustainable.

Peter and Paul were not in a position to unilaterally take action because neither could dismiss the other. Moreover, due to the fact that they were 50/50 shareholders, one could not vote the other out. They had no recourse other than to resolve the stalemate by agreement.

To facilitate and amicable arrangement, Peter and Paul opted to hire a forensic accountant. The forensic accountant reviewed NewCo’s financial statements and contracts, interviewed both parties, and verified all assets held by the company, liabilities, income and expenses.

As a result of the work the forensic accountant conducted, Peter and Paul were able to agree on the specific terms of the agreement whereby Peter would buyout Paul’s shares in NewCo, and the subsequent resignation of Paul as Director. The terms of the agreement included a structure for the payment of the shares, and the parameters under which the Paul (the exiting Director) would be able to establish another business.

Relevant Evidence:

  • Contracts and other relevant company agreements or documents
  • Financial records
  • Interviews

To determine whether your organization may be susceptible to fraud, take the following brief survey: