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BP Claimants Call in the Detectives

In a disaster, such as the BP oil spill or Hurricane Katrina, a business’ best friend can be a forensic accounting firm—“the intersection between accounting, investigation and the law.”

• BP’s $20 billion claims fund brought an influx of business to Alabama accounting firms.
• Emergency payments ended in November, but claims for interim and final payments still are being reviewed.
• The average small business does not have an adequate disaster plan.
• Many business owners hit by Katrina found they were just out of luck.

When a disaster strikes, whether it be natural, such as a hurricane, or manmade, as in the case of the Gulf oil spill, business managers often are left scrambling as they try to resume normal operations. After the dust settles from the tornado, flood or fire, they must be able to prove how much business was lost, to make insurance claims for lost revenue, assuming there is business interruption insurance. If an enterprise is destroyed because of a disaster, the value of the business must be determined, for the owners to be adequately compensated.

Proving lost revenues can be challenging. Accountants with business valuation and forensic accounting expertise may be called upon to verify the legitimacy of insurance claims. Such accountants often are hired by insurance companies, attorneys or businesses after disasters. The accountants also may serve as expert witnesses if a case goes to court.

“Anytime we work on a case, we always document our findings to the point that we could take our report to court and testify to its accuracy. You never know if an insurance case will go to court, so you always have to prepare for what if,” says Kelly Todd, CPA, forensic accountant, certified fraud examiner and business valuation expert with Forensic/Strategic Solutions PC in Birmingham.

The Gulf oil spill last April and BP’s $20 billion claims fund has brought an influx of such business to Forensic/Strategic Solutions and other Alabama accounting firms. Many firms continue to help businesses sort out how much compensation they deserve from BP and insurance companies. Emergency payments provided through the Gulf Coast Claims Facility ended in November. Claims for interim and final payments still are being reviewed.

"Anytime we work on a case, we always document our findings to the point that we could take our report to court and testify to its accuracy."                -Kelly Todd, Forensic/Strategic Solutions PC

“BP made applying for the money easy, but many businesses believed they deserved more for their losses than what BP initially offered them. That’s where firms like ours come in,” says Paul Fields, CPA, a business valuation expert with Wilson, Price, Barranco, Blankenship & Billingsley P.C. in Montgomery.

BP typically has responded favorably when businesses are able to clearly document and prove their losses via the help of forensic accounting and business valuation experts, says Skip Brown, a CPA and certified forensic financial analyst with Russell Thompson Butler & Houston LLP, in Mobile and Fairhope.

“A forensic accountant’s report is not a guesstimate or biased, it’s factually based. If a team at another firm worked up a report on the same case, our numbers should be similar,” Brown says.

Beyond reviewing financial records and auditing the company’s books to help determine disaster claims, business valuation and forensic accounting experts investigate the company’s figures to validate their accuracy. Profit and loss statements, sales records, bank statements, income tax returns and various other financial records are probed.

“Forensic accounting is a lot like detective work. It investigates the history and circumstances behind the transactions and entries,” Brown says. “Our investigative procedures are designed to identify the propriety of the entries. Forensic accounting encompasses litigation support, investigation, and dispute resolution and is the intersection between accounting, investigation and the law.”

In addition to such investigative techniques, standard business valuation models and formulas are used to project and quantify losses for disaster claims, says Tommie Singleton, Ph.D., scholar-in-residence at the accounting firm of Carr, Riggs & Ingram LLC, in Enterprise. Singleton is certified in information technology and information system auditing.

“Disaster claims typically require accountants that have both forensic accounting and business valuation skills or work in a team that has them,” Singleton says. “There’s a bit of an overlap of the two areas of accounting. That’s why in some firms business valuation experts take the lead on disaster claims and in others forensic accountants,” Singleton says.

Even with the expert assistance of forensic and business valuation accountants, businesses need to be prepared in case disaster strikes to best weather the disaster and successfully make their compensation claims. Businesses must be able to access their records and to show that they have done all they could to lessen the impact of the disaster on the business, Brown says.

Organizations with well-designed disaster plans typically make faster, more complete recoveries and get better business interruption settlements after disasters. “While well-run large organizations typically have a well-practiced disaster plan, the average small business does not. That can cause major problems, not only in keeping the business going after a disaster, but also in getting compensated for lost business,” Singleton says.

Forensic and business valuation accounting experts recommend business managers take the following steps to lessen the impact of a disaster:
Review the insurance policy. While deciphering the fine print of an insurance policy can be daunting, it’s important to understand what is covered in case of a disaster. Review your business insurance on an annual basis and ask your agent questions if you have them. “It’s always a good idea to learn what kind of documentation the insurance company would require in case you ever need to make a claim,” Todd says.

Keep records. To adequately prove how much business was lost because of a disaster or the value of a business if it is destroyed, it’s critical to maintain good business records. Important records include tax returns, bank statements, profit and loss statements, and sales records.  Keeping three to five years’ records is recommended to show revenue trends. “After the Gulf oil spill, fishermen and other small businesses that only kept spotty records had difficulty proving how much income they had made in recent years,” Todd says.

Keep a backup of records offsite. A copy of all critical records should be keep offsite, at least 30 to 60 miles away from the business location. Maintaining a second backup is even better. Professional businesses, such as law, medical and accounting firms, will need to keep copies of all client/patient records offsite. Backups should be periodically tested. “In many cases when business suffer losses during a fire, hurricane or other disaster, they can’t access their records. We often saw that after (hurricane) Katrina. You can use bank records to reconstruct some of the information, but such records are limited in detail. Business owners found they were just out of luck when it came to getting back what their businesses were actually worth,” Fields says.

Maintain relationships with alternative suppliers. Some disasters, such as hurricanes, may interrupt the operations of local suppliers. Having alternate suppliers located out of the area, with a plan for changing over to the alternative suppliers in case of emergency, can lessen business losses.

Establish an alternative business location. If the physical location of a business is destroyed or severely damaged, having an alternative location to set up business also may lessen losses. Fields’ firm, for example, contracts with Agility Recovery Solutions to have a modular office space with computer setups for 30 people within 48 hours.

Have sufficient capital to cover expenses during a business interruption. Because it can take months before insurance claims may be paid, it’s critical to have financial reserves.

Establish a line of credit in advance of when you may need it.  In addition to financial reserves, having a line of credit also provides a business breathing room until the settlement comes in.

If disaster strikes, keep a diary of events and your response to them. Maintaining a chronological record of the effects of the disaster and the steps taken to mitigate losses can strengthen an insurance claim. “Often so much happens so quickly that it is impossible to remember it all. A diary will help a business answer questions and prove the claim,” Brown says.

Kathy Hagood is a freelance contributor to Business Alabama. She lives in Homewood.

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