Stefano Vranca, a principal at Rothstein Kass’s Beverly Hills, Calif., office, sees lawsuits in the entertainment industry up close.As head of the firm’s litigation and forensics practice, he often handles royalty reviews and negotiations for various movie studios. Vranca has noticed an increasing reliance on “creative accounting” by businesses of all types as the economy goes sour and companies try to eke out revenues whatever way they can.

“A lot of big studios have problems with manufacturing or distribution of videos or music, whether it’s packaging or advertising costs,” said Vranca. “We’re working to help them recoup money.”

Rothstein Kass generally gets called in by an attorney, and often does work all the way until the case reaches trial — although Vranca often advises clients to settle before that happens. He recently had to handle six different cases involving a major studio.

“The main work is going like a surgeon through the books and records, interviewing people to try to understand what happened, and calculating the damages.” He often encounters instances of fraud in the six- or seven-figure range. One client suspected that he had been overcharged by his advertising agency. It turned out he was right — to the tune of at least $700,000!

FRAUD AND LITIGATION

Indeed, uncovering fraud has become a hot practice area for accountants who team up with law firms. Fraud detection often involves forensic accounting skills, and accountants increasingly find themselves called on to testify as expert witnesses. In fact, 75 percent of those on Accounting Today’s 2008 Top 100 Firms list reported an increase in litigation support revenues.

Catherine Parente heads up the litigation support practice at Carlin, Charron & Rosen from its Providence, R.I., office. She handles mostly business litigation, including damages analysis on cases that involve breach of contract, shareholder and partner disputes, fraud cases, and matrimonial battles. “Divorce has a lot of the same concepts as business partner cases, except they’re married to each other,” she said.

Parente also gets involved in wrongful termination cases and accountant malpractice cases. “There’s always litigation out there,” she said.

She sometimes testifies as an expert witness, but cases frequently get settled before they go to trial. “Eighty percent of the time they settle and 20 percent of the time you wind up in court,” she said.

A law degree isn’t necessary to provide litigation support, she noted. “You don’t need to have a legal background, but the more you understand the process, it’s obviously helpful to you,” said Parente.

She said that she enjoys delving into the cases and finding out more about the underlying facts and numbers. “When you get engaged by an attorney, you hear one side of the case, and when you start digging into these cases, you find there’s another side to the story as told by the other party,” said Parente. “I always say the truth lies somewhere in between.”

Terry Simonds, an officer in the Litigation and Valuation Department at Amper Politziner & Mattia’s Bridgewater, N.J., office, works on matters such as divorces, business valuations, breach-of-contract cases, fraud investigations, mergers, acquisitions, buy-ins and buy-outs. She too works closely with the attorneys on these matters.

“Most of what we do is the result of some kind of litigated matter,” she said. “We work with law firms all around the state of New Jersey. We work closely with the attorney because that’s where we get the work from. We also get it from the judges. They know our reputation.”

Litigation support doesn’t always involve forensic accounting, although Simonds sometimes does some for Amper in small-business cases. “We do the forensic accounting to see if we can rely on the financial numbers and the adjustments we need to make,” she said.

Amper sometimes also gets involved in divorce cases when the couple operates a small, closely held business, to determine an equitable distribution. “We review the documents to determine what the earnings are,” said Simonds. “The issue might involve pre-marital assets, to trace the assets to see if they were segregated or commingled. Sometimes we’re asked to do a lifestyle analysis, which involves reviewing credit card bills to determine what the parties’ lifestyles were like.”

Leon LaRosa, partner and chair at Goldenberg Rosenthal in Jenkintown, Pa., which recently merged with Amper, handles fraud investigations of all types. “Management fraud and employee fraud are No. 1,” he said, but the firm also handles all types of contract disputes between shareholders, partners, employees and their employers; purchase price disputes after a merger or acquisition; “piercing-the-corporate-veil matters, where they try to indicate that a corporation really did not exist and you’re trying to assess liability directly to its owners;” bankruptcy and reorganization matters; and marital disputes between parties.

LaRosa estimated that Goldenberg Rosenthal generates roughly $9 million to $10 million per year on litigation support. He also does expert witness testimony work, and estimated that he has testified over 30 times.

Jerry Bremer, managing director at CBiz/Mayer Hoffman McCann in Minneapolis, said that his firm provides litigation support and business valuation on a national basis, as well as locally.

Sometimes the court appoints CBiz as a neutral expert in the dispute. “Let’s say there’s a marriage dissolution, and a business needs to be valued,” said Bremer. “Rather than each side hiring an expert and fighting it out in court, usually the court suggests that a neutral expert be hired to eliminate the controversy regarding the value.”

When a law firm hires an accountant and designates them as a consultant, the work can be protected under the attorney-client work product privilege. If the information satisfies the objective of the client and attorney, the accountant will be designated as a testifying expert and that removes the work product privilege. Then all of the opinions and analysis are discoverable by the other side. “There’s a very real distinction between a consulting expert and a testifying expert,” said Bremer.

WHAT’S NEXT?

Looking to the future, Amper’s Simonds predicted that computer forensics will become even more important: “That’s an area we want to make sure we’re up to speed on.”

Vranca predicted that the next hot area will be accounting for mortgage fraud. Two attorneys have already approached him to take on mortgage fraud cases. “It’s not only for subprime, but it will expand into mortgage lending in general at the major banks,” he said. “Their systems are not what they’re supposed to be.”

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