Attorneys often need help evaluating whether a defendant company’s settlement offer is reasonable.

Financial statements or tax returns purporting to support the company’s claim of ill health may be provided. The CPA’s ability to find hidden meanings in financial documents can often reveal sources of additional settlement funds.

Which documents are useful?

Recent financial statements and income tax returns are the most readily available documents and provide an excellent starting point. Most small businesses also keep fixed-asset inventory lists that can be useful in figuring the value of the company’s assets.

Occasionally, attorneys are told that no financial statements are available, or that the company can’t get copies of tax returns. But most companies have some management reporting material that can substitute, and paid preparers should keep copies of their clients’ tax returns. So, it is usually reasonable to apply a little pressure to get the desired information.

For small companies, financial statements generally provide less detail than tax returns. Financial statements sometimes reflect information in different and interesting ways, but tax returns usually provide more information about related parties, owner or officer compensation, and fixed-asset transactions.

For publicly traded companies, the comprehensive financial statements filed with the SEC provide a wealth of information. These reports are available free over the Internet.

What can be learned from the documents?

• By analyzing financial documents, CPAs often can detect:
• Possible excessive distributions to owners
• Irregular financial relationships that might suggest improper transactions
• Evidence that claimed financial problems are temporary or nonexistent

Sometimes, merely pointing out to opposing counsel discrepancies between the defendant’s statements and financial documents can hasten or increase settlements. For example: In a seemingly uncollectible case, unusual prior-year payments were made by a defunct company. This discovery led to hiring a private investigator. The owners, who had claimed to have only nominal assets, were found driving expensive cars and living in a mansion.

In another case, one company’s financial statements reported substantial working capital and net assets, but the company wanted to make settlement payments over several years because of current operating losses. A careful reading of the footnotes to the financial statements revealed that, after the date of the financial information, a 50-percent owner sold his stock back to the company for more than double its book value, resulting in a net deficit. This finding called into question the company’s ability to meet its proposed payment schedule, and whether the stock repurchase might lead to personal liability of the owners or management.

Don’t risk missing hidden sources of settlement funds. Your CPA can read between the lines to make sense of complex financial information. CPAs also follow a strict code of independence and objectivity, which can add credibility when you discuss the CPA’s findings with opposing counsel.