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The connection between Business Valuation and Forensic Accounting

01 October, 2013 | Posted By: Rakis Christoforou

By Rakis Christoforou, BBA, CPA/ABV/CFF, MCSI, CGMA, ACFE


Defining Business Valuation
Business valuation is a processed set of procedures used to estimate the economic value of an owner’s interest in a business.
In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to economic damages calculation, shareholder litigation, allocate business purchase price among business assets, or establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, mergers, acquisitions, bankruptcies/reorganisations and many other business and legal purposes.

Defining Forensic Accounting/Financial Forensics
Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation.
"Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally have to work. Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence as "financial expert witnesses" at the eventual trial.

Is there a Connection?
Professionals that are involved in the business valuation process are often called on to defend their estimate of value in the court room, boardroom or other legal administrative venue. In order to be successful in this task, business appraisers need to have forensic accounting training and experience otherwise they may not be able to defend properly their own work product and end up being personally liable.
On the other hand, forensic accountants are often called on to comment on the business valuation performed by another professional and unless they have some skills and knowledge about the business valuation process, they will not be able to identify the crucial issues raised in the business valuation report.

Conclusion
It is clear from the above that the business valuation process and forensic accounting are very well connected and a professional specialising in either of the two areas needs to have also a good knowledge of the other area. That's the main reason why in my latest articles on business valuation issues I prefer using the term "Forensic Business Valuation".
The business valuation due diligence process can sometimes be extremely complex and requires the involvement of several legal as well as business professionals. There are many risks associated with determining the true value of an existing business, both large and small. Those interested in determining the real value of an existing business should take the prudent step of engaging appropriately qualified professionals.

Rakis Christoforou is the founder of RC Business Valuation & Forensic Accounting, the first company in Cyprus specialising in the areas of Business Valuation, for the determination of a Business worth, and Financial Forensics involving litigation support on complicated financial issues and damage calculations. The company is aslo involved in assisting businesses in their debt restructuring and negotiation with banking institutions. For information contact rakis@spidernet.com.cy or visit www.businessvaluations.info