18 Key Elements in Financial Experts’ Engagement Letters & Written Reports

Engagement letters and written reports from financial experts deserve special attention in family law cases. Including these 18 elements can

Engagement letters and written reports from financial experts deserve special attention in family law cases. Including these 18 elements can help family lawyers to win their financial cases.

By Ken Stalcup and Craig Cwynar,Financial Experts

“The single biggest problem in communication is the illusion that it has taken place.” – George Bernard Shaw

Best case scenario: The financial expert prepares a bullet-proof, understandable, well-reasoned, impartial, and supported report.

Worst case scenario:  The financial expert produces a 452-page sleeping pill that cannot be explained to the average layperson in five minutes.

Whether the engagement is a forensic accounting project or a business valuation engagement, properly written communications will bend the arc away from those worst-case scenarios and more towards the best-case scenarios with the best possible outcomes for your client.

A Financial Expert’s Engagement Letter Should Address the Essential Elements of the Project

All financial experts should use written engagement letters. After discussing all the case elements until all parties are satisfied, the financial expert should draft an engagement letter.

The engagement letter should typically be addressed to the attorney. This may allow the attorney to cover the work product with attorney-client privilege in the early stages of the engagement. The engagement letter should identify all the parties involved, the significant elements of the work and the scope of the project. The letter should also disclose the professional standards to be followed and the fees charged by the expert.

Ideally, the engagement letter will address the essential elements of the project but will remain flexible enough to allow the financial expert to investigate new avenues of interest that may develop, particularly in a forensic accounting engagement.

Business Valuation Reports

If you are asking for a business valuation report or reviewing a report from the other side, a good business valuation report will include the following elements:

  1. General information on the Valuation Assignment:  The general information will include the names of the individuals and business interests involved, the date of value and percentage interest being valued.  The report should also indicate the purpose of the valuation, the standard of value and premise of value used.
  2. Information on the Subject Company:  A good valuation report will include extensive research on the company, its owners, its tax status, the entity type and the service or products sold.  A well-written report should also describe any buy/sell agreements and any restrictions on transfers of the equity interests. The appraiser will usually visit the site of the business and include pictures obtained from the visit.
  3. Economic Outlook:  A business valuation report should contain an analysis of the national, regional and local economic trends at the date of value.  The information should be relevant to the understanding of the economic trends that affect the value of the subject company.
  4. Financial Analysis of the Subject Company:  It’s typical to expect to see five years of financial data presented in a valuation report.  The financial data will typically include a balance sheet, an income statement, financial ratios and a comparison of the subject company’s data to industry averages.  The valuation expert should also disclose key findings in a written analysis of the financial information.
  5. Valuation Approaches:  It’s important to consider and identify all the valuation approaches.  The valuation expert should identify #1) An asset approach, #2) A market approach, and #3) An income approach.  If a particular approach is not used, the valuation expert should explain why. It’s also important to consider discounts.  Generally, valuation experts will consider discounts for a lack of control and discounts for lack of marketability. Each discount should be explained and supported by empirical evidence.  The ultimate conclusion of value should be expressed as a specific number or a range of values.
  6. Statement of Assumptions and Limiting Conditions:  This statement will typically contain numbered paragraphs that explain the approaches and conditions affecting the valuation process.
  7. Exhibits:  The report should be supported by detailed exhibits referenced in the written report.
  8. Appraiser Certifications:  This certification references standards and affirms that the report is true and correct.  The appraisers will certify they are unbiased and have no prospective interest in the property being valued.  The certification should be signed by the appraiser(s).
  9. Appraiser Biographies:  The appraisers should provide a summary of their credentials and experience.  Look for one of the following credentials: ABV-Accredited in Business Valuation  ASA-Accredited Senior Appraiser or a CVA-Certified Valuation Analyst.

Forensic Accounting Reports

If you are asking for a forensic accounting report or reviewing a report from the other side, a good forensic accounting report will include the following elements:

  1. Forensic Accountant’s Letter: This letter will outline the nature and duration of the engagement and the professional standards followed. The report will typically indicate that the forensic expert was compensated on a flat, hourly rate that was not dependent on any finding or conclusion. The report should be signed by the forensic accountant.
  2. Executive Summary:  This section of the report should summarize the entire report, the findings, and recommendations.
  3. Background:  The report should identify the parties, the nature of the case, and the disputed facts.
  4. Scope:  The scope, in terms of dates and data analyzed, should be disclosed.  For example, “We reviewed the cash disbursements between March 5th and October 9th 2017.  This includes all Bates stamped documents from A001 to A941.”
  5. Procedures:  This section of the report will outline the nature of the tests or work performed.  A standard approach will identify the purpose of the procedure, the individual steps undertaken, and individual conclusions reached as a result of the work performed.
  6. Conclusions or Findings:  While the forensic expert should not state a determination of guilt or innocence, the expert can state objective, overall findings, and conclusions about the work completed.
  7. Recommendations:   The expert can make recommendations to the client as to future actions to be taken or avoided.
  8. Exhibits:  The report should be supported by detailed exhibits referenced into the written report.
  9. Forensic Accountant’s CV:  This document should summarize the credentials and experience of the forensic expert.  Look for the following credentials: CPA, a Certified Public Accountant, CFE-Certified Fraud Examiners, or CFF-Certified in Financial Forensics.

Engagement letters and written reports from financial experts deserve special attention in family law cases. An engagement letter will focus the financial expert’s efforts on the significant elements of the work, and a well-written report will help you win your financial case. While the written reports express the intent and opinion of the financial expert, the attorney should understand and carefully review each document to provide legal input from start to finish.

Ken Scalup, CPA, CFE, CFF, ABV,  is a Senior Director with Houlihan Valuation Advisors, a national firm of consultants providing business valuation and economic strategy services. Craig Cwynar is a valuation analyst with Houlihan Valuation Advisors.  www.houlihan-hva.com