In the increasingly complex landscape of commercial disputes, timing is critical, particularly when clarity around financial evidence can dictate the trajectory of a case. Forensic accountants play a pivotal role in uncovering, analyzing, and presenting financial information that supports or challenges the claims of disputing parties. Yet, they are too often engaged only after a dispute has escalated or litigation has formally commenced. By that point, opportunities to preserve key evidence, influence preliminary strategy, or advise on the financial viability of potential claims may already have slipped away.

This article explores the value of bringing forensic accountants into the process at the earliest stage. By examining several examples—each reflecting situations where delayed engagement resulted in avoidable inefficiencies or where early engagement brought tangible benefits—we illustrate how early involvement can materially enhance a party’s position. Whether in shareholder disputes, fraud investigations, valuation disagreements, or breach of contract claims, proactive financial analysis enables clients and counsel to move from reactive defense to strategic, well-informed action.

Early Engagement of Damages Experts Enhances Claim Strategy

Engaging damages experts early enables legal counsel and clients to understand the financial dimensions of a dispute before a position is settled. When experts are introduced late, they typically must work within the confines of a preestablished narrative, incomplete records, or unrealistic expectations about claim values. Early involvement, by contrast, helps ensure that legal strategy, client expectations, and evidentiary realities are aligned from the outset.

Example 1

A claimant initiated an arbitration against a business partner for wrongful termination of a contract, seeking loss of profits but without specifying an amount. After the proceedings had begun, the claimant engaged a damages expert to submit expert evidence in relation to the claim amount.

To produce a robust and defensible loss-of-profit calculation, damages experts typically require access to historical financial statements, management accounts, underlying ledgers, post-breach results, business plans, forecasts, and relevant market or industry data.

However, initial discussions with the claimant revealed a serious constraint: Many of the required financial records were incomplete, inconsistent, or missing altogether. Without reliable data, the expert would have to rely heavily on assumptions with respect to historical trends and future growth, thus potentially undermining the credibility of the analysis and exposing the claim to criticism. 

Ultimately, by working with counsel to explore alternative avenues the expert pursued both a loss-of-profit calculation and an alternative assessment of wasted costs, also known as reliance loss. While the reliance-loss approach produced a smaller claim amount, it was a simpler, more objective, and more defensible given the available evidence.

Had the damages expert been consulted earlier—even before the arbitration was filed—the claimant could have been advised about the documentation required to substantiate a loss-of-profit claim. The team could have assessed the viability of various claim strategies, secured missing records (or contemporaneously documented their absence), and avoided investing significant time and procedural resources in a damages theory that later proved difficult to defend. This example underscores a recurring theme: The feasibility and strength of damages theories are often determined not by legal arguments but by the availability and integrity of underlying financial evidence.

Example 2

A global technology company reached out for assistance after a group of product developers in one of the developing markets resigned and launched a competing business soon after. Management initially contemplated pursuing a claim through a labor arbitration as an employment breach and considered seeking injunctive relief and salary clawbacks. 

During scoping discussions together with external counsel and the experts, management decided to reframe the matter as potential trade secret misuse and product design misappropriation and to pursue an intellectual property infringement claim. With regard to quantum, the experts proposed using appropriate income-based approaches, including the Relief‑from‑Royalty (RFR) method¹ and the Excess Earnings Method (EEM)², to assess potential damages.

A critical requirement, however, was to prove that the new competing products adopted proprietary knowledge developed by the company. With this clarification, the management immediately identified and preserved key technical blueprints, product comparisons, business forecasts, and financial documentation.

By acting early, the company strengthened both the liability and quantum aspects of its claim, allowing the arbitration to proceed on a well‑supported basis. The matter was ultimately settled favorably. The outcome demonstrates how early forensic and valuation input can influence not just the amount of the damages claim but also the selection of the most effective legal path and evidentiary foundation.

Pre-Dispute Investigations Help Companies Explore Options

Early engagement of forensic accountants is particularly valuable when a dispute is just emerging and parties are contemplating their options. In such situations, management may sense potential financial irregularities or contractual breaches but lack clarity on their scope, impact, or evidentiary foundation. A targeted early‑stage forensic exercise can clarify the financial landscape, inform strategic decisions, and provide time to gather materials that might later become inaccessible.

Example 3

A global conglomerate acquired a majority stake in a medical device business in a major developing market. Under the Sale and Purchase Agreement, sellers—who continued to run the business—were entitled to earn-out payments based on revenue, net profit, and other defined KPIs.

Toward the end of the first year, the buyer noticed a new service line introduced by the sellers that appeared unrelated to the core business. The new service line had a direct impact on the financial KPIs linked to the earn-out, raising the buyer’s concerns about whether the reported results genuinely reflected performance or were manipulated to trigger payments.

Anticipating a dispute, the buyer engaged an expert to conduct a discreet forensic review framed as part of the buyer’s routine internal audit. This approach avoided alerting the sellers prematurely and enabled the buyer to access records smoothly.

The forensic examination, which targeted the new service line, uncovered undisclosed related-party transactions and indicators of a round-tripping scheme involving potentially fictitious sales and purchases. These activities appeared designed to inflate revenue and meet KPI thresholds, suggesting a deliberate attempt by the sellers to manipulate financial outcomes and secure unjustified earn-out payments.

With these findings in hand, the buyer renegotiated the earn-out terms and avoided both unnecessary payments and potential litigation. Had the buyer waited until a formal dispute arose, access to systems, documentation, and personnel would likely have been constrained, and the dispute would have become more adversarial, costly, and time‑consuming. This example illustrates how early forensic involvement can provide crucial lead time, preserve access to information, and facilitate more constructive commercial resolutions.

Assessment of Evidence to Assist With Contentious Negotiations

Even where parties are preparing for contentious processes, early engagement of forensic accountants can help test the strength of evidence before positions formalize. This can prevent reliance on flawed valuations or assumptions and help counsel pivot strategy at critical junctures.

Example 4

An Asian renewable energy business (Company A) formed a cooperation with a multinational corporation (Company B). As part of the cooperation arrangement, Company B was to provide loan funding to Company A.

Years later, Company B terminated the loan, asserting that the value of Company A’s shares no longer provided adequate collateral for the loan. 

Company A’s external counsel considered bringing an arbitration claim against Company B but wanted reassurance regarding the third-party valuation reports of the shares on which Company A planned to rely. Therefore, Company A required experts’ assistance in assessing these valuation reports.

Upon review, the valuation experts quickly identified that these reports had failed to consider issues such as Discounts for Lack of Control (DLOC) when valuing the share collateral. Within 24 hours, the team completed a streamlined discounted cashflow analysis incorporating market-based benchmark discounts. Once DLOC was applied, it became clear that the shares were indeed worth less than the outstanding loan (often referred to as a “deficiency balance”).

This insight prompted Company A’s legal team to shift away from arbitration to settlement discussions, with a clearer understanding of negotiation leverage. The example demonstrates how rapid early‑stage forensic assessment can prevent parties from pursuing claims premised on flawed valuations and can streamline the path to resolution.

Conclusion

Engaging a forensic accountant early in the dispute process is a strategic investment that brings clarity, credibility, and control to the dispute resolution process or potentially contentious situations. Early forensic involvement enables parties to preserve critical evidence, assess the financial viability of claims, streamline discovery, and align legal and commercial strategy. It mitigates the risk of missing or misinterpreting key financial information and gives counsel and clients a more reliable foundation for decision‑making. Ultimately, whether the objective is negotiation, arbitration, or litigation, early engagement of forensic accountants positions parties to achieve more informed, efficient, and favorable resolutions.

The views and opinions expressed in this article are those of the authors.

Read Past Raising the Bar Issues

1. The RFR method is an income-based valuation technique that estimates an intangible asset’s value by calculating the present value of hypothetical, pre-tax royalty payments saved by owning the asset rather than licensing it.
2. The EEM is a valuation approach that determines a company’s total value by adding the fair market value of its net tangible asset to the capitalised value of its “excess” earnings attributable to intangible assets such as goodwill.