Decoding Financial Statements: Insights for Transactional and Litigation Lawyers

In this episode of Corporate Conversations, Nossaman attorneys Nathan Guttman, Kimberly Kamkar and Patrick Richard introduce the basics of financial statements and how they function as both deal tools and litigation evidence. Our hosts walk through the balance sheet, income statement and cash flow statement, explain additional components like footnotes, management discussion and analysis and highlight key accounting and auditing standards (GAAP, GAAS, PCAOB, AICPA).

From the transactional side, the discussion focuses on how financials drive deal terms, including working capital adjustments and earnout structures. From the litigation side, it covers how those same numbers inform theories of liability and damages, what red flags to look for and how to work effectively with experts such as CPAs, forensic accountants, economists and auditors.

Lawyers don’t need to be accountants, but they do need enough fluency to read the “story behind the numbers” and know when and how to bring in the right experts.

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Transcript for Sandbagging: It's Not Just for Floods

_{0:00:00.1 Nathan Guttman: Financial statements are something most lawyers encounter, but we don't always stop to appreciate how powerful they are as tools. Today's episode is about financial statements, what they mean, how to read them, and why they matter so much in both transactions and litigation. We're focusing on the idea that the same set of numbers can tell very different stories depending on who's looking at them, a transactional lawyer structuring a deal or a litigator building a case.}

_{0:00:27.4 Speaker 2: Welcome to Nossaman's Corporate Conversations Podcast, where our corporate attorneys bring practical insights into the deals, disputes, and legal decisions shaping today's corporate world.}

_{0:00:41.3 NG: I'm Nathan Guttman, a commercial litigator here at Nossaman. I'm thrilled to have two guests with me today. First, Patrick Richard, a seasoned corporate litigator and co-chair of our corporate practice group, who regularly works with financial statements as evidence in high-stakes disputes. And joining him is Kimberly Kamkar, a corporate and M&A attorney who relies on those same financial statements to structure transactions, assess risk, and draft deal terms on the front end. Patrick, Kimberly, thank you so much for being here.}

_{0:01:12.0 Kim Kamkar: Great to be here, Nathan.}

_{0:01:13.8 Patrick Richard: Happy to be here. Looking forward to the discussion.}

_{0:01:17.2 NG: Let's start with the basics. When someone says financial statements, what are we actually talking about?}

_{0:01:24.9 KK: So I don't mind jumping in here and just starting us off. When I think of financial statements, I think of three big main statements. It's the balance sheet, the income statement, and the cash flow statement. And each of them tells... They kind of overlap, but they all tell a very different part of the story if you know how to read them. And if you don't mind, I'll just start with the balance sheet. It's kind of like a snapshot. Like when you take a Kodak photo and you just have this one image, it captures that exact moment in time. And so it's that company's financial health on that given day. So what assets it's got, what liabilities it has, its A/R, all of those amounts as of that date. The balance sheet lists out what the company owns, which can include all of its assets like cash, inventory, any money that's owed to the company, any equipment it has, if it owns cars or laptops, but also on the flip side, liabilities, so accounts payable and debt. And typically, the way you would read this is the difference between the assets and the liabilities would reflect the owner's equity in the company. And so if there's a positive difference, the owners have positive equity in the company. And if the difference is negative, then the owners are in the red and probably have to do some catching up. But if you want to know whether or not a company is liquid in the term that we usually think of that term, it means having enough assets to cover your debts. And you can kind of see that from this one balance sheet, but you're not gonna get any sort of a good picture on the overall health of the company or its trends or its ups and downs. That's not on this sheet.}

_{0:03:42.6 NG: If we do wanna see what you're talking about, how a company has performed over time, then which of those statements would you look at instead?}

_{0:03:51.0 PR: Well, and this comes up a lot in litigation, as you know, Nate, you're gonna want to be looking at the profit and loss, what we call the income statement. And that's where you're looking at the performance of a company over time. Quarter or annual profit loss statement. It's revenues in, expenses out, get to the bottom line. It's also where you can find a narrative, identify unusual expense patterns, and really start to dig into how is this company performing and how is it recording its financial transactions in its profit loss statement. So it's a key document in almost all commercial litigation. And we'll get into this in a bit, especially any case involving damages. Was there a profit? Was there a loss? Well, look in the profit loss statement.}

_{0:04:44.7 KK: Yeah.}

_{0:04:45.9 NG: Right. And then what about the third option, the cash flow statement? How is that different?}

_{0:04:53.5 KK: The cash flow statement is also a kind of recap. It tracks the actual movement of cash in and out of the business over a period of time. And it'll... When you're looking at the statement itself, you can generally expect to see sort of three buckets. The first one is the operating activities, so money in or out from daily core business operations. For example, you own a coffee shop, that would be the sales of coffees and pastries. It could also include payments to suppliers that are in the normal course, so buying nice Arabica beans, that would count in your operating activities. And the second bucket would be investing activities, so think of that as money spent or received from selling assets. And the third would be financing activities, so money in or out from funding sources. So think about taking loans or issuing stock or paying dividends. All of that will count under financing activities. One other key thing to mention here is that cash in and out is not quite the same thing as a profit. You can show that you're bringing in a lot of money but still be hemorrhaging cash. And so that's why it's really important to look at all three statements together, because it's really only together that you'll get a sort of whole picture of how the company is doing.}

_{0:06:39.6 NG: Beyond these big three statements that we've just covered, are there any other financial statements that our listeners should know about?}

_{0:06:47.9 KK: You can also typically see something like a statement of a stockholders' equity, which tracks changes in stockholders' equity over a given time, and also dividends and retained earning and all those fancy terms. There's also a lot of times a management discussion and analysis, which is like the narrative section of, if you've seen it in public company filings, it's basically where the company uses real words to tell you the story of how they are doing, the good and the bad. Patrick, did I miss anything?}

_{0:07:25.7 PR: I wouldn't say you missed anything, but if you're involved in litigation and you have a public entity, for example, that has the annual financial statement, that's gonna provide a lot more information than say a single-owned LLC or some other entity. And when you have the annual financial statement of a publicly traded company, you're gonna have footnotes that discuss the accounting policies, accounting standards, and that is often the first thing. If I can get financial statements with the footnotes, read those for really key information. Because the financial statements really tell you what the numbers are, the footnotes often tell you what the numbers mean. And depending on the dispute, that can be where you really find those nuggets. And when you're in deposition, you cover the footnotes. And early on in my career, I had a case where the whole case was about a footnote in a financial statement. And that was an eye-opener. I was just the junior associate, but the senior partner kept talking about total audit failure, you missed the footnote. So look at the footnotes.}

_{0:08:38.6 NG: Let's touch on another pretty basic idea, which is why are we looking at financial statements in the first place? What is it that we're trying to figure out when financials land on your desk, either in litigation or in transactional work?}

_{0:08:56.6 PR: Yeah, I mean, that's a good question, Nate. For me, the financial statements in commercial litigation is an important data point, either for liability, you're trying to understand what happened to this business because it's relevant, there's a claim involving management or mismanagement or breach of fiduciary duty, but also damages. And oftentimes when if you're the defendant and you're facing a claim of overblown damages because the expert's projecting very rosy performance, this would have happened but for the defendant's conduct, you look at past performance and you get a good expert to dig into the financial statements. So I break it into liability and/or damages. And there's just some basic level of familiarity that the attorney should have if you're doing commercial litigation. You have to know enough to know when do I need to bring in the expert. Obviously, you're gonna need a damages witness, but oftentimes it's the forensic accountant or others who can help you interpret those financial statements.}

_{0:10:10.5 NG: Yeah, I was just gonna ask on the transactional side.}

_{0:10:15.8 KK: Well, it's really similar to what Patrick was saying. When we do, for example, M&A deals, and I'll probably pick on M&A deals frequently in this podcast because I think it's a great example on the transactional side, we typically have accountants that we are working with to do a very detailed analysis of the financial statements. And my job as the transactional attorney is not to redo their work by any means. And as a transactional attorney, you don't need that much of a familiarity with the numbers. Our job is to translate those numbers into the actual deal terms. And so when we're looking at the financial statements, I'm looking at them trying to understand how they are going to impact risk allocation and enforceable mechanisms in the purchase agreement. I just want to walk through an example because I think take working capital. I think that's a great example. The whole point of a working capital mechanism is, I mean, at its core, it's to make sure that the buyer isn't handed a business on closing day that's been totally starved of short-term assets and it just doesn't have the cash to operate, right? So it has nothing on hand. So the parties agree ahead of time, we put it in writing that there's a target number, usually based on some kind of average that gets trued up to the purchase price. It's a funny mechanic. Basically what we're saying is this is the amount we are anticipating as working capital. We talk about working capital as this single term, but it's not a single number by any means. It's a defined formula built based off of the specific items that we pull out of the cash flow statement. So we can look at the cash flow statement to understand, for example, the accrual method or the inventory valuation calculation and use that to impact how we draft what specific numbers and line items will actually make up the working capital mechanism that we write into the purchase agreement. Does that make sense?}

_{0:12:45.5 NG: Yeah, and it sounds like something that could easily be disputed in litigation about a purchase and sale, right?}

_{0:12:54.1 KK: I'll leave that to Patrick.}

_{0:12:55.9 PR: Yeah, I mean, Kimberly's explanation is a little more complicated than what the simple trial lawyer has to deal with. I'm looking for who made the mistake, my guy or someone else. So for example, you can carry a short-term liability. It can have an impact, say, on a bank's balance sheet where what is the valuation of that asset? If you have loans for sale, you don't have to mark those down to market. If they're loans held for investment, what is their market value? And that should be accurately reflected on your balance sheet. A lot of banks had an issue where they were overstating their assets because they characterized those loans in a way that was favorable to the balance sheet. And then when the regulator said, "No, you have to reclassify it," then the bank was terribly undercapitalized. So it matters. We learned a lot about accounting standards and the mischief that can occur when a business changes its accounting standards that it uses in the backdating of stock options cases. Just because everyone was doing it doesn't mean it doesn't violate one or more accounting standards. So those are all issues that if you're reading the financial statements with an expert or with an expert eye, you're gonna learn things that other litigators will miss for sure.}

_{0:14:30.3 NG: And we've spoken about accountants several times now. Now that we've covered a little bit of the what of financial statements, I'm curious to know who prepares them.}

_{0:14:43.4 PR: Yeah, this comes up, Nate, in a lot of cases where you're talking to the company's accountant and they are quick to say, "Look, management prepares these." The outside accountant may just check the math. The auditor certainly does not prepare the financial statements. So understanding the difference between the internal accounting team and understanding the difference between what is the role of a bookkeeper versus a controller versus a CFO. Again, with public companies, you're gonna get into the standards under Sarbanes-Oxley and certification. It's obviously a serious, serious deal because investors and the SEC understand that financial statements are critical and they need to be accurate. For the litigator, you need to understand the different roles so that you're getting the terminology accurate. When you say "the accountant," do you mean the internal fellow, the controller? Do you mean the outside accountants? Do you mean the auditors? And pretty basic, but I'm always surprised at how many commercial litigators don't understand the difference between financial statements that have simply been compiled, reviewed, versus audited, and then what it means to actually audit financial statements. And so compiled is just you're formatting the numbers. Really no accounting expertise has been applied to those financial statements. Reviewed, there's some basic analysis, maybe a plausibility check, but the accountant's not gonna stand behind those. Again, well, management, this is what they delivered and 2 plus 5 was 7 and that's as far as I got. Auditing, yeah, there's supposed to sample and check, but it is a sampling. They're not a substitute for management. And there's... If you can get your hands on auditor work papers, there's a lot that comes out of that because oftentimes the junior auditors have analyzed something that doesn't quite show up in the final audit. So depending on your case, understanding the different roles and then the types of documents generated by each of those different types of accountants and different levels of review can be very, very important.}

_{0:17:03.9 KK: And to just piggyback on what Patrick said, you covered everything beautifully, so I'm just gonna pick up a couple small nits. Like there are a couple also different standards that you can look out for, accounting standards. So there's GAAP, which is not the same thing as GAAS, which is an auditing standard. Those are different terms. There's PCAOB, I think we all colloquially call it Peekaboo, which is the standards for public companies, and then AICPA is the standard for private companies. And I think that goes towards what Patrick was talking about with the working papers. These sort of set the rules for what you can expect to see within the statements themselves, and it sort of goes back to if you understand the equation, you'll understand the answer just a little better.}

_{0:18:02.3 PR: And just to piggyback on that, if you have a case where you're going to be deposing an auditor, understand the difference between GAAP, which are generally accepted accounting practices, and then asking the auditor, "What's the S stand for in GAAS?" Well, those are standards. "Oh, is that something that you should be held to? What are some of those standards?" The skepticism that an auditor is supposed to bring to their engagement. So once you know that there is something called GAAS, these auditing standards, then you review those, ideally with your own consultant or expert, before you start cross-examining the expert on the other side.}

_{0:18:41.4 NG: When these financial statements land on your desk in litigation, is there anything sort of pattern-wise that you're looking for or any approach you take to reading them?}

_{0:18:52.6 PR: I actually like to get financial statements. And I've been in cases where I was told that there were financial statements from co-counsel and then it turned out to be a rent roll or some monthly printout and they were not at all financial statements. And I'm like, "Well, where's the balance sheet?" "The what?" So one, I just want to make sure that I have a relevant time period of financial statements. And Kimberly will certainly certify that the more years you have, the more periods you have, then you can look for patterns. Simply having one year, in most cases, whether it's liability or damages, is not gonna tell you enough. So I start at a general level. What do I have? What time period's covered? And then I try to read through them, not quite like a detective reads a crime scene, but I look for anomalies and inconsistencies and spikes and just some questions that I can either go back to my client or go back to an actual expert and say, "Hey, I noticed this. Looks like the expenses, the general expenses here, were really growing." "Yeah, that's something we should look into. Let's get the further detail on that." So oftentimes it's just a starting point to point you where to look for further information.}

_{0:20:11.8 NG: Looking for patterns, are there particular red flags that jump out at you pattern-wise?}

_{0:20:16.6 PR: For sure. If you see a spike in revenue, often through changing how you account for something, you can either defer or speed up revenue. It can misrepresent the actual financial performance of the entity. So you look for changes in accounting policies. You also sometimes compare board minutes, if I have them, projections to look for differences. Cookie jar accounting is a classic. A company, maybe it's planning to go public, so it wants to have a nice, even trajectory of increasing revenues and increasing profits. And then you see that, well, that was really accomplished through changing accounting characterization. And the accounting characterization shouldn't be driving those things. It should be the actual performance. So it comes down to comparing the same category of expenses or revenue over time. And when you see things that don't match up, maybe revenue is up, but the AR is growing. Well, what's the story? So it's a way to... I don't draw conclusions necessarily. Those are gonna be for the experts, but it helps me start asking the questions and focusing in on what could be the problem areas.}

_{0:21:41.5 NG: That same first scan, Kimberly, would that be different for you than it would be for Patrick?}

_{0:21:48.3 KK: We really look for the same kinds of patterns, maybe just for different reasons. I think Patrick looks for evidence of wrongdoing, whereas when I'm looking at it from a transactional perspective, I'm looking at the risk factors that may one day turn into evidence, but they're not yet quite evidence. They're just risk factors that affect valuation or deal structure. So same camera, different lens.}

_{0:22:21.8 NG: Yeah. Do you have any examples?}

_{0:22:24.0 KK: We had a really interesting one recently. So let's talk about earnouts. We actually talked about earnouts on episode five of our podcast, so a little while ago. But if you haven't had a chance to listen, earnouts are basically a portion of the purchase price that depends on the target company hitting certain financial targets after closing. And the purchase agreement defines how that gets calculated. And to do that, we reference metrics like EBITDA and net revenue and gross profit so that we can set up the calculation to figure out whether or not the earnout has been earned. Just like with the working capital example from earlier, earnout sounds like a single number, but it's an abstract concept and we end up having to look for the key terms and we have to look for those patterns across the financial statements to be able to figure out how to build the earnout calculation. For example, if the earnout, if we want to say that the earnout is based on net revenue calculated in accordance with GAAP, consistently applied, I might dig into the discretion the company exercises in handling things like discounts. Well, I don't know that I would look into it. I would probably ask the experts to look into it. But the question I would ask is, does the company have any sort of discretion in things like discounts or returns, customer incentives, or anything that would increase the deductions that would sort of lower or raise net revenue that might artificially change the earnout, if that makes sense? If I was the buyer, just like Patrick said, we are looking at a large amount of data over a lot of numbers of periods, whether that's quarters or years, so that we can track historical operations and make sure that the earnout is in line with some average annual operation, whether you take the total of four years or the annualized of six months out of those four years or the average of those four, whatever you want to do. Just, it has to be some... There has to be a metric that we can measure against. And then we want to also make sure that we are accounting for variables that could artificially increase or decrease that number.}

_{0:25:21.0 NG: Something that I've heard a couple times now is both of you talking about basically what you don't know and how you handle that, either with experts or hired experts or the accountants that you work with. Can you talk a little bit more about how you handle dealing with what you don't know?}

_{0:25:42.2 KK: Just in case it's not obvious, I am not an accountant. I am a lawyer. And I would like to say that over time, I've developed a kind of working fluency with financial statements, and that lets me do my job effectively even if I'm not an expert in this. And part of that comes from the courses I took in law school on business law and tax and legal accounting classes. And part of it is, I think more of it really comes from a place of curiosity and a willingness to continue learning, even though I'm some number of years out of law school that I won't admit to date myself. And I think what comes with that also is a little bit of humility in knowing that you, at least I don't have all of the answers. And I need to just be willing to ask the right questions and be open to the feedback and the answers that I get. And I think that makes it a lot easier to do my job because my job is to know the deal. I'll know the purchase agreement inside and out. I will have read that thing a hundred times because that's my job. The reps and warranties that we build in, the protective indemnities, the mechanisms, how the purchase price is structured, that makes up the core of my job and the value that I can bring to the table in effectively drafting those provisions in a way that means both parties walk away from the table feeling like we've gotten the job done well. I do not need to be that familiar with financial statements because there are people who do have that familiarity. They do have that same love of their documents as I have of my documents.} 

_{0:28:09.2 PR: Yeah, that's not what we say in litigation, Nate. But no, the... I was listening to Kimberly and it is similar for commercial litigation. The pleadings are going to frame the issues and should provide a clue as to the role of financial statements. But I think for most litigators, financial statements are not top of mind. I was fortunate that I began working with someone and worked with them for decades who began as a litigator at the IRS. And he knew financial statements and kind of drilled into the lawyers that worked with him the importance of it. That's one way to learn is from a lawyer who actually understands the legal relevance of financial statements. The other is there's courses, take a course on financial statements for lawyers, some preliminary vocabulary that you become familiar with. For me, the best way is working with an actual expert: an accountant, a finance expert, an economist. All these professionals rely on financial statements for different purposes. And you can learn a lot if you ask the right questions and listen. So I don't pretend to be an expert on financial statements, but I do enjoy working with experts who are.}

_{0:29:35.2 KK: I think we said the same thing, Patrick. I'm just more poetic about it.}

_{0:29:41.5 PR: No comment.}

_{0:29:44.9 NG: The idea of experts has come up a bunch. They're obviously crucial. What kind of experts would you typically consult with?}

_{0:29:56.6 KK: Yeah, I think that depends on the question you're trying to answer, honestly. And I know everyone hates it when a lawyer says "it depends."}

_{0:30:06.9 NG: But it does.}

_{0:30:07.2 KK: It does. Not all accounting experts "are really doing the same thing". Some people use the term "forensic accountant." That's a really colloquial way of saying someone who is digging through numbers to figure out what happened in the past. That's different from a CPA, that is another type of accounting expert, and that's someone who's focused on compiling the financial statements in compliance with whatever standard they have decided to apply. And that's different from also a finance expert who's maybe putting a value or evaluating the risks, so putting a number to it. It really depends on the question you are trying to ask. You have to match your expert to your issue. Are you trying to understand how the numbers were prepared? Are you trying to figure out if the correct rules were followed and validate that they were followed correctly? Are you trying to quantify some kind of financial risk? I mean, there's more categories, but I think that gets to the heart of it.}

_{0:31:29.5 NG: Right, you need to know what questions you're asking.}

_{0:31:33.1 KK: Yeah.}

_{0:31:34.7 PR: Well, it's easier in litigation. It's either going to be relevant to liability or damages. And for damages, it's either going to be a CPA or an economist, but someone who has done it many, many times before and understands the interface between legal standards and accounting or economic standards. So for me, it's, well, if it's liability where I actually need to understand the accounting standards, was GAAS followed, if it was auditor, you know, the defendant or is it someone else, that really drives the expert. The one certainty I can... Almost every client does not want to bring in an expert too early 'cause they can be expensive and then they start looking at a bunch of documents. And yet, penny wise and pound foolish. The sooner you bring in a financial expert, either an accountant, preferably a CPA, an economist, personally I like finance experts because they understand risk and can often put things in a broader perspective. Bring them in early. They can help frame discovery, they can tell you where to look, absolutely integral when it comes to taking depositions of the other side. I mean, we haven't talked about this, but I had a case where I had to depose owners who were claiming that new regulations during COVID caused owners of apartment complexes that they lost almost all the value of their business. And when I got involved, we did not yet have the financial statements. And they hemmed and hawed and we finally got them and, wait a minute, you actually made more money. Apparently, the plaintiffs' lawyers hadn't looked at the financial statements before filing the complaint. It seems obvious that, get the financial statements and then line up the appropriate expert to help you interpret them. Anyone who's worked with me has heard me say, "Do not get out over your skis." People start making assumptions, lawyers get attached to their own view of the world. You need a good expert who can say, "I'm sorry, that's not what happened here. Follow the money."}

_{0:33:47.3 NG: And shifting topics to another recurring theme here, auditors. What do listeners need to understand about audits and auditors?}

_{0:34:03.7 PR: Yeah, again, in litigation, an audit is supposed to be a systematic examination by an independent third party. And rules have developed that, especially for public companies, the auditor cannot otherwise have an interest. "Oh, I'm also consulting. I also have this other role. I'm also on the board." Supposed to be somewhat independent. And I would say that that's improved over the last couple of decades since Sarbanes-Oxley. But an audit is not a guarantee, and the auditors will be the first to tell you, especially if they're the defendant. It's not a certification. We took a sample. We relied on management. I mean, you had a thousand companies, Nate, who had some form of backdating or misdating stock options. A thousand companies. The auditors didn't see it in any of them. The SEC did not go after a single auditing firm. They relied on them as experts to point the finger at management. Huge oversight. So don't assume that just because they're audited financial statements that the auditors caught everything. They most certainly didn't. But audited financial statements are certainly intended to be more reliable and generally are more reliable than just something that was reviewed or compiled.}

_{0:35:32.7 NG: But there are still practical limits there, right?}

_{0:35:36.4 KK: Yeah, I mean, of course. I think clients sometimes assume audited financials means the numbers have been verified down to every single penny. Unfortunately, they haven't. Auditors express their professional opinion based on their professional standards. It's valuable, but it's limited in that they're not looking at the whole situation with fraud in mind. They're looking at it within the scope of their actual engagement letter. So what's in the letter you guys agreed to? What did you ask them to look at? Did you ask them to look at 10% and to audit 10% of your records? Did you ask them to audit 50%? Did you ask them to look at specific transactions or with a specific issue in mind? That's what they're gonna look at is what you agreed to that's within and complies with their professional standards. If your CEO deliberately withholds information or lies to auditors, the auditors might not be able to catch it. That's not necessarily... I just don't want us to jump and say that's necessarily the auditor's fault. That's not really... The job they're out to do is to catch everyone in the act.}

_{0:37:03.9 PR: I'm thinking back, Nate, now that we're talking about it, I think it was in 2008 or '09, I wrote an article, "Where Were the Auditors?" and it was published in American Banker. So it gives you my perspective that I think they had a job to do. I think that often they turned a blind eye. But in terms of what you need to know about an audit, you get an audit opinion. Is it clean or unqualified? That means they didn't find any material issues. You have to ask what was the standard of materiality? Was it 5% or some other standard? Qualified opinion, that means the auditor flagged something. Adverse opinion, oh, the financial statements are materially misstated. They're probably not gonna get asked to do next year's audit. Disclaimer of opinion, the auditor just couldn't complete their work. That does come up where they didn't have sufficient information, they couldn't get what they said they needed from management. But anything other than a clean opinion is a red flag requiring immediate attention. I was thinking of a case where it wasn't... It was... You need to look for the initials behind the person's name, Nate. So if someone is a CFE, I had a case involving a CFE, Certified Fraud Examiner. Oh, again, there are standards, they're published. If you're looking for fraud, there are red flags. The auditor showed up, asked for receipts. "Oh, I'll get them for you next week." Large cash transactions. I mean, everything was a red flag. This involved, I think it was the Ray Wersching insurance brokerage. It's all public in a lawsuit from 20 years ago. But deposing a Certified Fraud Examiner in a case where they missed multiple red flags was, I'll say it was fun. But it started with understanding the standards that that professional was telling the world they understood. They just didn't deploy them in that particular engagement.}

_{0:39:10.2 NG: Let's wrap up as we're winding down with some key takeaways. Let's go around the table.}

_{0:39:16.4 PR: Well, I think the first thing is financial statements are not just numbers. They can often be evidence in your case. Certainly in depositions, they're gonna be key when you're talking to management. So they're not just numbers, they're evidence. You need to read the story behind the numbers. That would be my first takeaway.}

_{0:39:39.4 KK: First, I guess our second takeaway would be the deal documents and the financial statements, they are joined at the hip. They are two teenage girls constantly texting each other. The purchase agreement is a roadmap and the financials tell you how to get down it. They are gonna have... They have to inform each other, and so you do need to understand them both.}

_{0:40:09.7 PR: I would say another just basic thing for litigators, learn some of the terminology. Learn the difference between compiled financial statements, reviewed, and audited. And the limits and standards for each. That'll put you eons ahead of other commercial litigators or trial lawyers if you can start learning the vocabulary that applies to a lot of these things. And it starts with the level of review. They're not all the same.}

_{0:40:37.4 KK: Yeah, and I'll add my next takeaway is know what you know and know what you don't know and know that it's okay not to know what you don't know. You can always ask for experts to come in to support and to get to a finish line together.}

_{0:40:59.8 PR: Every litigator needs to know enough to know when to bring in the expert. And I've learned the hard way. You don't just rely on the damages expert and say, go calculate damages or go attack the other side's damages. You need to be expert enough to examine them and say, okay, I see you made this assumption. Why did you do that instead of this? What period of financial statements were you looking at? Did you look at the, which income statement? What years? What period? Simply abdicating to the expert you've hired without some scrutiny is, you can learn a lot from the experts, but total reliance is, I don't want to say malpractice, but not a good way to approach things. So learn from the experts, ask the questions, as Kimberly's talking about, and bring the expert in early.}

_{0:41:52.7 KK: You know, Patrick, I think you and I said the same thing again.}

_{0:41:57.0 NG: Yeah.}

_{0:41:59.7 PR: Except I was poetic this time.}

_{0:42:01.2 KK: I loved it.}

_{0:42:03.7 NG: That's a wrap on this episode of Nossman Corporate Conversations. I'd also like to thank our listeners for joining us on this episode. For additional information on this topic or other corporate transactional or litigation matters, please visit our website at nossman.com. And don't forget to subscribe to Corporate Conversations wherever you listen to podcasts so that you don't miss an episode. Until next time.}

_{0:42:27.7 S2: Corporate Conversations is presented by Nossman LLP and may not be copied or rebroadcast without consent. Content reflects the personal views and opinions of the participants. Statements provided in this podcast are for informational purposes only, are not intended as legal advice, and do not create an attorney-client relationship. Listeners should not act solely upon this information without seeking professional legal counsel.}