Money Is Not the Only Cost of Fraud

Marcelle H. Piglia, Financial Analyst

When you read articles or listen to news about fraud, what is the one thing that is always heavily emphasized? The amount of money the person allegedly stole. While this is a very important reality and cost of fraud, it is not the only cost of fraud. Through some of my own experience of cases I’ve worked on, I’ve observed other “costs” of fraud that are not quite as obvious: 

Anxiety – Some victims of fraud partially blame themselves for the wrongdoings of the fraudster, always pondering what-if scenarios. They constantly wonder “Why didn’t I see this sooner?” “What if I would have paid more attention?” “What if this happens again?” This could lead to a person feeling insecure about his or her abilities as a manager or even his or her job security. 

Loss of Trust – I’ve witnessed firsthand the emotional toll these situations put on business owners and its employees. People feel betrayed, confused, and vulnerable. I’ve seen clients choke up after explaining how the fraud was discovered. It’s heartbreaking. People say, for example, “We’ve worked together for 20 years. How could she do this to me?” It is difficult for business owners and managers to fully trust their employees after something like this has happened to the company. 

Time – Fraud investigations generally take a lot of time. If the investigation is conducted internally, the time an employee spends examining the fraud is time not spent on his or her normal duties (after all, time is money, right?). Even if the investigation is conducted by an independent forensic accountant, there is the time the accountant spends at the client’s office and the time the client spends answering his or her questions. It does not end after the accountants tabulate the damages – there is time spent pursuing criminal charges, civil litigation, or both against the perpetrator.

Social Media Can be a Valuable Tool in Forensic Accounting

Marcelle Piglia, Analyst, Forensic and Valuation Services Group

Forensic accountants often use sophisticated software packages, word processing programs, and mountains of professional practice aids when working on forensic cases. Such resources are necessary, but can also come at a hefty price. There’s a not-so-new and inexpensive tool available for practitioners in this field that can be just as useful as any of the items I just listed: social media. Yes, Twitter, Faceboook, and LinkedIn can be just as valuable as Microsoft Excel when working on any variety of forensic cases.

Here’s an example:

Suppose a client comes to you with the suspicion that an employee is receiving kickbacks from Vendor A. You pour through the company’s accounting records often noticing this vendor, but you don’t see it listed in the employee’s personal records. However, you notice the employee is receiving fairly regular payments from a company other than his or her employer – let’s call it Company B. This could be suspicious, but you have no proof of wrongdoing from the information you’ve received. Try typing that employee’s name in the search bar on LinkedIn (or Facebook). Sometimes you can see the person’s entire profile, his or her connections, and the profiles viewed by other LinkedIn users who have looked at the employee’s profile (this depends on the person’s privacy settings). You find the employee you’re investigating, and he/she lists Company B as a former employer – so why is he/she still receiving payments from that company? After looking at a few of the employee’s connections, you discover that Company B is owned by the same person who owns Vendor A. Hmmm…

Suspicious? Yes. Proof of the employee receiving kickbacks? Not necessarily.
Fraud by its very nature is meant to be concealed, and can be very difficult to prove. This is merely a red flag, a piece of evidence, and something either the client or legal counsel can use to confront the employee.  This information may not have been known by the client prior to the investigation, and could be the very piece of information that gets the employee to spill the beans. 

Exercise professional judgment if you choose to use social media in your next case. Never pretend to be a person you are not, and be sure to protect yourself with appropriate privacy settings. 

Valuing Medical Practices – Accounts Receivable

Kevin P. Summers, JD, CPA/ABV/CFF, ASA, CVA, CDFA, Senior Manager, Forensics and Valuation

When using the asset approach to value a medical practice, one of the medical practice’s most valuable assets will most likely not appear on the historical financial statements.  What asset are we talking about?  The answer is accounts receivable. 

Most professional services, including medical practices, use the cash basis of accounting.  Under the cash basis of accounting, accounts receivable do not appear on the financial statements because they reflect the future receipt of cash for previously rendered services.  Utilizing this method of accounting, the medical practice only needs to recognize income when cash has actually been received. 

When valuing a medical practice using the asset approach, it is important for the valuation analyst to include the accounts receivable in his or her analysis.  However, valuation analysts need to realize that medical practices do not generally collect 100% of their accounts receivable.  Depending on the mix of payors and contracts, a medical practice may only collect between 50% and 60% of its account receivable.  Thus, when adding the accounts receivable to the fair market value balance sheet, a valuation analyst must take into account the collection rate for the medical practice in order to not overstate the value of the accounts receivable.

Why it is Important to Know the Value of your Company

Marcelle H. Piglia, Forensics & Valuation Analyst

“Value” is a term we hear about almost every night on the news – “Home values are down,” “How to increase the value of your retirement funds,” “Finding value while cutting costs,”  etc. But what about the value of your small business? What is IT worth? Sure, it’s a huge investment of time and money on your part, but it’s not an investment you can check the value of by logging on to your brokerage account. For a variety of reasons, it is important to know the value of your business.

One of the most important, and possibly obvious, reasons is to know how much the business could sell for to a potential buyer. The more value created in the business simply means higher returns for the owners. Knowing the value could assist in price negotiations and help weed out which offers value the company at a premium or a deep discount. It is also useful in the formation of buy-sell agreements among the owners of the business.

Some other less obvious, but not less important reasons to value a business are for estate and gift tax planning, divorce, damages litigation, and stockholder disputes. Sometimes a business has to be valued to see if its goodwill has been impaired or not.  

Business owners should always strive to create value for their business. When an owner is facing the question as to whether or not value is being created or damaged, it is important to seek the advice of a business valuation professional to determine the on-going value of their investment.

Hidden Assets In Divorce

Kevin P. Summers, JD, CPA/ABV/CFF, ASA, CVA, CDFA, Senior Manager, Forensics and Valuation

There are a number of ways that one spouse may try to undervalue or hide assets from another spouse during a divorce, such as: 

• Collusion with an employer to delay the payment of bonuses, commissions, stock options, or annual raises to salary;
• Failure to disclose retirement accounts;
• Undervaluing personal items, such as artwork, antiques, collections (coins, guns, sports memorabilia, etc…), and hobby equipment;
• Opening custodial accounts in the name of a child;
• Moving assets to an offshore account,
• Skimming cash from a business and/or other unreported income, and
• Placing assets in a safe deposit box. 

In order to locate these assets, it is usually necessary to hire a forensic accountant who can gather and review evidence and present his or her findings to the court. ksummers@amdcpa.com

Hidden Assets in Divorce

Thomas E. Hilton, MS, CPA/ABV/CFF, ASA, CVA

There are a number of ways that one spouse may try to undervalue or hide assets from another spouse during a divorce, such as: 

• Collusion with an employer to delay the payment of bonuses, commissions, stock options, or annual raises to salary;
• Failure to disclose retirement accounts;
• Undervaluing personal items, such as artwork, antiques, collections (coins, guns, sports memorabilia, etc…), and hobby equipment;
• Opening custodial accounts in the name of a child;
• Moving assets to an offshore account,
• Skimming cash from a business and/or other unreported income, and
• Placing assets in a safe deposit box.

In order to locate these assets, it is usually necessary to hire a forensic accountant who can gather and review evidence and present his or her findings to the court. Contact me today for more information, 314.655.5500.

Lost profits vs. Loss of business value – What’s the Difference?

Marcelle Piglia, Forensics and Valuation Analyst

Our Forensic and Valuation department is often called upon as an expert witness to do lost profits and loss of business value calculations associated with commercial litigation cases. While the two sound similar, they’re actually quite different. Seeing as I am not an attorney, I will not go into legal details, but I will give a broad overview of each topic.

 If a company is subjected to a harmful act by an outside party which results in lower than expected profits, the company may have a claim to lost profits damages. The harmful act could result in lower revenues and/or higher costs, which in turn reduce profits. The day the company is subject to the harmful act is the beginning of the “damage period,” and it usually ends as of the date of trial or earlier, depending on the facts surrounding the case. There are three common approaches to measuring lost profits – before-and-after analysis, yardstick analysis, and market forecast (sales) approach. In some form, all three compare the projected level of profits to the actual level and use the difference as a means of calculating a final damage amount. Lost profits are a measurement of past damages, while loss of business value is a measurement of future damages.

In theory, the value of an asset (in this case, a business) is the present value of its future earnings. If the future earnings (or profits) of a company are impacted by the past harmful act, then it could make a claim for loss of business value. While lost profits are sometimes the cause of a loss of business value, other causes include destruction of a business and slow death. There are three widely accepted approaches to valuing a business – the market, asset, and income approaches. Similar to lost profit calculations, these methods are used to compare the company’s value assuming the harmful act never occurred and the value of the company as is. This measurement takes place as of the end of the damage period and projects into the future.

Lost profits can lead to a loss of business value, but not always.  It is the job of the attorney to determine liability. Every litigation case has its own unique set of facts and circumstances that guide the damages expert use of calculation methods.

Divorce and The Capital Loss Carry-Forward

Kevin P. Summers, JD, CPA/ABV/CFF, ASA, CVA, CDFA

Due to turmoil in the stock market during 2008, as well as 2000 through 2002, many married couples may have incurred losses on the sale of their stocks.  Due to limitations within the Internal Revenue Code, capital losses in excess of capital gains plus $3,000 result in a capital loss carry-forward which can be used to offset future capital gains.  When married couples get divorced, the capital loss carry-forward is an often overlooked asset within the marital estate.

One question that should arise when dividing the marital estate is how to divide the capital loss carry-forward.  The answer is, as with most things in litigation, it depends.  What it depends on is how the capital loss was originally generated.

For example, if the capital asset which generated the capital loss carry-forward was a separate asset owned by the husband, then the capital loss carry-forward should be allocated to the husband.  Likewise, if the capital asset which generated the capital loss carry-forward was a jointly owned asset, then the capital loss carry-forward should be split between the husband and wife.  The allocation of the capital asset carry-forward is a bit more complicated when there have been capital losses generated for multiple tax years and when the ownership of the capital assets generating the capital loss carry-forward has been mixed (marital vs. separate).

Intangible Assets #4: Asset Valuation

By: G. William Kennedy, Ph.D., CPA/ABV

U.S. financial accounting standards (Statement of Financial Accounting Standards 141R and 157 for example) provide the guidance for corporations regarding the categories of intangible assets that must be valued and reported on their balance sheets. Additionally, the U.S. accounting standards provide guidance on the standard of value and the valuation methods and approaches for the valuation expert to use when valuing their client’s intangible assets. The valuation expert that serves clients that have significant portfolios of Intangible assets must have substantial depth and breadth of knowledge in both the fields of GAAP financial reporting rules and business valuation. Because of AICPA professional standards, a company’s auditors are prohibited from providing valuation services to their audit clients, specifically valuation services related to the values of the intangible assets reported on the client’s balance sheet. As a result, the corporation and its CPA firm must seek the assistance of an independent qualified valuation expert.

Intangible Assets #3: Patents

By: G. William Kennedy, Ph.D., CPA/ABV

According to the USPTO, a patent is the grant of a property right to the inventor. The property right specifically granted to the patent holder is “the right to exclude others from making, using, offering for sale, or selling” the invention covered by the patent. This legal protection for the patented invention is potentially a source of value for the patent because the patent confers a legal monopoly for its owner to practice or produce the invention protected by the patent and exclude all others from profiting from the invention unless a specific license is granted by the patent holder to the individual or entity desiring to use the patent claims.