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Forensic accountants confirm worst suspicions

 

When a client voiced strong suspicions that her soon-to-be ex-husband was hiding assets, her attorney investigated the claim but found nothing amiss. However, he hired a forensic accounting expert to help ensure his client would receive an equitable share of the marital estate. The expert turned up a trunkload of hidden treasure — undeclared cash income and property “stashed” under the names of the husband’s mother and siblings.

Deceptive spouses — and other parties to litigation — often are experts at hiding assets. To protect your client from such scam artists, you’ll need your own expert.

Gathering data

To begin their search for hidden assets, financial experts request information and records relating to the spouse’s employment and financial holdings. Details about all sources of income (including pending litigation and insurance settlements), and all banks, brokerage firms and other financial institutions where the spouse has held accounts, are critical.

Experts also need to know about the spouse’s lifestyle and personal spending habits, as well as his or her personal and business relationships. The individual could be funneling income or assets to family members, friends and business associates.

Tax returns can be a particularly rich source of information. Itemized deductions listed on Schedule A, for example, may suggest that the spouse is living beyond his or her apparent means, in turn raising the possibility of hidden assets. It’s important to investigate whether the deductions for property taxes, mortgage interest and charitable giving are proportionate to reported income.

Methods that work

Experts use one or more of several methods to ferret out assets:

Net worth. The spouse’s net worth (assets less liabilities) at the beginning of a period is compared with the ending net worth. Information about assets might be accessed through bank and brokerage records, tax returns, and credit applications.

Expenditure. This strategy is deployed by matching the spouse’s total personal expenditures during a period of time — using evidence from bank statements and canceled checks — against the available sources of funds. These sources can include salary, loans, gifts, inheritances and cash on hand at the beginning of the period.

Bank deposits. This method assumes that money is either spent or deposited. Thus, net deposits (deposits less transfers and redeposits) are added to cash expenditures to

calculate total receipts. Funds from known sources are then deducted to calculate the total funds from unknown sources.

Business owners pose particular challenges

If the suspected scammer is a business owner, he or she may try to use the company to mask assets and income. A deceptive spouse, for example, may use business funds to purchase personal assets, such as cars and real estate, or to cover personal expenses, such as mobile phone bills, insurance premiums or club membership dues. All of these expenditures can reduce the business’s net income, thereby reducing its value as a marital asset.

The business also could have unreported income. A forensic accounting expert will scrutinize:

* Actual expenses,

* Associated expected sales,

* Accounts receivable,

* Journal entry write-offs,

* Internal controls (and the owner’s ability to override them), and

* Expected profitability.

Finally, an expert will search for related-party transactions. These are important because they can indicate the owner’s attempts to divert income from the business.

What clients deserve

No matter how well-intentioned, clients and attorneys are unlikely to be able to find all of a deceptive spouse’s hidden assets or income on their own. Forensic accountants, on the other hand, are trained to gather relevant data, scour it for anomalies and prove that the opposing party is being dishonest. This is the kind of expertise your client deserves.  CJA Forensic Accounting provides this type of expertise.

 

© 2014 TR

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Myths about the value of your business

Owning a business is hard work and it’s common for business owners to wonder how much their company is worth. Whether you are thinking about selling your business or not, have an offer on the table or are merely curious, there are quite a few misconceptions out there about how to value a business. Here are five myths about the value of your business.

Myth 1: Valuation is Only Needed When You Want to Sell

A common myth about valuing businesses is that valuation should only be figured when a business is getting ready to be sold. Knowing how much your business is worth is good information to have on hand at all times. This figure is helpful for both business and estate planning issues, particularly with regards to planning the future disposition of the company or ownership transition. Of equal importance, is to keep this figure up to date for planning purposes. The value of a business is not the same today as it was a year ago.

Myth 2: The “Rules of Thumb” Myth

Contrary to what you may hear in casual conversation, there are too many variables to consider in valuing a business to give any credence to a “rule of thumb” calculation. A business is not necessarily worth two or three times annual revenue (the revenue multiple valuation) as other factors need to be taken into account. Also, valuing a business based on past transactions (precedent transactions analysis) may not take into account changed market conditions or capture other relevant values. The idea that financial statements are all that are needed to determine business value is a common misconception. While rule of thumb valuations are a great measure of prudence once a detailed assessment has taken place, they don’t take into consideration such things as the value of goodwill and regional outlook.

Myth 3: The Comparison Myth

We all love to compare ourselves to others, but this can be a mistake when it comes to business valuations as no two companies are the same. Even if you are comparing yourself to a local competitor that recently sold, most likely the figures used in their valuation are more dated than yours. Changing interest rates and economic conditions along with different ongoing customers and contracts, and different cash flows and expected growth than your competitor, could contribute to a better valuation for your business in the end.

Myth 4: Value Depends on the Purpose of the Calculation

While it would be nice to tailor the results to the purpose, it doesn’t work that way nor is it legal. The value of a business, as defined by the Internal Revenue Service, is the Fair Market Value (FMV) of that business. The FMV is what a willing buyer would pay a willing seller for the company and the figure could be a range but won’t vary wildly depending upon the circumstances. For example, if an outsider wanted to buy your business and you set the FMV at $5 million vs. if a family member wanted to buy it, and you set the FMV at $1 million. This would undoubtedly raise a red flag. There are external resources, however, that have examples of formulas available to help you accurately calculate and valuate your business.

Myth 5: A Business in the Red Isn’t Worth Much

In smaller, private businesses the distinction between ownership and management is often blurred and companies that are actually profitable may not appear to be so at first glance.. Owners have discretion over how cash flow is categorized, and a business could be generating a significant amount of cash that would make a difference in a formal valuation. This is why it’s important that more than just business tax returns are analyzed, and the right questions are asked about both cash flow and asset values when a valuation of a small business is undertaken. There are misconceptions about business valuations only measuring profit that can be addressed in these instances. For example, “losing money” does not always equate to losing value and a sudden increase in revenue may not mean the same for the overall valuation of the company.

In the end, there are many important reasons why business owners should know the value of their business at any given time. AICPA (American Institute of CPAs) offers a Statement on Standards for Valuation Services toolkit for members to help guide in endeavors as well. With an understanding of the common misconceptions about business valuation, you should be able to find a specialist to help you make these important determinations.
For more information on the valuation of your business, contact CJA Forensic Accounting or call 202.759.9335.

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Economic damages in government contracts

 

There are 3 important causes of loss profit (or loss fee) litigation in government contracts.  Loss profit calculations are based primarily on a contract and a defined period of time (i.e. contract term). Scope creep, subcontractor disputes, and delays are the most common causes of loss profits/fees when performing work on federal contracts.  All stem from a failure to clarify contract or subcontract language before work begins and/or during the contract performance (i.e. modifications and change orders).

Scope Creep

Scope creep ensues when the customer begins to request work that is not specified in the original contract, task order or subsequent modifications.  T&M contracts tend to be less affected by scope creep due in part that all work is billed by the hour and materials requested by the customer are passed through.  Albeit, they are still at risk of loss profits due to the lack of clear agreement as to the payment of the additional number of hours to be billed and/or written requests for additional materials and other direct costs.  A significant impact of scope creep falls on firm fixed price contracts and cost reimbursable contracts with caps on fee or profit.  When I say firm fixed price, we’re not talking about Fixed Price Level of Effort (FPLOE) as these contracts are issued as a roundabout way of issuing a T&M contract.  FPLOE contracts, like T&M contracts and task orders may create a loss profit scenario due to caps on the amount of hours allowed in the contract and if there are no clear definitive milestone or deliverables that must be met.

Loss profits are realized when the government requests changes to the contract scope that they feel are in line with the current contract, but do not provide any additional funding or man-hours into the contract.  In this case, your loss profits would be:

Scenario #1 

Hours for additional work not in contract scope = Scope Creep Hours

Scope creep hours X negotiated T&M billing rates for those labor categories = LOSS PROFITS

In some cases, and depending on the language in the contract clauses, you may be only able to claim the actual cost of the direct labor to perform the additional work plus applicable indirect burdens.

Scenario #2

Cost of additional work requested on a fixed price contract or additional deliverables + applicable burdens = LOSS PROFITS

Since circumstances vary, one may argue that a company is also entitled to the average realizable fee on those contract costs, as well.

Subcontractor disputes with prime contractor

Subcontractor and prime contractor disputes have probably gone on since the beginning of time.  They are no different in the world of government contracts.  Typically, the subcontractor was used in the bidding proposal for a significant portion of work, then when it is contract performance time, the subcontractor’s portion is cut back significantly.  In this situation, loss profits would be calculated as the profits on the work promised but not granted.  In addition, a claim may be made for the salaries of employees hired and being paid to sit on the bench for the promised work.  If the contract has ended, the period under review and used in the calculation would be the entire subcontract period.  Moreover, some states may take into consideration mitigating factors such as the ability to put those employees on another contract.  In this case, the loss profits from contract A would be reduced by the profit earned on those employees moved to contract B.

Delays

Delays in contract performance by the government, prime contractors or even subcontractors can be cause for loss profits.  Loss profits or loss fees are experienced in contract delays when payroll, benefits and other costs of operations must still be paid in order to stand ready to continue on a project when it “restarts”.  Also the cost of replacing people that could not be financially support during the delay can be cause for loss profit litigation.

The key to avoiding the need to engage in loss profits litigation is to make sure to carefully read your contract and have an attorney review it as well.  Also, understand, with certainty, the scope of the work to be performed.  Any changes outside of the scope should be made in writing including the exact change in work, amounts to be paid, and any limitations.  If you do wish to pursue litigation, engage a CPA certified in forensic financials to assist with calculating whether it is worth your while.

 

 

Contributed by Cheryl Jefferson Cooke, CPA / CPFF
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Reasons to use a forensic CPA as an expert witness

An expert witness is someone who by virtue of training, skill, education or experience is believed to have knowledge or expertise in a certain subject beyond an average person. This knowledge makes the person eligible to be a witness in a case they otherwise may have no interest in. Expert witnesses are often brought in by legal teams to help the court understand complex matters in more detail.

Experts ranging from doctors to security officers often appear as witnesses. In most cases, they help shine a light on crucial information in a case, as well as assist in winning the influence of the judge or jury.

Similar to any other field of expertise, accounting requires expert witnesses. Accounting often involves complicated financial reporting and concepts. Therefore, it is important to bring in an expert witness who will be able to undo accounting jargon for lawyers, judges, and the jury. Accountants are often viewed as credible and ethical people and their involvement in a case might play a significant role in convincing the jury in a subconscious way.

Why Require an Accountant as an Expert Witness?

Some of the reasons we require accounting expert witnesses depend on the particular case involved. An accountant can be brought in to testify in a case for any of the following reasons:

1.Credentials and Credibility

Credentials for an accountant expert witness, just like credentials for all other expert witnesses, are essential. An expert accountant witness should at least be a certified public accountant (CPA). There may be a variety of certifications that might qualify the witness on accounting, but being a CPA is preferred because CPA is a state-licensed certification.  Another important credential for matters of forensic accounting or litigation support is Certified in Forensic Financials (CFF), and only a CPA can earn this credential.

The experience a person has in accounting is also vital as one can draw comparisons from past work. This can also be of great help if an accountant has had past experiences with government contracts, service industries, or small businesses, as these are specialized experiences.

Data presented and explained by an experienced and well-trained CPA will lend to the case.

2. Analyzing and Interpreting Data

Accounting is known for the presentation of data such as the cash flow statement and income statements. These are not terms members of the court may understand. This is where the accountant comes in. They will help in matters such as contract disputes, fraud investigations, accounting, and audits. The interpretation of the numbers on these reports will then be explained in simpler terms for the court.

3. Communicating in Non-Accounting Terms

We have already established that accounting often uses phrases and presentations that are not friendly to a non-accounting audience. However, accountants who have accumulated a lot of experience in different accounting issues are not likely to face the challenges of clarifying these ideas. A good expert witness can explain complicated financial terms and interpretations in layman’s terms, so it is most useful for decision making.  This is where experience communicating with small business owners becomes a desirable skill since most are unfamiliar with accounting terms.

4. Litigation Support

Litigation support is a service offered by CPAs. It is a specialized accounting service that helps businesses and attorneys with complex accounting problems such as legal disputes, damage calculations, and fraud. An experienced CPA with the CFF credential is in a position to analyze, report, and testify as an expert witness if needed. This specialization makes a CPA/CFF the ideal expert witness.

When it comes to bringing an expert witness to the stand to testify, it should be someone who is an authority in their field. This same concept applies to accounting – put your trust in a firm that has a proven litigation support track record and will understand your needs.

If you have a question about hiring CJA as an expert witness for your legal needs, contact us.

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What Types of Cases Do Forensic Accountants Handle?

Hiring forensic accountants for cases involving fraud investigation, litigation support, disputes and more

With the seeming rise in corruption and financial related crime in both the for- and non-profit sectors, identifying when forensic accounting is required can help to uncover evidence and limit overall risks to your company or organization. Just this month, International Relief and Development (IRD) was suspended from working with the US Forensic Accounting in word collageGovernment over alleged misuse by the organization’s senior executives of finances. Kris Manos, IRD’s interim president who was brought in, hired an outside forensic accounting firm to audit finances, including charges on the credit card of former president, Arthur Keys, who retired last July. Reported in the Washington Post on February 9, 2015, it claims that a top USAID contractor allegedly billed taxpayers for Redskins tickets, alcohol. It is in cases such as these where forensic accounting is needed to uncover the details and possible cover up or hiding of evidence. This can usually be uncovered when investigated and analyzed properly by a qualified and experienced forensic accountant. Read on for more areas of business and financial operations where forensic accounting comes into play.

Fraud

Cheryl Jefferson and Associates summarizes fraud as “…the act of one party deliberately misrepresenting the truth or fact, in order to obtain something of value from or causing damage to another party.”

According to a survey conducted by the Association of Certified Fraud Examiners and reported in their 2014 Report to The Nations on Occupational Fraud and Abuse, organizations typically lose 5% of annual revenues each year to fraud, with the median loss totaling $145,000 and 22% of those being at least $1 million. The report goes on to reveal that the 3 primary categories of fraud are asset misappropriations, corruption and financial statement fraud. These statistics along with report details make a compelling case for anti-fraud expertise to identify fraud and recover losses.

Litigation Support

Comprised of several elements including discovery, fact finding, transaction testing, trial assistance and settlement, forensic accountants apply their expert accounting skills & knowledge to ensure the necessary analysis and evidential findings are determined for success of the case.

Dispute Analysis

Handling cases of disputes properly requires forensic accounting. Some of the areas of disputes can involve calculating commercial damages, settling financial matters from contract disputes, handling a violation of the False Claims Act or infringement of patents & intellectual property. These types of cases require forensic accountants to uncover the details and allow optimal resolution.

Bankruptcy

As laws involving bankruptcy & insolvency become more stringent, forensic accounting becomes necessary to assist in preparing the case, offering the proper records and providing the proper evidence for court proceedings.

If you know or believe your company or organization is involved in internal criminal activity or you are facing litigation, forensic accounting is necessary to ensure you are uncovering accurate findings, gathering the appropriate evidence, and garnering the expert support as litigation unfolds. Make certain your accountants hold the required expertise and knowledge for forensic accounting.

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Things a forensic expert for a government contractor knows

Forensic accountants/CPAs require unique skills and training in order to blend accounting, auditing, and investigative skills to uncover and analyze financial data. In addition, to uncovering fraud, forensic accountants/CPAs provide litigation support in a courtroom setting. If you are a government contractor, considering hiring a forensic accountant or CPA, here are five things your forensic expert should know:

1. Government Contractors and their Unique Accounting Needs

Extensive experience in assisting government contractors is critical. CPA firms like Cheryl Jefferson & Associates are familiar with the specific needs of government agencies, their frequently changing regulations, and how to navigate a government contract audit. An experienced forensic CPA can provide more accurate service, more quickly, and know what to look for as it relates to government contract requirements.

2. Small Businesses and Their Internal Control Limitations

Small business accounting may appear to be simpler than that of a larger business. This isn’t always the case as many subtle nuances must be considered when working with smaller companies. A forensic CPA/accountant that specializes in these types of clients and are aware of all the intricacies that come with them, will be more fluent their particular internal controls. This will significantly reduce the time spent on researching accounting and taxation matters.

3. Cost and Revenue Sharing Joint Ventures Disputes

Forensic accounting specialists that have a great deal of experience in analyzing cost and revenue sharing arrangements, and can greatly expedite resolving joint ventures disputes. Because joint venture disputes require special knowledge, your forensic expert should have experience with accounting for joint ventures in order to adequately resolve all issues. Cost analysis can dramatically change the outcome of such contracts so there is a lot at stake. It is important to hire the right team that can support a fair resolution.

4. False Claims Act & Unallowable Payments

An experienced forensic CPA/accountant can offer advice on accounting practices and transactions that  may violate the False Claims Act and other matters of unallowable payments. Such information can help your company avoid committing fraud against the government, as well as defend against false claims act charges. Government contractors often need consulting on how to navigate these issues to avoid further claims so a high-quality forensic advisory service is essential.

5. Fraud in Financial Reporting and Employee Theft

No company wants to deal with fraud, but the unfortunate truth is fraud, bribery and corruption cases continue to rise. A forensic CPA can conduct extensive review on financial reports to identify possible fraud. Employee theft can be uncovered by specialists through the examination of company financials records and assets. An experienced CPA will know what to look for in order to identify fraud or employee theft within your business.

Cheryl Jefferson & Associates provides accounting, auditing, and advisory services to small businesses and government contractors, in conjunction with the comprehensive forensic accounting services of CJA Forensic Accounting, for your business. Our principal is certified in financial forensics (CFF) and is dedicated to make sure you receive a high-quality experience. We are confident that we will be able to take care of your company’s needs. Contact us to get the facts today!

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