Tag Archive for: forensic accounting

The Importance of Cost Accounting Standards

What are Cost Accounting Standards? 

Cost Accounting Standards (CAS) are important because they promote a better understanding of costing as a whole, and exist to ensure consistency and uniformity in cost accounting practices.

Having a system of standards and practices every government contractor can follow, ensures that investors and stakeholders can depend on the information presented to them. This credibility ensures a level playing field of sorts.

It is paramount that contractors follow CAS to avoid a potential contract violation. Government contractors must know if they are subject to all nineteen standards, or if they qualify for an exemption. Exemptions are typically based on the dollar value or type of contract. However, if you are not exempt, you must be familiar with and be prepared to adhere to each standard. Failure to do so means you will violate your contract, leading to consequences.

How CAS Affects Contracts 

While cost accounting is not a new concept, CAS are specific to the United States. CAS are applicable to many different industries, including education, defense contracts, and any other industry funded, to some extent, by government funds. 

It is important to note CAS applies to contracts rather than contractors. Contracts are subject to either full or modified CAS coverage. Full CAS coverage means all nineteen standards must be followed. Modified CAS coverage means only a small handful of the nineteen standards must be followed.

Regardless of the amount, a CAS Disclosure Statement is filed. This statement details the accounting practices of the contractor. Unique statements exist for educational institutions and commercial companies. 

The Nineteen Cost Accounting Standards

The nineteen Cost Accounting Standards, as set by the Cost Accounting Standards Board, are as follows:

  1. Consistency in estimating, accumulating, and reporting costs.
  2. Consistency in allocating costs incurred for the same purpose.
  3. Allocation of home office expenses to segments.
  4. Capitalization of tangible assets.
  5. Accounting for unallowable costs.
  6. Cost accounting period.
  7. Use of standard costs for direct material and direct labor.
  8. Accounting for compensated personal absence.
  9. Depreciation of tangible capital assets.
  10. Allocation of business unit general and administrative expenses to final cost objectives.
  11. Accounting for acquisition costs of material.
  12. Composition and measurement of pension costs.
  13. Adjustment and allocation of pension costs.
  14. Cost of money as an element of the cost of facilities capital.
  15. Accounting for the cost of deferred compensation.
  16. Accounting for insurance costs.
  17. Cost of money as an element of the cost of capital assets under construction.
  18. Allocation of direct and indirect costs.
  19. Accounting for independent research and development costs & bid and proposal costs.

Cost Accounting Standards Exemptions

There are several scenarios in which contracts are exempt from the listed standards. In fact, a contract can be entirely exempt from CAS. Below are some scenarios which qualify for CAS exemptions:

  • Contracts won by small businesses are always exempt from CAS, regardless of contract amount.
  • Contracts in which price is set by either law or regulation. 
  • Contracts won by foreign governments. 
  • Contracts won by foreign concerns. 
  • All contracts under $750,000 are exempt.
  • Contracts under $7.5 million are exempt if the company has not won a contract in an amount greater than $7.5 million in the past. 
  • Contracts for commercial items are exempt. 
  • Contracts won during sealed bid procedures and/or scenarios in which adequate price competition was available. 

Cost Accounting Standards must be followed correctly to conduct business involving government contracts. If CAS are not followed correctly, it is not only possible, but in fact likely, your business will run into legal trouble. CAS can become complicated and difficult to navigate. 

Contact us today to speak with CJA Forensic Accounting, your forensic financial experts. 

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Investigating Employee Embezzlement

Employee embezzlement is, unfortunately, a frequent occurrence in the workplace and often goes unnoticed for months or even years. Both outright stolen and mishandled funds can constitute embezzlement and lead to significant financial losses for your company or business. 

What Is Employee Embezzlement?

Employee embezzlement is when an entrusted person steals from the business they are employed by. Some examples include padding expenses, creating fake vendor payments, or stealing customer credit card data.  Vigilance is key to both preventing and eliminating these opportunities and others. When evidence or suspicion is present, action should be taken immediately. Recovering embezzled funds is a long and complicated process that requires the professional help of an experienced forensic accountant.

What Does Employee Embezzlement Look Like?

There are several questions to consider when establishing the likelihood of embezzlement at your company or business. Considering these questions can also help you to discover any opportunities for potential embezzlement which may exist, and which employees may be involved. 

  1. Is it one or multiple employees taking money from the company or business? According to this study, 79% of embezzlement cases include more than one culprit. 
  2. Do you see inconsistencies in your organization’s financial records?
  3. Missing financial records, unknown vendors, and unapproved payments are all red flags.
  4. Who has access to financial records and clearance to access funds? This study states 85% of employment embezzlement cases are perpetrated by an employee at the management level or above.

How Can I Investigate Employee Embezzlement?

If you suspect employee embezzlement is happening at your company or business, it is important to act fast. Theft of large sums can happen quickly and go unnoticed for years or even decades. Additionally, it is not always possible to recover all embezzled funds. The sooner you act, the more likely you are to recover as much money as possible.

Because so many cases of fraud include multiple people, uncovering the truth can quickly become complex and convoluted. A forensic accountant possesses the skill set to interpret and properly analyze discrepancies. They are specially trained to search for specific, key pieces of evidence and information. A forensic accountant methodically calculates both the magnitude and the duration of embezzlement, as well as identifies the employee or employees responsible for the misappropriation.  

A forensic accountant’s expertise is essential in quantifying all the damages sustained in a legal dispute. Once the forensic accountant determines the extent of the activity, the evidence is documented in the form of an investigation report. This report is critical to recovering the embezzled funds through subsequent legal prosecution. Without a detailed report, a successful resolution in the form of recovered funds may not be possible.

In addition to facilitating the possibility of recovering losses, a forensic accountant will work with you to pinpoint areas in which the opportunity to keep this from happening again. A forensic accountant will offer advice on methods and strategies to be more proactive about possible employee embezzlement in the future. This insight is critical in preventing future employee embezzlement.

If you suspect employee embezzlement, take control of the situation today. Contact a forensic accountant immediately to protect your company or business.

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How a Forensic Accountant Can Help with Homeowner Association Fraud

Homeowner associations can be wonderful. They allow for community building, upkeep, and beautification of shared spaces and entire neighborhoods, and can increase property value. However, they do come with the risk of possible homeowner association fraud.

Homeowner association fraud happens when funds are used inappropriately, irresponsibly, or even criminally. It’s important to be informed about—and have a clear picture of—how and why funds are used. Unfortunately, it is not unusual for funds to mysteriously go missing or be unaccounted for.

What Do I Do if I Suspect HOA Fraud?

If you believe the funds your homeowner association receives are not being used appropriately, there may be some fraudulent activity or even embezzlement happening behind the scenes. When suspicions arise, you must seek professional help in the form of a forensic accountant.

A forensic accountant will sift through past financial statements to determine whether any type of fraudulent activity may be taking place on the board of your homeowner’s association. Fraudulent activity includes both misappropriated and outright stolen funds. The conclusions a forensic accountant can draw are crucial in removing and prosecuting the person or persons responsible for the fraudulent activity, and in proactively saving the members of your homeowner’s association thousands, or even millions, of dollars.

How Can I Identify Possible HOA Fraud?

There are several ways to identify possible homeowner’s association fraud.

  1. Consider whether the budget of the homeowner’s association corresponds to the expenditures the homeowner’s association is responsible for.
  2. Pay careful attention to the vendors and services the homeowner’s association has chosen to use.
  3. Pay close attention to any financial statements the homeowner’s association sends to all members. It is important to note if all funds are accounted for. Additionally, focus on how much vendors and services are being paid. Do prices seem at all inflated, or do they match typical market rates for the area?
  4. Take stock of the areas the homeowner’s association is responsible for maintaining. Notice whether areas are well maintained. If maintenance is poor, it could be a sign funds are being used inappropriately.

Digging Deeper: How a Forensic Accountant Will Uncover the Truth

Even if all transactions are accounted for, fraudulent activity is still possible. Financial statements and accounting records can be modified and important information can be concealed, omitted, or even buried in financial jargon and complicated paperwork (it shouldn’t be).

Making sense of these documents—and determining whether fraudulent activity has occurred—is the job of a forensic accountant. A forensic accountant can piece together all record-keeping, or lack thereof, make sense of both available and lacking records, and determine and document the extent of any fraudulent activity.

A forensic accountant should also verify the existence of contractors and vendors, investigate whether contractors and vendors have official contracts and are being paid according to those contracts, and determine whether pricing matches local market rates. Because most HOAs are self-regulating, fraudulent activity is prevalent and continues unnoticed for a long time. The forensic accountant’s report is crucial in the legal process of recovering funds.

It is important to note a forensic accountant should be hired as soon as fraudulent activity is suspected; recovering funds requires litigation and time. Therefore, unearthing and prosecuting fraudulent activity in a timely manner is of the utmost importance.

If you need a forensic accountant, don’t hesitate – contact us today for assistance.

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When does an HOA need a forensic audit?

Homeowner associations (HOA) and condominium associations (CA) are legal entities set up to manage the operations and finances on behalf of the owners. Typically, the management team (administrator) selected to run the HOA or CA is comprised of other homeowners or condo owners. If a lot of thought was put into the selection criteria, then the administrators will be knowledgeable individuals with experience in management and/or finance. If not, the administrator can end up being someone who can barely balance their own checkbook, let alone manage the books and records of a $5,000 annual budget or a $1,000,000 annual budget.

Depending on the bylaws of the HOA or CA, a forensic audit of the financial books and records may be required annually or never. However, a financial audit is not designed to detect fraud. At a minimum, homeowners should be presented with annual financial reporting, but monthly is preferred. The Educational Community for HOA Homeowners states that 18 months is the average time before a fraud scheme is detected.

Given today’s unlimited resources in accounting software, monthly reporting is not cumbersome and provides more relevant feedback on the management of HOA resources.

Forensic Audit for Homeowners Associations and Condo Associations

So, when does an HOA need a forensic audit?

1. When you suspect fraud

While a financial statement audit ensures that all the transactions are accounted for, it does not ensure that someone hasn’t stolen or misappropriated funds.  This is the number one reason for a forensic audit. If fraud is suspected, if becomes imperative to contact legal counsel and begin a fraud investigation right away. The longer the homeowners wait, the more funds that can be absconded and the more difficult it will become to recover them if fraud is found.

2. When there is no requirement for annual financial audits

The risk of fraud increases when no one is providing oversight to the administrators and their handling of the funds entrusted to them. Even simple forensic accounting such as verifying vendors could be beneficial.  Investigating whether payments are being provided to contractors and vendors that do actually exist and the payments are as agreed upon in written contracts or purchase orders, can mitigate vendor fraud. 

3. When requested reporting to the homeowners is untimely and confusing

Most small HOA’s provide annual reporting of last year’s results of operations, last year’s budget comparison, and a proposed budget for the upcoming year. If your homeowners are only seeing collections and spending once a year, a lot of fraud can be buried in those reports. At a minimum, homeowners should demand quarterly or monthly financial reporting on collections and budget versus actual spending. When the reports received by the homeowners bring up a lot of questions or just don’t make sense, it is the responsibility of the administrator to clarify.  If the reporting is not quarterly or monthly and the responses from the administrator don’t make sense, a forensic audit is a consideration.  Forensic audits for HOAs can be tailored to ensure bank reconciliations have been performed, reserve funds exist, and overbudget items are all valid and properly authorized transactions.

4. When the administrators are not maintaining the property as budgeted

Another sign of fraud is when the property appears to be deteriorating, despite low outstanding collections of homeowner dues. The funds contributed by the homeowners seem to be falling short of the funds need to maintain the property or constant increases in dues that increase at a greater rate than normal homeowner costs. This could be a sign of misappropriation of HOA funds or kickbacks from contractors, and a sign a financial audit is needed.

5. When the administrators appear to be living beyond their means

While no one wants to judge someone else’s lifestyle, homeowner associations and condo associations are often close-knit organizations.  There is often a lot of gossip and private information that gets passed about. Not all gossip is untrue. When the administrators appear to be buying a lot of big-ticket items, going on a lot of vacations, all without a change in job status or lottery winnings, it could be a sign of living beyond one’s means. This in itself does not mean they are committing fraud, but if the management of the HOA is seriously lacking, administrators are unresponsive to inquiries and dues are increasing, it does not hurt to have a financial audit.

Remember that a well-run HOA or CA also affects your property value positively and is an investment for the owners. A forensic audit of the HOA or CA finances can only serve to help preserve property values and demonstrate good stewardship of owner’s investments.

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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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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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Financial Statement Fraud Red Flags

Over the last several years, the number of cases related to financial statement fraud has experienced a gradual increase. In fact, according to a recent Cornerstone Research report, Accounting Class Action Filings and Settlements—2014 Review and Analysis, shows the SEC has a heightened focus on accounting, with cases involving restatements reaching a 7-year high in 2014.

Corporate FraudWhen you first hear the phrase financial statement fraud, you might think of having a bank statement that does not reflect the actual transactions that took place relating to a particular account. To be precise, financial statement fraud is a calculated method to omit, include, or misrepresent information that would affect the interpretation of a statement by the reader.

Both private and public businesses commit financial statement fraud to gain financially, conceal misappropriation of funds, or satisfy stakeholders in various circumstances. Top-level management most often performs financial statement fraud but any accounting employees with the inclination, ethical ambiguity, or pressure to “cook the books” may do so.

Indicators of Financial Statement Fraud

Although businesses that commit financial statement fraud might carry out such activities for any number of reasons, they risk coming into collision with the IRS. If tax returns do not coincide with the businesses’ statements, financial statement fraud may be the underlying reason. Below are some ways financial statement fraud is manipulated in business:

1. Improper Income Recognition

When a company does not give the right figures on the revenue they are committing financial statement fraud. The reason for this can be something as simple as the business realizing that it has experienced an increase in revenue and does not want all of it taxed. To keep some of the extra revenue, they might decide to doctor their statements to reflect lower income entries so that taxes are reduced.

2. Manipulating Expenses

For companies that want to seek financial assistance from potential investors or stakeholders, altering expenses may be one way they aim to be appealing. If a company recognizes that a stakeholder will only offer financial assistance if expenses are up to a given level, increasing costs on the statement might prove to be a viable option. Inversely, a company that wants to conceal misappropriation of funds might alter the statement to display lower levels of expenses.

3. Complexities in the Statement

If an account displays some complex transactions that are not clearly reflected in the statement, it might raise a flag. Complex transactions are sometimes included in statements to deviate the attention of the reader from some irregularities that, if detected, would raise controversies. As a result, complex statements keep the observer occupied, hence, missing out on important information on the statement.

Benefits of a Forensic Accountant

The discovery of financial statement fraud can have far-reaching implications for a business that may undermine their credibility and integrity. Investors are predominantly at risk, either by being misled prior to investment being, or by invested funds being misused. Others that may be defrauded are banks considering loans, suppliers with outstanding receivables, and customers who get paid by performance or are contracted to hit certain revenue milestones.
To avoid the above issues, consulting a CPA who specializes in forensic accounting is strongly recommended—and as most will say, when fraud is suspected—the earlier, the better. A forensic accountant is experienced in tracing funds, identifying assets, recovering assets, financial intelligence gathering, performing suspect interviews, and performing due diligence. These are critical skills needed to address concerns before they become red flags for the IRS.
If fraud is possibly an issue or if you are picking up the pieces after fraud has been uncovered, hiring an outside independent CPA firm to prepare financial statements can bring an added level of reassurance that integrity and objectivity is being upheld.
If financial statement fraud activities are brought to light, a business not only threatens tarnishing its reputation but also may be at risk for costly lawsuits and encourages regulatory involvement. To avoid such a fate, it is important that the business takes every precaution to avoid being linked in any activities that might lead to financial statement fraud.
Resources:

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Hidden Assets in a Business Owner’s Return

Experts look to tax returns in hidden-asset investigations

Business owners involved in divorce or engaged in fraudulent activity have plenty of motivation to manipulate their companies’ financial statements for their own ends. Fortunately, for financial experts such as forensic accountants and valuators investigating hidden assets, business tax returns aren’t so easy to misrepresent. In fact, these returns have some built-in protections that help ensure their accuracy.

Getting the real story

Taxpayers who falsify information on their returns risk being charged with tax evasion. In addition, many income and deduction items are reported directly to the IRS by third parties — such as employers, banks, lenders and brokerage firms — making it difficult to omit or alter them.

Tax returns are particularly useful if an expert can obtain them from several years early on in the investigation. Examining changes from one year to the next can provide valuable leads in the search for hidden assets or income sources.

Finding buried treasure

Many treasures to be discovered in tax returns are buried in attached schedules, including:

Form 1040, Line 7 — Income from wages, etc. This is where the taxpayer reports sources of income. If he or she receives wages from several businesses, it may be possible to discover previously undisclosed business interests. The attached W-2s also contain information about retirement plans and fringe benefits.

Form 1040, Line 8b — Tax-exempt interest income. This income may reveal other investment assets.

Form 1040, Lines 15 and 16 — Retirement plan distributions. These funds can be traced to determine whether they were rolled over into other tax-deferred plans or used for some other purpose.

Form 1040, Line 45— Alternative minimum tax (AMT). An entry on this line indicates the existence of tax preference items — deductions, credits and other tax benefits that are disallowed for AMT purposes. Obtaining more information about these items, which are listed on Form 6251, may lead to the discovery of hidden assets.

A potentially significant item is the exercise of incentive stock options, which may signal a sudden increase in the taxpayer’s net worth. Each of these items may provide clues about the taxpayer’s investments.

Form 1040, Line 73 — Refund. This line on previous years’ returns may reveal important information. Dishonest owners and unscrupulous spouses have been known to overpay taxes in previous years and then seek a refund after the dust has settled.

Schedule A — Itemized deductions. A comparison of real estate taxes (Line 6) with taxes on disclosed property may show additional income resulting from hidden real estate assets. Similarly, entries for state and local taxes (Line 5), personal property taxes (Line 7) and investment interest paid (Line 14) may reveal the existence of undisclosed assets.

Schedule B — Interest and ordinary dividends. It’s important to pay close attention to any foreign accounts or trusts reported in Part III. If the taxpayer has set up an asset protection trust in a foreign country with strict secrecy laws, this may be the only clue that such a trust exists.

Schedule C — Profit or loss from a sole proprietorship. Depreciation expenses listed in Part II may show that the owner has valuable business equipment. Entries for mortgage interest as well as pension and profit-sharing plans may reveal other undisclosed assets.

If insurance expenses are reported on Line 15, the types of insurance the business bought may be significant. Taxpayers sometimes use whole life insurance policies to hide assets.

Schedule D — Capital gains and losses. It’s important to review any capital transactions reported here and make sure the business has accounted for all sales proceeds. A large decrease in a taxpayer’s net worth from one year to another may indicate an asset sale.

Schedule E — Supplemental income and loss. Schedule E reports income from rental properties, royalties, partnerships, S corporations, estates and trusts. Entries here may reveal important information about the taxpayer’s assets and business interests. Income and expenses that seem suspicious or unreasonable may indicate that these entities are being used to conceal assets.

Leading to victory

Tax returns — again, especially several years’ worth obtained early in the process — can form part of a solid foundation to a successful legal action. Specifically, tax-related information can aid in the drafting of discovery requests that lead to victory.

© 2014 TRTA

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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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