Tag Archive for: Litigation Support

,

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.

/by
,

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.

/by
,

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

/by
, ,

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.

/by