The bookkeeper for a small Sullivan County business is
charged with making $3,000 in personal purchases on the company credit card.
An employee of an Ulster County restaurant is charged with stealing $12,000.
The longtime office manager of an Orange County propane dealer
pleads guilty to embezzling more than $1.3 million – the equivalent of four
years of profits – by disguising thefts as payments to vendors.
Experts estimate that organizations lose 5 percent of their
annual revenues to fraud. Organizations with fewer than 100 employees are more
likely to be victimized by occupational fraud – acts committed against an
organization by its own officers, directors or employees – than are larger ones.
And the losses for small organizations, which are more likely to lack internal
controls, are typically twice as large, according to the Association of
Certified Fraud Examiners’ Report to the Nations 2018 Global Study on
Occupational Fraud and Abuse.
The path to a more secure workplace
Organizations need strong internal controls to prevent theft and fraud. What can a small organization with limited resources do to protect itself? Consider these steps to help reduce risk:
Have a written code of conduct, documentation of
policies/processes, and anti-fraud policies in place. Have staff review these
documents each year.
Segregate duties when possible, bearing in mind
the potential for collusion.
Conduct background checks on all potential
hires. If red flags are detected, do not hire the applicant without a confirmed
(hopefully, in writing), sound explanation.
Rotate job responsibilities when possible.
Require employees to use vacation days, and have
their job duties covered by another employee who can discover any questionable
activity. Follow up with the covering employee. Ask about job-efficiency
suggestions, and if they identified any concerns.
Provide separate user names and passwords for
all authorized IT users, with information-access rights limited to required
Use a safe and security cameras. Safeguard cash,
checks, credit cards and inventory.
Take a physical inventory at least once a year.
Require authorizations, receipts and recording
of all petty cash transactions.
Have copies of bank and credit card statements
sent to the home of a key manager or board member who can review them.
Require detailed receipts for all credit/debit
card charges shortly after they are incurred.
Require two signatures or written authorization
for expenditures over a material dollar amount.
Require detailed invoices from vendors that
clearly outline goods and/or services provided, related locations/job names,
Give your organization a checkup
Conducting regular reviews of key checkpoints in your
organization can help you detect fraud early. If maintaining a schedule is difficult,
try random, unpredictable reviews as frequently as possible.
Here are a few ways to get started:
Review monthly bank statements. Ensure checks
paid were properly authorized and signed. Test large checks to the related
underlying documentation. If checks are out of chronological order, determine
why, and locate any missing ones. Confirm total deposits match accounting
records and investigate any discrepancies. Compare the bank statement to the
bank reconciliation and note if any payee name differences exist. If payroll
checks are issued, examine any payroll checks with two endorsements.
Investigate unexplained differences in monthly
cash flows from prior periods.
Review monthly or quarterly payroll reports. Investigate
unexplained compensation increases, overtime and/or unusual reimbursements.
Verify that new employees exist and former employees are no longer being
compensated. Investigate any employees with no withholdings.
For point-of-sale transactions, reconcile closeouts
to bank deposits. Note if discrepancies regularly occur with a specific
Investigate unexplained changes in sales from
prior periods. Identify missing invoice numbers, unusual credits and potential
over- or under-billings.
Review software audit trails and access logs to
identify any questionable activity or patterns.
Compare financial statements to the former period
and clarify any unexplained discrepancies.
Here’s a final piece of advice. To limit workplace fraud, build
a fair organization. Avoid situations that promote fraud, such as unrealistic
goals, poorly designed incentive compensation plans or unfair workloads.
Encourage an atmosphere of open communication where problems can be identified
If you think your organization may have been victimized by occupational fraud, contact Advent Valuation Advisors at firstname.lastname@example.org.
Advent Valuation Advisors, LLC, takes great pleasure in announcing that Lorraine Barton, CPA/ABV/CFF, CIRA, CVA, MAFF, MBA, has been admitted to the partnership.
Lorraine joined Advent, an affiliate of accounting and advisory firm RBT CPAs, LLP, in 2015. She has an extensive and varied accounting, valuation and litigation-support background in private industry and public accounting.
Lorraine has provided bankruptcy-support services since 2002 and business valuation services since 2004. She previously served as interim chief financial officer of a $125 million credit card processing company operating in Chapter 11 bankruptcy, helping to facilitate the sale of the business and saving more than 100 jobs.
At Advent, she and her team provide valuation and litigation-support services to closely held businesses and their advisors for purposes including mergers and acquisitions, buy-sell agreements, divorce, estate and gift-tax planning and corporate reorganizations.
Lorraine has completed a 40-hour divorce mediation training program that meets the requirements of the New York Association of Collaborative Professionals. She and the firm have wide-ranging experience in matrimonial finance, including asset tracing, lifestyle analysis and forensic examination.
Lorraine lives in Fishkill and has two sons. She is a graduate of Leadership Orange and serves on the NYSSCPA Business Valuation Committee.
She is also a member of the American Institute of Certified Public Accountants (AICPA), the National Association of Certified Valuators and Analysts (NACVA), the Association of Insolvency and Restructuring Advisors (AIRA) and the Hudson Valley Collaborative Divorce & Dispute Resolution Association (HVCDDRA).
“We are so pleased to welcome Lorraine as the newest partner in Advent Valuation Advisors,” said Michael Turturro, managing partner of RBT CPAs. “Lorraine is a crucial part of our continued growth. I wish her congratulations and many years of continued success!”
On March 27, 2018 the New York Court of Appeals applied effective discounts and deductions amounting to 81.22%, or $3,938,928 on a 3.08% minority partnership interest in a partnership wrongful dissolution matter. The partnership, Poughkeepsie Galleria Company, owns, operates and manages a shopping mall, the Poughkeepsie Galleria Mall. We were not provided with any of the valuation reports related to the matter, and you know what they say about assuming. The standard of value utilized by the Court was going concern value, with a reduction for goodwill and discounts for a minority interest and lack of marketability.
The case involves a minority partner who the court determined wrongfully dissolved their partnership. The remaining partners continued the partnership’s business. NY Partnership Law § 69(2)(c)(II) was applied to the case, which states that when a partner dissolves a partnership in contravention of the partnership agreement, and the remaining partners continue the business in the same name, the dissolving partner has “the right as against his copartners . . . to have the value of his interest in the partnership, less any damages caused to his copartners by the dissolution, ascertained and paid to him in cash . . . but in ascertaining the value of the partner’s interest the value of the goodwill of the business shall not be considered.”
In Congel v. Malfitano, the Court of Appeals applied the following deductions and discounts: 15% for goodwill, 35% for DLOM, and 66% for DLOC; resulting in effective deductions of 81.22%. No details were provided regarding how the business value (before deductions) was derived. The Plaintiffs’ valuation expert testified that the value of the Partnership included goodwill of 44%, and that a marketability discount of 35% and a minority discount of 66% applied to the matter. The Defendant’s valuation expert testified that the Partnership, a real estate holding company, did not possess goodwill, that a minority discount was not applicable when determining fair value, and that a 25% marketability discount applied to the matter.
New York Business Corporate Law §623(h)(4), which pertains to the procedure to enforce a shareholder’s right to receive payment for shares (for corporations and not partnerships), states “if the corporation fails to make such offer within such period of fifteen days, or if it makes the offer and any dissenting shareholder or shareholders fail to agree with it within the period of thirty days thereafter upon the price to be paid for their shares…The court shall determine the fair value of the shares without a jury and without referral to an appraiser or referee. Upon application by the corporation or by any shareholder who is a party to the proceeding, the court may, in its discretion, permit pretrial disclosure, including, but not limited to, disclosure of any expert’s reports relating to the fair value of the shares whether or not intended for use at the trial in the proceeding”.
The Appellate Division relied on Anastos v. Sable for guidance on its decision. Anastos v. Sable is a Massachusetts wrongful dissolution of a partnership by a minority shareholder case. The related Company was a real estate holding company located in a jurisdiction possessing a similar regulation excluding the value of the goodwill of the business in the settlement. In the Anastos v. Sable matter, the value of the net assets of the partnership were $2,494,005, indicating utilization of a cost approach in valuing the entity. The judge applied a discount of 40% to obtain what was termed “a minority interest going concern value” for a 33.33% partnership interest, with no mention made of a deduction for goodwill.
Goodwill and Going Concern Value
Lynda J. Oswald, in her article “Goodwill and Going-Concern Value: Emerging Factors in the Just Compensation Equation” sheds light on the goodwill and going concern topic. Her article originated from eminent domain proceedings and the related recovery of business losses. Oswald identifies goodwill and going concern value as closely-related, but separate, components of business value. With goodwill relating to the value which inheres in the fixed and favorable consideration of customers, rising from an established, well-known, well-conducted business that create an expectancy of earnings in excess of the normal returns on the tangible assets, and going-concern value created by such factors as avoidance of start-up costs, increased operating efficiency, and increased marketing and administration efficiencies. Goodwill reflects the existence or expectation of excess earnings, while going-concern value reflects the ability of an ongoing business to realize a higher rate of return than a newly established one. The Appellate Division decision appears to relate strongly to these concepts.
In addition to the legal foundation previous mentioned, my research on this topic identified that the SBA requires (in specified cases) going concern special purpose property appraisals be obtained from experienced and qualified appraisers. Special purpose properties are limited market properties with unique physical designs, special construction materials, or layouts that restrict their utility to the specific use for which the property was built. Their appraisals allocate separate values to the individual components of the transaction including land, building, equipment and intangible assets. Paul R. Hyde, EA, MCBA, ASA, ASA, MAI has written similarly on the topic in his article “Valuing Real Property Going Concerns”, and Mark T. Kenney, MAI, SRPA, MRICS, MBA in his article “Shopping Mall Valuation: Is There Intangible Value to Extract?” discusses the issue of intangible assets related to shopping mall real estate. If you haven’t guessed it by now, going concern special purpose property and real property going concern appraisals are a complex area of valuation, requiring real estate appraisal as well as business valuation competencies.
Without copies of the Congel v. Malfitano valuation reports, we are unable to determine with certainty whether they were going concern special purpose property or real property going concern appraisals. Based upon the history of the matter, my hypothesis is they were not. The Congel v. Malfitano decision underscores the importance of fully understanding the purpose of a valuation assignment and the applicable laws relating to the matter, as well as in seeking guidance on the appropriate appraisal for your case.
This article was intended to provide commentary on a controversial, recently decided valuation matter and does not constitute legal advice. If you have any questions or comments relating to this topic, please contact me at email@example.com.
 Lynda J. Oswald, Goodwill and Going-Concern Value: Emerging Factors in the Just Compensation Equation, 32 B.C.L. Rev. 283 (1991), http://lawdigitalcommons.bc.edu/bclr/vol32/iss2/1.
 Paul R. Hyde, EA, MCBA, ASA, ASA, MAI, Valuing Real Property Going Concerns, American Society of Appraisers, http://www.appraisers.org/docs/default-source/discipline_rp/hyde-valuing-real-property-going-concerns.pdf?sfvrsn=0.
 Mark T. Kenney, MAI, SRPA, MRICS, MBA, Shopping Mall Valuation: Is There Intangible Value to Extract?, American Society of Appraisers, http://www.appraisers.org/docs/default-source/discipline_rp/shopping-mall-valuation-is-there-intangible-value-to-extract-.pdf?sfvrsn=0.
Hiring a forensic accountant requires due diligence. Your forensic accountant will be providing services to you during a stressful situation, during which they will be conducting an investigation and providing findings related to your matter; and possibly providing guidance to favorably structure a settlement that protects your interests, and delivering testimony that clarifies uncertainties, confirms the accuracy of your position, and succeeds in securing the proper settlement of your case. Forensic accountants impartially and objectively apply accounting, financial analysis, and investigative skills to determine facts, conduct financial investigations, and provide credible analyses and reports that may be relied upon in court, arbitration, and mediation, or by other parties to a matter. They may be called upon to deliver expert witness testimony in depositions, arbitration, mediation, and/or trial settings. This article provides guidance on the factors to consider in your selection of a forensic accountant including personal qualities, experience, credentials, costs, staffing, and resources available to assist in your hiring decision.
Identifying Forensic Accountants
Forensic accountants should possess experience in accounting and financial analysis, strong ethics, discretion, sensitivity, sound professional judgment, curiosity, effective listening, and clear communications skills. They must be able to contemplate alternatives and scrutinize fine details, while maintaining a big picture perspective. While computer forensics is a specialty of its own, a forensic accountant should possess strong, relevant computer skills, or a staff that does, and a complete understanding of how the results of their analyses were derived. Because your forensic accountant may be asking difficult questions while delving into the most highly sensitive, personal and financial details of your life, and their job is not to tell you what you want to hear, but to tell you what you need to hear, it is paramount that the professional you hire is someone whom you not only feel confident in, but are comfortable working with, feel listened to and respected by, and that is capable of understanding and looking out for your best interests.
Experience and professional credentials are two important factors to consider in hiring a forensic accountant. What is their forensic accounting experience? Is this professional familiar with the industry and its nuances, or a similar industry to yours? If not, can they readily obtain this understanding from you or other sources? Have they been deposed and/or provided expert witness testimony before? In the event that your matter proceeds to litigation, does this professional possess the qualifications and utilize the accepted methodology and reasoning to have their analyses, report, or testimony accepted by a trier of fact, mediator, or arbitrator, or will their work be rejected? Do you feel confident they possess the ability to clearly and logically articulate your case before a judge and/or jury, should that occur? Do they possess experience in assisting in structuring settlements?
Forensic accounting experience can be obtained from a variety of sources. Examples include internal audit, government examinations/investigations (ex. IRS, FBI, and SEC), as well as experience with a forensic accounting and litigation support department for a consulting or public accounting firm, a fraud department, a law firm, an insurance company, or a financial institution. A review of the forensic accountant’s resume/CV and/or LinkedIn profile will provide this information. How much experience is sufficient? There is no simple answer, and in fact, a less-experienced forensic accountant, possessing no previous similar-case bias, may ask the very questions or delve into the specific information that is the key to solving your financial puzzle!
Request a sample work product that corresponds to an engagement similar to yours, to review and understand what you can expect to receive. You may only be permitted to review this document on site, and may not obtain a copy, in order to protect the forensic accountant’s processes and work product. Do you understand the sample provided or is it confusing? Are the associated analyses and exhibits clear and logical? Be sure that the sample you review contains clearly supported conclusions.
Forensic Accounting in Litigation
In the event your case does not settle and proceeds to litigation, you will need a forensic accountant that is able to represent you. During your meeting, carefully observe your interaction with the candidate to determine if you feel confident they will be able to clearly and logically explain your case before a judge and/or jury, should that should occur. Find out if the candidate has ever been deposed and/or provided expert witness testimony. If so, did this professional possess the qualifications and utilize the accepted methodology and reasoning to have their analyses, report, or testimony accepted by a trier of fact, mediator, or arbitrator? A Daubert challenge is a hearing conducted before a judge where the validity and admissibility of expert testimony is challenged by opposing counsel. A Daubert challenge relates to the admissibility requirements in Federal Rule of Evidence 702, which state “A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; b) the testimony is based on sufficient facts or data; c) the testimony is the product of reliable principles and methods; and d) the expert has reliably applied the principles and methods to the facts of the case.” Has the candidate successfully defended a Daubert challenge, if one occurred?
The financial settlement of your case may have short and/or long-term tax repercussions that require thoughtful consideration, as you will be living with the results of this legally agreed to and binding settlement. The financial settlement process occurs at the end of your case, during a time you are emotionally exhausted and may feel ready to throw in the towel, to end your matter and move forward with your life. Other parties involved with your case may be applying pressure to end your case. This is the time you require wise advice to make an informed decision to protect your financial interests and future. A forensic accountant can provide guidance on the different settlement options available and their potential ramifications, sometimes suggesting creative ways to settle a case to the mutual satisfaction of the parties. The candidates you are considering should be able to discuss the ways they can support you at this juncture. Should your forensic accountant lack this experience, you will need to consult with an accountant who is familiar with your financial circumstances and wishes, to protect your interests during this process.
While a credentialed forensic accountant is not a guarantee of quality, it provides some level of assurance and provides legitimacy before a trier of fact, should your case proceed to trial. Some common forensic accountant professional credentials include CPA, CFE, CFF, and MAFF. More details about these credentials will appear in a future article.
Forensic Accounting Costs
After experience and professional credentials have been considered, we consider the all-important factor, cost. The Benjamin Franklin quote “The bitterness of poor quality remains long after the sweetness of low price is forgotten” applies in hiring any professional, and the hiring of a forensic accountant is no exception. While hiring a forensic accountant to represent parties jointly may save money in the short run by avoiding the duplication of forensic accounting fees by the parties, the professional will not advocate for one party over the other during the settlement process. This may or may not be in your best interest. Be sure to think this over carefully, before agreeing to joint representation, if it is applicable.
Forensic accounting deals with unknowns and a multitude of variables, with no guaranteed outcome. Typically, at the outset of a case, the final scope and cost cannot be determined with accuracy, but with an estimate generally requiring revision as the case proceeds. As the initial case work begins, it is common to discover that more work will be required than what was originally assumed, for those very reasons that only come to light as the forensic accounting work is performed. Therefore, it is important to understand what specific costs are involved in your case and what you can expect to receive for those costs. An understanding of what you might do, or not do, to keep costs down is equally important. It is critical that you provide organized information, in the format and within the requested confines, as is required by your forensic accountant, with the understanding that you are contributing to rising fees if you do not. Be prepared to communicate your anticipated budget with the prospective forensic accountant and once hired, to discuss case milestones and unanticipated hurdles openly to avoid any unpleasant surprises. This underscores the importance in hiring someone you feel comfortable working with, as you may be having difficult, uncomfortable conversations with the forensic accountant regarding fees that will be incurred to properly represent your interests.
Staffing/fees, resources and technology available will contribute to your end costs. What components of the engagement will the person you hire be performing, and what parts, if any, will be delegated to staff at different levels and billing rates? If you desire that only the person you hire works on your engagement, consider that you may be paying more for this. What qualifications do “other staff” that may be working on your engagement possess? Will staff be adequately supervised, and their work properly reviewed, to ensure that you receive an error free analysis and report? What resources and technology does the forensic accountant have access to, and how will they be utilized? Discuss the industry and other resources that might be used in your case. Is their technology up to date and compatible with yours? If their technology is not up to date or compatible with yours, additional fees may be incurred to resolve these issues. Details on the different fees relating to your engagement, and for the staff/service levels provided should be discussed and provided in writing.
This article was intended to provide guidance in the selection of a forensic accountant by discussing the personal qualities, experience, credentials, costs, staffing, and other available resources to consider during the decision making process. If you have any questions or comments relating to this topic, please contact me at firstname.lastname@example.org.