Forensic Accounting Case Study: Divorce Case

A forensic accountant is often called in on a divorce case to assess income and assets, especially when one or both spouses is a business owner. Here is a case study where PBTK was the court-ordered accounting expert in a divorce:Divorce forensic expert

PBTK was engaged in a Court-ordered divorce matter to conduct a forensic analysis of all the businesses, separately owned and operated by the husband or wife (the “Parties”), for the purpose of determining the available income and earnings. Marital discord had heightened over multiple years, providing the spouses with ample time and opportunity to engineer their reporting of business operations, but also significantly raising the level of distrust.

The businesses consisted of medical and retail operations, including entities established before, or received by gift during, the pendency of the marriage and entities formed during the marriage, presumptively establishing separate and community property interests.

Procedures:

PBTK’s forensic accountants performed procedures that included assessing reported business operations to determine the level of reliability, using QuickBooks reports, annual income tax returns and bank account records. They also evaluated expenses to determine whether personal benefits were received by the Parties even though they may have been deducted as ordinary and necessary business expenses.

Planning Phase:

Planning for this engagement included evaluating and understanding the financial and accounting of all the businesses, identifying areas of possible risk, conducting interviews with the Parties, accountants for the businesses and office/administrative personnel. Further, PBTK’s forensic accountants performed analytical review of business operating activity (revenue and expense) and year-end balance sheets for 3-5 previous years, both horizontally from year-to-year and proportional/common-size evaluation for each year.

Investigative Accounting Procedures:

Initial procedures concentrated on assembling complete accounting records for the scope period, by scheduling of deposits and withdrawals from bank account statements and supporting records. This resulted in portrayal of business revenues and expenses on the cash basis of accounting. Then, our forensic accounts performed analysis of the new customer acquisition process and related costs thereof, including internet based presence. Monthly revenue trends were identified and evaluated based upon the customer acquisition process, in addition to year-to-year revenue proportional change analysis by month.

Quantify the Income:

After analyzing the financial data, we determined the cash flow for the scope period to be substantially higher than the income reported on QuickBook reports or income tax returns. Necessary adjustments included: 1) add back of expenses that we determined personally benefitted the owner/manager spouse, 2) add back of non-cash expenses and 3) add back of costs incurred for overall overhead and administration of a group of entities, not just the paying entity.

PBTK adjustments were made to reflect stand-alone operations of each entity independently, which entailed shifting of expenses between entities to properly match revenues and expenses. Also, PBTK adjustments were made to reflect tens of thousands paid toward significantly past due credit card balances incurred primarily for business purposes, but with commingled personal charges that required separate efforts to isolate.

The Court-ordered Accounting Report added clarity to the businesses aspect of this protracted divorce battle, which allowed the Parties to effectively settle the dispute at mediation.

 

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Joint Retention of Forensic Accounting Experts

Should an attorney jointly retain a forensic accountant before litigation, mediation or arbitration?

A qualified neutral forensic accounting analysis has a strong potential to facilitate early resolution of a contested matter.Legal counsel should not view a jointly retained forensic accountant as a relinquishment of control but rather, as another tool for resolving disputes. A work product that is objective and unbiased towards the litigating parties is likely to benefit counsel and litigants alike.

Can a Forensics Report Lead to Dispute Resolution?

A proactive forensic accounting may be the prudent tactic for your clients by:

  • Eliminating or reducing areas of uncertainty or incompleteness of information
  • Quantifying the potential range of economic damages, thereby allowing the litigating parties to more fully evaluate the risks and rewards they face in further pursuing litigation.

The result of such a qualified forensic accounting report may even lead to dispute resolution before filing litigation, further reducing costs to the litigating parties.

When it Comes to Fraud, Prevention Means Education

Earlier this year, an employee of the State of Vermont tried to make a personal purchase online using a check issued from the State. The employee, the sole liability claims adjuster within the office of Risk Management, had asked for a claims check to be returned to her instead of being mailed out directly to the claimant, per usual practice. Thanks to the skeptical check recipient, the State of Vermont was alerted to a possible fraud.

The employee was accused of using her position to falsify a claim and use those funds for online shopping.  What lessons can we learn from this employee’s access to funds and her ability to get as far as she did in committing fraud?

  • No one person should have full control over any aspect of a system. Having just one claims adjuster may help lower the overall employee salary budget, but not for establishing proper oversight. Was there another employee who could have reviewed the cut checks, and another to sign them? Checks and balances are just one tool used to protect an organization from employee fraud.
  • Any departure from protocol should be a red flag. When the check was returned to the adjuster instead of mailed, other employees should have questioned the request. However, even with strong safeguards in place, employees must be trained on how to follow the proper steps to help prevent fraud.
  • This employee may not have been so bold if she knew the State may do a surprise audit at any time.Make employees aware that surprise audits may happen, and follow through with those audits. Fear of discovery can be a powerful fraud deterrent.
  • Just like in this example, many instances of fraud are caught by a third party or a tip. Companies should standardize the reporting process with a way for employees to anonymously report when policies and procedures are not being followed. A hotline is a great way to offer that ability to employees.

Preventing fraud in the workplace is about education.  Employees need to be aware of the company or organization’s fraud policies and the consequences for fraud.  This can help lessen the fraud risk and also give employees some guidance on reporting fraud should they observe any red flags.

Mike Rosten on Financial Fridays Radio

Our guests on this week’s Financial Fridays included Clare K. Levison and Stan The Annuity Man. Mike Rosten, CPA, CFE was the guest host for Scott Taylor.

Clare K. Levison is a certified public accountant and national financial literacy spokesperson for the American Institute of Certified Public Accountants (AICPA). She has appeared on major radio and television networks across the country and has served as a member of the Virginia Society of Certified Public Accountants (VSCPA) Board of Directors. She was named one of the 2010 Top Five CPAs Under Thirty-Five by the VSCPA. Clare has more than a decade of corporate accounting experience and is also an active volunteer, serving as PTA president, Girl Scout leader, and Sunday school teacher. She lives in Blacksburg, Virginia, with her husband and two daughters.

Stan The Annuity Man a.k.a. Stan Haithcock, is a nationally recognized expert on annuities known for his transparency, honesty, and endless research. He has spoken at every major financial trade show in the United States. He is rigorously independent, representing all major carriers that meet his uncompromisingly high standards. With a financial background that spans some of the major wirehouse organizations such as Dean Witter, Morgan Stanley, Paine Webber and UBS, Stan brings to his clients an informed clarity and “insider” wisdom that makes him extra careful and cognizant of risks and how to avoid them. In 2005, when Stan became Stan The Annuity Man he determined that each client deserved his undivided personal attention and that his mission was to become a trusted member of each client’s “Financial Team.”  That meant he would be known for fly-to-your-home coast-to-coast service. Today Stan does indeed have clients nationwide. Stan and his wife, Christine, reside in Ponte Vedra Beach, Florida with their two daughters and their Shih-tzu, Cutie the Wonder Dog.

If you have any questions about anything discussed on the show, or if you would like to be a guest, please contact Financial Fridays host Scott Taylor at staylor@pbtk.com or 702-384-1120. Scott W. Taylor’s tax practice focuses on services for a wide range of clients including real estate partnerships, limited liability companies, large and small closely-held corporations and not-for-profit organizations. He started with PBTK in 1992 and was made a Shareholder in January 2005. In addition to his tax work, he also provides services for business consulting, deal structuring, receivership and litigation support services.

Lessons Learned: Segregate Duties to Unmask Employee Fraud

Borrowing a case from the Internal Revenue Service’s list of recent fraud investigations, an experienced office manager was seen as a trusted employee and was given little to no supervision. Unfortunately, she was wearing that trust as a mask to disguise her fraudulent behavior.

Over a span of two years she secretly forged documents allowing her to steal almost $120,000 and commit tax evasion. This was possible because of a lax office environment with little to no internal controls. So how do we unmask the hidden dangers of employee fraud to help prevent these behaviors?

Segregation of duties is often considered to be one of the keys to having successful internal controls in a business. In the case above, the office manager did not have anyone working with her on a day-to-day basis; if she had, they may have observed improper financial procedures well before they were discovered two years later. A business should have more than one person required to complete a task, especially one involving finances.

This helps in two ways:
1. Minimizes minor mistakes. With two or more sets of eyes going over a task, the risk of missing a mistake is significantly reduced.
2. Reduces opportunities for fraud. A successful scheme often heavily relies on one element of the fraud triangle: opportunity. If an employee has proper supervision and knows that several people will be involved in a financial procedure, the lack of opportunity may keep their fraudulent behavior in check.

For more information on how internal controls can help reduce your risk of occupational fraud, please contact a Certified Fraud Examiner at Piercy Bowler Taylor & Kern.
Fraud case source: http://www.irs.gov/uac/Examples-of-General-Fraud-Investigations-Fiscal-Year-2014

What’s your Fraud IQ?

From Accounting Today

Fraud happens in companies of all sizes, in all industries, and in all countries. Given enough time, it will almost certainly happen in a company that does not enact proactive fraud prevention measures. Do you know what initiatives are most effective in deterring potential fraudsters? Are your clients among those who are left unguarded? How well-versed are you in protecting organizational resources from the hands of would-be fraudsters? Take this quiz and find out.

1. Generally speaking, what is the primary objective of a fraud risk assessment?

a. To provide an estimate of an organization’s fraud losses.

b. To help an organization’s leadership identify areas most vulnerable to fraud.

c. To establish the guilt or innocence of an employee suspected of committing fraud.

d. To assess the design and effectiveness of internal controls over financial reporting.

Continue reading at Accounting Today.