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The Expert
Winter 2012 l December 2011 l Fall 2010 l Summer 2010 l Spring 2010 l Winter 2010
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Rules of thumb are mathematical formulas designed to gauge value. Some business brokers, company owners and trade associations may propagate these rules of thumb as convenient yardsticks for estimating a company’s value. But do such rules of thumb have a place in today’s business appraisals? This article shows that they do, but explains why they should never be used as a sole valuation method. And a section notes that using oversimplified rules of thumb differs from applying the market approach to value a business. 
If an executive and his or her attorney head to court to litigate a given injury, they should bear in mind that the lost profits calculation used by their financial expert will depend on the context of their case. This article explains how a valuation expert chooses the discount rate, which must accurately reflect the expected risks the particular business would face in the absence of the injury. The expert will also look at such issues as illiquidity and excessive debt, the company’s product line, management depth, and dependence on key employees. 
This article looks at a recent court case in which the IRS argued that assets transferred to a family limited partnership (FLP) should be included in the transferor’s taxable gross estate. The provisions of the partnership agreement came from a standard form the decedent’s attorney used for such agreements. But, according to the Tax Court, the agreement didn’t necessarily reflect the decedent’s actual, primarily testamentary, reasons for forming the FLP. The court explained the specific reasons why the agreement failed to meet the requirements of an FLP. 
The FBI reports that fraudsters are increasingly using technology to target the financial accounts of businesses, resulting in substantial monetary losses. This article looks at “phishing” schemes and their variants, and explains how a fraud expert can help a company beef up its defenses, and perhaps even trace the path of stolen funds after they leave a business account.
Merger and acquisition (M&A) transactions can be daunting endeavors for both buyers and sellers. That’s why they both can have a better shot at a winning deal if they use financial experts proficient in valuation methods. This article describes the specific assistance that experts can provide before, during and after the deal. A section explains why it’s beneficial for businesses to always be prepared to sell even if they have no current plans to do so. 
Under the market approach, appraisers use guideline companies to help them estimate the value of a private business. With so many companies in circulation, this approach has become a long-standing valuation touchstone. This article discusses two primary valuation methods that are categorized under the market approach: the guideline public company method and the guideline merger and acquisition method. 
Some cases that go before the U.S. Tax Court are more dynamic than others. This article looks at one estate valuation case in which the court addressed two areas of dispute: the propriety of tax affecting and the guideline public company valuation method. 
With the economy in turmoil, many employees may be tempted to indulge in occupational fraud. Fraud experts can help companies detect such wrongdoings — and potentially recover their funds — by identifying and tracing misappropriated cash assets via the point of payment. This article specifically looks at schemes involving fictitious billing and ghost employees. 
One challenge that companies face today is identifying assets acquired before the global financial crisis that have since declined in value. Once identified, management must quantify and report the amount of impairment. But estimating and reporting impairment is a complex process, and many in-house accounting personnel lack the requisite training to test for asset impairment — or to provide testing that can withstand outside scrutiny. This article provides an overview of impairment and shows why it’s imperative to hire a credentialed appraiser to get impairment testing done right. A sidebar looks at common impairment testing pitfalls. 
In a time of great economic uncertainty, the estimated value of a given company can seemingly turn on a dime. To bring clarity to the situation, appraisers can calculate a company’s “normalized earnings.” This process allows them to determine, among other things, whether a struggling business is being mismanaged or whether a prosperous company is doing as well as it seems. This article looks at the different accounting methods that may lead to a need for adjustments, and examines the kinds of adjustments that valuators make. 
Many people believe that an outside damages expert can lend credibility and objectivity to a legal argument. But, every so often, this belief is put to the test. This article examines one court battle in which the plaintiff alleged misappropriation of trade secrets. In disputing liability for compensatory damages, the defendant argued that the damages expert provided insufficient evidence to support its lost profits calculation. But the court found that the expert’s assumptions were well supported by the evidence and testimony of several independent witnesses, and awarded the plaintiff the full amount of compensatory damages. 
As digital data has become indispensable in almost every industry, the incidence of computer fraud has climbed accordingly. Although the schemes can prove difficult to detect, it’s possible to help clients minimize their losses by understanding the typical methods of computer fraud and calling in qualified experts at the first sign of trouble. This article discusses three types of computer manipulation schemes. 
Absent congressional intervention, proposed amendments to the Federal Rules of Civil Procedure will likely foster significant changes in expert witness practices. The proposed amendments, with three exceptions, make draft reports between an expert and the retaining attorney subject to work product protections. This article discusses these amendments, the impetus for their creation, and their implications for the development and discovery of testifying witnesses’ draft reports. A section talks about the effect of a similar rule upon discovery practices in New Jersey. 
In today’s uncertain and competitive business environment, economic damages can be particularly devastating for a new or as-yet-unlaunched company. Under such difficult circumstances, appraisers can help these “green” businesses in court by using specific valuation techniques to calculate estimated damages. This article explains how financial experts make projections and apply discounts when little or no performance data is available. 
In addition to achieving other legitimate business purposes, holding discounted units in a family limited partnership (FLP) can result in a lower estate value than holding the underlying, undiscounted assets in an estate. Yet, the IRS has successfully used IRC Section 2036 to persuade the U.S. Tax Court to eliminate discounts for lack of control and marketability in several FLP cases. This article reviews an exception to that trend — a case in which the agency wasn’t successful. 
When it comes to interviews with suspected fraud perpetrators, qualified fraud experts often can get the best results. They’re well trained to pursue suspicions of financial fraud, elicit new information and detect deception. This article explains what to expect from the fraud interview process. 
The extent of access that parties should have to each other’s electronically stored information (ESI) continues to roil the courts. In one recent case, a court looked into whether a plaintiff could make “mirror images” of the defendants’ hard drives. The defendants made three arguments: 1) state law prohibited this disclosure of privileged health information; 2) “broad” search terms would surely “pull up” privileged information; and 3) state regulations didn’t authorize unrestricted direct access to the drives. But the court disagreed, citing evidence that raised an inference of the defendants’ improper conduct in handling the information. 
If the respective valuation reports of two parties are so far apart that an agreement seems unlikely, a third appraiser can provide another opinion in the form of a rebuttal report. Rebuttal experts streamline the appraisal process and reduce overall appraisal costs. Rebuttal reports also facilitate settlement by pinpointing differences and putting technical appraisal issues in more user-friendly language. But rebuttal reports come in many forms, and court procedural rules and professional appraisal standards provide little guidance on how to prepare written rebuttals. 
Billing schemes rank among the most common types of occupational fraud, according to the Association of Certified Fraud Examiners (ACFE). But fraud investigators have several tools available to ferret out billing schemes, including data mining, ledger reviews, statistical sampling, and anonymous hotlines. 
In a difficult economy, many parties want to point fingers when projected results fall short, acquisition synergies fail to materialize or insolvency ensues. For this reason, among others, fairness opinions are becoming increasingly popular. Simply put, a fairness opinion addresses whether a transaction appears “fair” from a financial point of view. Fairness opinions aren’t legally mandated, but they can help facilitate major transactions, such as mergers and acquisitions (M&As), spin-offs, stock repurchases, and divestitures. This article looks at what goes into fairness opinions and their different applications, while a sidebar discusses potential conflicts of interest among fairness opinion providers. 
When a business suffers what it believes to be wrongful conduct leading to lost profits, an appraiser is often asked to estimate “what might have been.” That is, for the resulting litigation, he or she must typically calculate, not just lost sales, but also the difference between lost sales and avoided costs. The appraiser starts by distinguishing between direct and indirect costs. He or she is then free to use multiple methodologies and compare the results to historical data, independent estimates or industry statistics. A lost profits calculation is a complex endeavor — but it’s often absolutely necessary in certain forms of litigation. 
In a recent case, a federal court upheld a family limited partnership (FLP) in an estate tax refund case — even though the FLP wasn’t funded before the decedent died. How did the family involved pull this off? It was important that state law provided that an owner’s intent to make an asset partnership property caused that asset to become the partnership’s property — regardless of whether legal title was transferred. 
These are busy times for fraud investigators, with businesses more concerned than ever about protecting their bottom lines. One way a company’s profits could suffer is if it’s struck by vendor fraud. But by recognizing the signs of this crime and initiating a timely investigation, businesses can minimize the resulting losses. If vendor fraud or another fraudulent scheme is suspected, a fraud expert’s involvement is critical. There are five common schemes to watch out for. 
“Good governance” is one of the hottest topics in the nonprofit world these days. Nonprofits have been strongly encouraged to adopt certain Sarbanes-Oxley (SOX) regulations, and the IRS has revised Form 990 to include several questions regarding governance policies. What’s more, the increasing power of charity watchdog groups means that nonprofits must try to put a responsible face forward to the public. This article offers a checklist of recommendations that a nonprofit’s board might follow, including forming an audit committee and regularly reviewing risk exposure. A sidebar discusses what constitutes “reasonable” executive compensation. 
Audits take considerable time and effort, but they provide nonprofits with fair assessments of their financial health, in addition to revealing vulnerabilities such as weak internal controls, insufficient cash reserves and poor investment policies. And although the newly revised IRS Form 990 doesn’t mandate them, the IRS does ask organizations to discuss their audit activities, as well as the role their board plays in them. This article looks at the difference between internal and external audits, the role of the audit committee, and how to prepare for an audit. 
As long as an IRS examiner isn’t knocking at the door asking specific questions, many nonprofit leaders don’t volunteer information. In some cases, however, it could be to their advantage to do just that. If, for example, a mistake is uncovered in a filing, taking a proactive stance with the IRS can help minimize potential hassles and penalties. It’s important to get professional advice, learn the facts, and keep a sense of perspective. The IRS is likely to be more amenable to finding a solution for nonprofits that approach it voluntarily. 
At a time when many nonprofits are scrutinizing every line item in their budgets, one item in the crosshairs is payroll processing. But the decision regarding whether to bring payroll back in-house should be studied from every angle. Who will manage it? Are there sufficient checks and balances ? What about technological capabilities? Before deciding that a payroll vendor is one of those costs that can be cut, it’s important to remember that they provide expertise and experience that may not necessarily exist in-house. 
If you believe, like we do, that taxes and interest rates will rise at some point, what’s your plan? Are you going to “grin and bear it”, and give the IRS more of your money, or are you proactively searching for ways to keep more of your money, and increase your income when rates rise?