23 Jul

Pay Support or Go to Jail?

Last week Dukes of Hazzard star John Schneider asked a judge to send him to jail because he can’t pay the spousal support he owes. Schneider apparently owes over $150,000 in alimony to his ex-wife Elly Schneider. He was previously sentenced to 3 days in jail for contempt for his failure to pay, but was let out right away because of jail overcrowding.

The court set certain conditions for him to avoid additional jail time, including paying Elly half of the earnings he is owed from Maven Entertainment, filing certain tax returns, and making certain financial disclosures.

But John would rather do time behind bars because he says he can’t pay. He says he’s taken out all sorts of loans and can’t do it anymore. When they divorced, he was ordered to pay nearly $19,000 per month in alimony. Read More

19 Jul

Keeping Forensic Reports Simple

Making complex transactions easy to understand is no small task, but it is part of the job of any good fraud investigator. You can find the most earth-shattering proof of fraud, but if you cannot articulate your findings in a report that others can understand, your investigation results are not worth much.

Use graphs, charts, and tables to help illustrate your points. Even though you may not need a graph or chart to demonstrate your findings, consider that the reader of your report might benefit from it. Remember that people learn and comprehend in different ways, and that fact could be very important if your case ever goes in front of a jury.

One juror might understand your written words best, so it is important to make the report very reader-friendly with short, well-organized paragraphs. Other jurors might understand the most by listening to your court testimony, which should support and reiterate the written report. Other jurors might be most receptive to pictures or charts that demonstrate what you have found. Read More

09 Jul

Rules For Getting Through a Tax Audit

Tax audits are scary, especially if you’ve got unusual income or deductions. The assumption is that at the end of the process, you’re going to owe the government money.

You can help yourself in the audit process, however, by following 4 simple rules:

  1. Shut up – You may think you’re helping by talking and volunteering information. You’re not. Even truthful answers can hurt you when talking to an auditor. The goal during an audit is to provide information but NOT raise additional issues or questions. There are right and wrong answers to the auditor’s questions, and the taxpayer often does not know the difference.
  2. Hire a professional – A competent professional will know those right and wrong answers. She knows how to be consistent in answer and not contradict information already provided. She knows what documents will support the position you’re taking in the audit, and she can give the best explanations. Let her answer questions for you.
  3. Prepare your documents – If you’ve done a good job of keeping records, this will be easy. Start pulling together documents right away, but don’t turn anything over until your attorney or CPA has gone through them. Do NOT volunteer extra data or documents to the auditor. Give him only what he needs to answer the questions that were asked.
  4. Do not let the auditor on site – Whether you work from home or in an office, you do not want the auditor there. They could overhear something or see something they shouldn’t. All meetings with the auditor should take place at your attorney’s or accountant’s office. It is much easier to control the documents and the flow of information this way.
05 Jul

Determining Income in Divorce and Child Support Cases

When attempting to calculate the income of a party in a divorce or child support case, it is important to remember that income is not determined simply on the basis of historical earnings. It is necessary to also consider the future prospects for income, and how the income scenario may change following the divorce. For example, one of the spouses may encounter a job change with a related change in earnings. Even if a change is not the result of the divorce, it still must be considered as changes in earnings may change a spouse’s ability to pay support.

In evaluating historical income, it is necessary to consider whether historical income was abnormally high or low for some reason. For example, suppose a business run by the spouse had lower net income in the past because there was a substantial investment to increase the capacity of the business. The investment included operating expenses and depreciation of fixed assets, which lowered historical earnings, but created an opportunity for the company to generate higher income in the future. Thus, the projection of future earnings must not rely solely on the historical earnings, but must consider the future prospects for income. Read More

02 Jul

Questions for New Clients

What questions do you ask a new potential client?

Nearly all of my work comes from attorneys, on behalf of their clients. I have two clients: the attorney and his/her client.

My questions are pretty much the same no matter which of them I’m talking to on that first phone call. The most important questions I ask are things like:

  • What kind of case is this – I am looking for some specifics of who is involved and what is going on.
  • What do you need me to do – Are they really in need of a forensic accountant, or do they need someone else, like a private investigator? Are they looking for services that I provide? For example, I trace funds in a divorce, but I do not provide business valuation services.
  • When does the work need to be done – I do most of my case work in 60 to 90 days. That’s great for clients, but it also means that there are cases I can’t take because I’m already at capacity.
  • Can you pay my fees – This might sound impolite, but I have to earn a living. This is where I explain my fixed fees and the deposit I require. I may ask about their budget to ensure that we are on the same page. (Even though I can’t quote a fee this early, I often get a feeling for a range of fees.)

Figure out the questions that are most important in your practice, and be ready to ask them of any potential new client.

27 Jun

Taxes: Guilty Until Proven Innocent

Taxes: You’re guilty until you prove yourself innocent.

That’s the way it works with the Internal Revenue Service. You have to be able to prove the numbers on your income tax return. If you can’t, the IRS auditor will pick a number and it’s up to you to prove them wrong.

It sounds unfair, doesn’t it?

Of course it does, but that’s the way the law works in the U.S. In normal criminal cases, you’re presumed innocent until the government proves you guilty. In tax cases, it’s the other way around.

Taxpayers run into trouble when they don’t have documentation to support the numbers on their tax return. What if the IRS believes a business has unreported income? Maybe the company has bad documentation. The IRS may use bank records to prove their case, assuming that all of the deposits are revenue. They may make an assumption that additional revenue was not deposited and was concealed. They have all sorts of methods to calculate what they think these numbers are.

That’s where a forensic accountant comes in. She can help shoot holes in their theories and their methods. Things get complicated quickly, and you need an expert who is well-versed in the methods the IRS uses to calculate income.

I help attorneys evaluate the numbers in tax cases (either civil or criminal) and challenge the government’s numbers.

Read More

26 Jun

Should You Investigate Suspected Fraud?

When an internal fraud (one committed by employees) occurs at a company, the natural reaction is to assume that an investigation must be started immediately. After all, it is important to determine who was involved, exactly how the fraud was committed and covered up, and what evidence exists to prove the fraud.

Intuitively, that makes sense. In reality, it’s not always the way things go. Whether a fraud is fully investigated often depends on the estimated size of the fraud and the size of the company in question. It does not always make sense for a company to investigate a fraud because of the cost involved.

For a public company, an internal fraud is probably always going to be investigated to some degree, and the larger the fraud, the larger the investigation. Many regulations must be followed, and it’s imperative that financial statements be restated if necessary. To determine the amount of the fraud, the effect on the financial statements, and whether the financial statements need to be restated, an in-depth investigation is usually required.

But for private companies, it is not so certain that an investigation must be done. There are a variety of reasons why. It is important to first understand that the recovery of the proceeds of fraud is typically very small. The Association of Certified Fraud Examiners (ACFE) reports that in more than  50% of cases, victim companies recover nothing. So to undertake an investigation with the intention of recovering significant money from the thief is probably misguided. If a victim company is fortunate enough to have insurance coverage for the fraud, an investigation must be initiated to help compile a proper insurance claim with supporting documentation.

Yet there are times when an investigation should be done, even if money is unlikely to be recovered. Management may conduct an investigation because they are not sure who was involved in the fraud and need to identify all responsible parties. They may also be unsure of the exact methods used in the commission of the fraud, and an investigation will help nail down this aspect. Fraud investigations play an important part in fraud prevention efforts; finding out exactly how a fraud was perpetrated and who was involved can go a long way toward preventing future frauds.

 

21 Jun

Rebuttal Reports

My favorite part of being a forensic accountant is rebuttal reports. An attorney comes to me with an expert report filed by the other side, which details some sort of economic loss. My job is to analyze that report and poke holes in it.

The things I will potentially criticize might include:

  • The numbers are wrong – mistakes were made in the calculations, wrong numbers were used, transactions were skipped or incorrect, etc.
  • The methods used to calculate the numbers are not widely accepted or used in the accounting profession
  • Assumptions used were unreasonable or inappropriate
  • The quality of data used in the calculations was suspect or unreliable in some way
  • Procedural errors may render the results unreliable – the process for validating numbers was bad, wrong documents were relied upon, etc.
  • Important information was ignored or glossed over -maybe it was detrimental to the other side’s case, which is why they ignored it
  • Facts unknown to the other side materially affect the numbers – sometimes we know important things that they do not

Sometimes I will offer an alternative way to calculate the numbers, and sometimes I won’t. That is up to the attorney when he/she defines the scope of my work.