How Do I Calculate Fixed Fees

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How do I come up with a fixed fee for a forensic accounting engagement? I’ve been doing fixed fees for almost 23 years, so I’ve developed a pretty good formula.

With a fixed fee, a client is paying for a result, rather than buying my time. In most of my cases, the “result” is an expert report.

The following things go into the fee:

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What’s the Big Deal About Financial Statement Fraud

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The manipulation of a company’s financial statements does not occur as often as asset misappropriation schemes like payroll fraud, check kiting, or inventory theft. And the losses from financial statement fraud aren’t readily apparent to most people. When money is stolen directly (asset misappropriation), it’s easy to see what the harm is to the company.  Financial statement fraud schemes are much more costly than other types of fraud. Some may wonder what the losses in a financial statement fraud could be. After all, the employees involved are just manipulating numbers on paper, but there is really no harm to anyone, right? Wrong.

Financial statement fraud is so expensive because its effects are far-reaching. Just a few of the many effects of financial statement fraud include:

  • Bank offers a loan that is riskier than it believed.
  • Stock price becomes inflated.
  • Company pays higher bonuses than it should.
  • Executives issued more stock options than they deserve.

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Companies at Greater Risk of Financial Fraud

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What kinds of companies are more prone to fraud?

In my business, we talk a lot about the red flags of fraud. There are two different types of red flags: the kind that suggest that a fraud is currently in progress, and the kind that puts a company at greater risk of fraud.

In this video, I talk about a few of the characteristics of companies that seem to put companies in greater danger of becoming a victim of fraud by employees. Some of these red flags include:

  • Executives act autonomously
  • Authority is not delegated
  • Distrustful management
  • Management driven by the pursuit of power

After the Fraud Investigation

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After an internal fraud is discovered and fully investigated, a company and its employees must move forward. That might seem like a simple thing to do, but it is not always quite that easy. The financial blow of an internal fraud can be devastating. Employees have long-term memories that may not allow them to forget about the violation of their trust by someone who worked side-by-side with them or by someone who was responsible for their future.

The most obvious potential long-term effect from an employee theft is financial devastation. Companies lose something on the order of 4% to 5% of revenue to internal fraud each year. Imagine how many companies could be put out of business with a fraud of that size.

The first step to moving beyond an internal fraud, especially a significant fraud, is repairing the financial damage. Often, cash reserves have been depleted and debts have mounted while the dishonest employee was filling her or his pockets. A plan to repair the company’s finances should be established quickly. Continue reading

Why It Is So Easy to Commit Fraud

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It sometimes seems like it’s easy to commit fraud at work. Why is that so?

One of the main reasons is that employers must put trust in their employees and give them access to data and assets. It’s also important to remember that employers give responsibility to people who are trusted. If someone wasn’t deemed trustworthy enough to take money to the bank, she or he wouldn’t be handed the bank deposit. That trust inherently means that opportunities to commit fraud are handed to employees each day. Continue reading

Net Worth Method to Prove Unreported Income

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When an IRS auditor or criminal investigator suspects that a taxpayer has unreported sources of income, he or she looks for ways to calculate that unreported income. One way is the net worth method of proof.

Forensic accountants and fraud investigators can use the same method to calculate unreported income in other types of cases, such as divorce. In this video, Tracy describes how the calculation is done and how the results may be used.

Fraud Investigations vs. Audits

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After management becomes aware of a potential fraud and decides that a fraud investigation is necessary, the process of creating a team, mapping the investigation plan, and requesting information begins. An organized approach is the best way to ensure that all facets of the investigation flow smoothly, that staff is properly assigned and supervised, and that all critical evidence is analyzed.

Many of the administrative parts of a forensic accounting or fraud investigation project are similar to those in a traditional auditing assignment. For those who have played an active role in managing audit engagements, some of this information will be familiar. Continue reading

A Forensic Accountant As a Consultant

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Forensic accountants are often retained in litigation as expert witnesses, with the intention that they will provide expert opinions and testimony on behalf of the client. Although retention as a consultant is less common, it is an important option to consider. Sometimes, the work of the consultant can be even more important than the work of the testifying expert. The consultant may be able to dig deeper into sensitive issues because there is no fear of testimony or of disclosing the consultant’s work.

Maintaining privilege
One of the biggest benefits to retaining a consultant is the fact that the consultant’s communications and work product enjoy privilege. Because the consultant is essentially an extension of the law firm, the identity of the consultant, the scope of work, the evidence examined, and the results of the work need not be disclosed to opposing counsel. (Note that documents examined by the consultant may very well need to be disclosed as part of the discovery process, but the consultant’s work or impressions of the documents should not be disclosed.) Continue reading

What to Do After a Fraud Investigation

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After a fraud investigator is done with her work and has issued the expert report, company management and retained attorneys must decide what to do with the information presented. If the case is already in litigation, the use of the report is obvious. If the company has not yet taken action, a few options should be considered.

Internal Discipline

It is natural to want to dismiss an employee as soon as it is apparent that the person has committed a fraud. It is often safer for the company to have the suspect off-site, so that no more fraud can occur, but it is important to realize that this may also hamper the gathering of information. For this reason, some companies decide not to immediately terminate the employee. If the employee is still actively employed by the company when the fraud investigator’s report is issued, a decision must be made about her or his future. The company could decide to do nothing if sufficient evidence is not available or if the evidence exonerates the employee. Continue reading

Expert Reports and Testimony in Divorce Cases

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The culmination of a financial expert’s work in a divorce or child support case is the expert report. This is followed by testimony, at deposition and possibly trial. The process of reporting and testifying should not be taken lightly, as these tasks make the financial analysis come to life.

The forensic accountant or financial analyst will complete a lifestyle analysis or other financial analysis, typically producing a report that can be understood by non-accountants. The financial expert always runs the risk that a user of the report will not understand it. This is especially precarious when the user of the report is the judge in the family law case.

The Report

Although a written report is not necessarily required of a financial expert in a family law case, a written report is recommended because it is the best way to present complicated financial issues. The report is a roadmap of the financial issues for the attorneys and the judge. Continue reading