In forensic investigations, I often find that bank information is one of the most important sources of information. Banking information includes bank statements, cancelled cheques, deposit books, debit memos, credit memos, wire transfer details, cheque stubs etc.  In the circumstances where you do not have access to the defendant’s banking information, legal counsel can use a variety of methods to obtain the necessary information for purposes of the forensic accounting investigation (including a Norwich Order or Anton Piller Order).

Here are some examples of possible procedures that could be performed in a forensic accounting review of cheques and other banking information:

• Identify who is signing the cheques.  Did that individual have cheque signing authority?  Were two signatures required but the cheques only had one signature?

• Look at the back of the cheque to see who endorsed it and for indications of transfers to other related or suspicious accounts.

• Carefully examine any debit memos and wire transfer advices for transfers to bank accounts of related parties.  I have often discovered corporations and bank accounts of the defendant that were not known prior to the review of bank statements.

• Review the cheques for any unusual payees, alterations to cheques and manual cheques.

• Determine where the cheques were recorded in the general ledger and review bank reconciliations.

The particular procedures employed by the forensic accountant will depend on the purpose of the engagement and the objective of the investigation. Following the trail of cheques in an investigation can provide valuable information.

 

Bruce Roher, CA • IFA, CBV, CFE
President
Fuller Landau Valuations Inc.
151 Bloor Street West 12th Floor
Toronto Ontario M5S 1S4
416.645.6526 Direct
416.645.6500 General
416.645.6501 Fax

Forensic accountants often use the “net worth method” to assess unreported income of a spouse.  This method is based on the premise that an individual’s opening net worth plus income less living expenses equals closing net worth. The net worth is calculated without reference to any increase or decrease in value of assets held during the period of analysis.

Assuming there are no unreported assets, the closing net worth may be obtained from the individual’s net family property Financial Statement.  A net worth statement provided to a financial institution for a mortgage application in a prior year or some similar document may be used to estimate the opening net worth.  Living expenses of the spouse paying child support are estimated based on the sworn budget, available receipts and credit card statements, as well as consultations with the other spouse.  Major expenses would include rent, mortgage payments, food, utilities, vehicle costs, insurance, clothing, child care expenses, tuition fees, loan and mortgage interest, travel and entertainment, income taxes, etc.  Living expenses such as food and entertainment that may be paid in cash without receipts should be estimated on a conservative basis.

For example, assume that the net worth was $500,000 based on a mortgage application filed with a bank two years ago and current net worth is $600,000.  Reported income is $50,000 per year and living expenses are $100,000 per year.  Unreported income may be estimated as follows:

When using the net worth method, the following points should be considered:

1. The spouse may claim that he or she accumulated cash that was on hand and not recorded in the opening net worth.  This claim may be rebutted by demonstrating that the spouse had a poor credit rating, incurred large debts, frequently borrowed money, etc.

2. The spouse may claim that he or she received cash or loan proceeds from family or friends to fund living expenses.  This claim may be rebutted by the absence of documentation supporting the loan, lack of bank account deposits and withdrawals of such funds, etc.

In the recent case of Agribrands Purina v. Kasamekas, the Court offered guidance in valuating insolvent companies. My summary of the case was published in the May 31, 2010 issue of the Law Times. Read More…

I have been contacted frequently about  succession planning matters.  According to a 2010 CICA/RBC Business Monitor Survey to  executive CAs, 60% of respondents working for privately held companies believe the company will undergo a change in ownership structure in the next 10 years.  About one-half indicated that succession had only been discussed and only 11% indicated that a formal succession plan had been started.

Succession planning takes time.  The survey indicated that for the companies that had already started the succession process, 57% of the respondents indicated that discussions on succession began at least five years ago.  It is a fundamental blunder to wait until the founder of the business either experiences ill-health or reaches the age where he/she suddenly takes into acount their mortality.

Interestingly, selling to another business or third party was indicated as the most likely way succession will take place (35%), outweighing transferring the business  to family members (25%).  Selling to management or employees represented only 7% of the respondents and selling to to partners was mentioned by only 6%.

Respondents indicated that the biggest challenge to succession planning was securing the appropriate value (30%), followed by idnetifying the right successor (25%).  Other challenges included:

• Financing for the successor
• Owner doesn’t want to relinquish control or management
• Finding time to plan
• Determining the role of family members
• Tax planning
• Underestimating complexity
• How to pass assets to heirs

I have found that family communication and conflict issues are obstacles in moving succession planning forward.

Clearly, there are a multitude of issues that need to be addressed well before the time a business is to be transferred to the next generation or sold to a third party.  I welcome  business advisors  to recommend the best ways to assist business owners in their succession planning dialogue and to hear  from business owners  on the challenges they face in getting started.

I recently met Wendy Myers who operates Women4Women, a Toronto business that offers education and support to any woman thinking of or going through the divorce process. 

Wendy and her colleagues are committed to ensure that women going through divorce are as empowered as possible to take control of and responsibility for their situations.  They offer one on one coaching, educational seminars and support groups.  I asked Wendy to be a guest blogger and provide an example of a recent case to illustrate how her organization can help women involved in divorce.

 “We have this particular client since our business has begun a year ago.  In the past twelve months this client and her ex-husband have been going back and forth to court.  Their issues are not complicated but they each felt the need to drag the other to court even though neither really had the money, or time, to do so.  It was a tug of war and the issues could have and should have been easily resolvable.  We have worked with this woman in helping her with all her materials as she is self represented but all along have tried to convince her to work it out – not in the courtroom.  Finally, we were able to give our client the tools to sit down with her ex husband and for them to agree to see a parenting coordinator who is also a  mediator/arbitrator so that it would save them both time, money and be a less of an emotionally exhausting process.  Both parties have recently agreed to sit down with the professional we recommended and work out their differences.  We have no doubt that they will be successful, be less stressed, and not spend as much time and money fighting in court.  Now they have the opportunity where they can make decisions regarding their child(ren) and finances and not leave it up to a Judge to decide for them.”

 Wendy Myers can be reached at 647-347-7339 or wendy@w4wdivorce.com.

I have noticed in my practice that there has been an increase in the incidence of fraud claims since the downturn in the economy in late 2008. The subject of this post is corporate fraud. I have identified three warning signs of employee fraud that management should be on the lookout:

1. A supplier who insists on dealing with one employee.

Some purchasing frauds are committed by inflating supplier invoice amounts. A corrupt purchasing agent may be receiving a kickback payment from a supplier for goods purchased from that supplier. The kickback will often be paid directly by the supplier to the employee. Alternatively, the employee may establish a purchasing company outside of the business and mark up products sold to the business.

In order for management to detect this type of fraud, management should:

• Have an employee outside of the purchasing department check supplier invoice prices to price lists and documentation of quotes obtained;
• Review contracts that were issued without competitive bids;
• Require two signatures on all cheques with careful scrutiny of invoices and supporting documentation. Be suspicious of invoices that indicate a post office box as the address.
• Compare all addresses and telephone numbers recorded for employees to the master file of suppliers.

2. Staff who never take holidays

When personnel are not taking annual holidays, it could indicate that the employee does not want other employees involved who may detect that a fraud has occurred. Management should consider insisting that employees take annual vacations and have other employees perform their duties during their absence. Management should implement a policy of rotating job responsibilities and cross training employees to perform different positions.

3. Sudden change in lifestyle

Management should be suspicious if an employee has a sudden change in lifestyle or appears to be living beyond his/her means. In many cases, fraud occurs because an employee is desperate for funds beyond the income earned from the employer.

In my practice, I help corporations implement appropriate internal controls to help reduce fraud or increase the detection of fraud. Should you wish to discuss further, please respond to this post.

I recommend a helpful book titled, The Joy of an Ex. For those of you involved in a divorce, the book will help you understand issues such as:

• Can you save your marriage?;
• Understanding your emotional transition through divorce;
• Understanding the fundamentals of the family law process;
• Avoiding the common financial mistakes families make in divorce;
• Considering your children – structuring a workable parenting plan;
• Community support programs;
• After the divorce has gone through; and
• The next relationship.

I believe this book will be an invaluable resource that shares the wisdom of more than 50 contributing authors.  I authored the chapter titled “Forensic Accounting”.  To preview or purchase a copy, click on the icon to the right of this blog or Click Here.

If you are in the initial stages of a divorce, the most important first step is to select a lawyer. Here are some of the key factors to consider when you are selecting a lawyer:

• Type of legal model that is appropriate for you (i.e., litigation, mediation or collaborative). Please see my previous blog on October 31, 2009 for a description of the different types of legal models.

• Experience of the lawyer it is best when the lawyer specializes in family law.

• Experience of the opposing lawyer retained by your spouse;

• Is the lawyer’s gender important to you?

• Style of the lawyer preference to litigate vs. settle cases.

• Location of the lawyer.

It is important to interview the lawyer to ensure that there is a good fit with you. I am often asked to provide clients with a list of lawyers. If you are interested in my recommendations, please feel free to contact me.

After you have retained a lawyer, you will be asked to prepare a Financial Statement. The first part of this form asks you to record your monthly income and each type of expense. This can be a very challenging task, particularly gathering support for each expense category. The second section of the form asks you to record your assets and liabilities both at the date of separation and the date of marriage. In order to complete this section, you may need to obtain the following types of supporting documentation:

• Real estate appraisals of the matrimonial home and cottage;
• Bank account statements;
• RRSP statements;
• Valuation of any business interests;
• Life insurance details including amount of insurance, beneficiaries and cash surrender value;
• Pension valuation;
• Monies owed to you or by you;
• Bank loan or line of credit statements;
• Other debts and liabilities; and
• Gifts, inheritances or life insurance proceeds received during marriage from third parties.

As a professional business valuator and forensic accountant, I would be pleased to assist you with the disclosures required.

I find it rewarding to help families deal with succession planning issues in family businesses. I am a director of The Ontario Chapter of Family Firm Institute (FFI), which is an organization focused on three pillars:
1) interdisciplinary education,
2) networking opportunities for family business advisors and
3) to increase public awareness about trends and developments in the family business and family wealth fields.

FFI has been an excellent netwoorking source to meet other professionals who advise family businesses.As a business valuator and family business advisor, I am frequently asked for the best method to maximize the price of a business when the business founder decides that transition of the business is not to be passed on to the next generation. Preparing your business for sale means much more than sprucing up its curb appeal and the organization and cleanliness of the plant. Clearly, these are important factors to create a positive first impression. However, there is a substantial amount of planning that should take place well in advance of exposing the business for sale. While the preparation process can be time consuming, the following 5 steps can significantly increase the price realized for your business.

Step # 1: Update and Normalize Financial Statements

One of the most important information items that potential buyers will be relying on will be your companys financial statements. If they are unaudited, you may want to consider upgrading the quality of the financial statements to an audit. The key advantage of audited financial statements is that financial information will have more credibility in the eyes of the buyer and may enhance the value of your business.

The business owner and advisors must have a good understanding of the reasons for fluctuations in revenue, gross profit percentages and expenses from year to year. Furthermore, it is a good idea to normalize the historical financial statements to show the true profitability, by adjusting for items including uneconomic management remuneration. salaries paid to non-working family members, benefits paid on the owner’s behalf that would likely not be incurred by a buyer; and non-recurring expenses.

Step # 2: Prepare Projections

A well reasoned and realistic business plan incorporating a projection of future profit for the next one to five years can result in a significant increase in the value of a company. Therefore, such projections are an excellent vehicle to paint a picture of the future plan for the business, specifically identifying growth opportunities and untapped expansion potential.

The preparation of projections may allow you to demand better terms, as it may convince buyers of the growth potential of the business. A properly prepared business plan and projection may also enhance the buyers ability to secure financing for the purchase.

The projections are developed using a “bottom-up” approach. This means that the projection is built upon the underlying assumptions (e.g., number of units that can be sold each month; selling price per unit; actual and potential customers, market penetration, etc.).

Step # 3: Gain an Understanding of the Value of Your Business

An outside valuation of your business has the following advantages:

Prevents leaving money on the table by under valuing the business;

If the lowest price that an owner will accept greatly exceeds the business valuation, it may not be the best time to sell the business;

Provides a benchmark for evaluating bids for the business;

Provides an understanding of the value drivers of your business which can enthuse prospective buyers about your business and indicate those drivers which are currently “weaknesses” that need to be addressed prior to the sale.

One of the best ways to enhance the value of your business is to take the current weaknesses in the business and change them into positive factors. For example, over a period of time, changing a business with a high percentage of sales derived from a few large customers, to one with a broader customer base can result in a significant enhancement to the value of the business.

There are many excellent resources dealing with this stage in the sale planning process. I recommend “Good to Great“, by Jim Collins and “100 Ways to Win The Profit Game“, by Barry R, Schimel, CPA and Gary R. Kravitz. Also, an independent business valuation can be conducted or an operational review of your business can be performed to recommend strategies to enhance the value of your business.

Step # 4: Plan for Tax Consequences of Sale

It is imperative that you consider the tax implications of a sale well in advance. For example, if the business satisfies the criteria for a Qualified Small Business Corporation (“QSBC”), a sale of shares could qualify for a $500,000 capital gains exemption. If the business does not satisfy the criteria because some of the assets may not be used in an active business carried on in Canada (e.g., marketable securities, real estate, excess cash, etc.), it may be possible to “purify” the company by transferring these passive assets to another corporation.

You should also consider whether it is more advantageous to sell shares or assets. Vendors usually desire to sell shares, primarily to obtain the capital gains exemption. On the other hand, purchasers usually want to buy the assets of the corporation for two primary reasons:

The purchaser will not be responsible for liabilities that are not known at the date of closing; and

On an assets purchase, the buyer has the ability to step up the cost base of depreciable property to fair market value, thereby increasing the capital cost allowance available to be deducted against future taxable income.

It should be noted that in most circumstances it is necessary to have held the shares in the QSBC for a period of 24 months to take advantage of the capital gains exemption.

Step # 5: Diversify Management Talent

If you ask a private equity firm what is the most important factor in assessing whether or not to invest in a business and what price to pay, the first response is usually the quality of management.

Businesses that depend solely on the owner may have difficulty selling and the price of the business will be negatively impacted because of the increased risk from the buyers perspective. When a business is too dependent on the owner, there is risk of loss of customers that only have a relationship with the owner, key employees that have remained with the company because of the owner and suppliers who may have had a long-term relationship with the owner.Therefore, it is critical to broaden the strength of the middle management team to reduce the risks in these areas.

I’m Bruce Roher, a Chartered Business Valuator in Toronto.  I am a partner at Fuller Landau LLP.  One of my areas of expertise is assisting spouses to deal with financial issues in a marital breakdown.

If you are involved in a divorce, before deciding on a “traditional divorce” path using the court process, I would consider a “collaborative divorce”

A key difference between a collaborative and traditional divorce is the pledge to reach an agreement without going to court.  Spouses going through a conventional divorce often become adversarial, and can end up in court. The ensuing conflicts can take an immense toll on all the participants, especially the children.

In a collaborative divorce, the spouses and their lawyers pledge in writing not to go to court. The separating couple meet with their lawyers and any other professionals they choose to involve in a series of meetings to work out an agreement. While each case is different, several meetings may be all that is needed to come to an equitable agreement. The collaborative approach allows separating couples to put child support and parenting agreements in place without having to wait months or years for a court ruling.

The cooperative nature of a collaborative divorce can greatly ease the emotional strain caused by the break-up of a relationship, and protect the well-being of children. If either party decides to leave the collaborative process and go to court, then both collaborative lawyers are required to resign from the case. This agreement ensures that everyone works hard at achieving a settlement acceptable to both spouses.

You might notice the current advertisement for Collaborative Practice Toronto in the TTC subway cars (see below).  Should you require further information regarding a collaborative divorce, please visit www.collaborativepracticetoronto.com or reply to me at: broher@fullerlandau.com

Bruce Roher, CA • IFA, CBV, CFE
President
Fuller Landau Valuations Inc.
151 Bloor Street West 12th Floor
Toronto Ontario M5S 1S4
416.645.6526 Direct
416.645.6500 General
416.645.6501 Fax