Welcome to our Winter issue of Valuation/Litigation Insights.Through this publication, our hope is to bring our friends in the business community original, internally prepared perspectives that are brief, meaningful and useful.With each article we identify our intended audience, allowing you to focus on what is relevant for your practice or business. Please let us know if there are any topics you would like to see addressed in future issues.

Joint Appraisal Expert

Considerations in Collaborative Divorce Matters

[This article is intended for Family Law Attorneys and others using valuations in litigious matters]

A growing trend in the marital dissolutions arena is the joint retention of a business valuation expert. This article identifies practical considerations to ensure that an otherwise emotional experience is tempered by logical thinking. We recommend that the following protocols be established during the early stages of an engagement:

Communications protocols - Clear protocols must be established to address communications between the expert and the parties to the case, the expert and legal counsel, and the expert and any rebuttal experts. Great effort must be taken to avoid the appearance of favoritism of one party over another. Additionally, responsiveness must be ensured to prevent excessive amounts of time trying to resolve he said / she said issues.
Cooperation protocols A methodology to require cooperation from both parties, and consequences for lack of cooperation, will help ensure full and timely disclosures.
Fee protocols Which party(ies) is (are) responsible for payment should be clearly identified at the outset of the engagement.
Scope expectations If one party wishes to engage the expert to provide forensic accounting and/or income determination services, such wishes should be identified early on. The cooperation protocols should help ensure responsiveness from the other party.
Reporting protocols The utilization of draft reports allows both parties to have insights into the experts thought process and provides an opportunity to provide meaningful clarification. Drafts should be viewed as an opportunity for full and open disclosure.

With a little advanced planning, these straight-forward procedures will minimize the opportunity for emotional, and expensive, delays to the valuation process.

The Fight Must Go On

Recent Fraud Statistics and a Declining Economy = Great Risk

[This article is intended for professional advisors, business owners, members of management and board members.]

Over my career I have worked with numerous business owners who were victimized by fraud; fraud perpetrated by their own employees. Never, not even once, have I heard I expected that hed do that to me someday or I saw that coming from the time I hired her. That does not happen. Victims of fraud are victimized because they put too much trust in a few people and too little emphasis on strong internal controls.

Generally, fraud occurs when 1) significant faith is placed in an employee, 2) that person faces some sort of pressure (debt, greed, peer pressure, addiction, etc.), and 3) that person is able to rationalize inappropriate behavior. It also occurs when business owners 1) falsely believe that improved internal controls will be costly or cumbersome, 2) are afraid to offend employees by strengthening internal controls, and 3) blindly trust their employees.

How Bad is the Problem

Here are a few interesting statistics from the Association of Certified Fraud Examiners (ACFE) September 2008 Report to the Nation:

The average fraud had been going on 2 years before it was detected,
The median losses were $175,000,
Privately held companies were the most common victims of fraud (followed by public companies, governmental entities and not-for-profits),
Members of the Accounting Department and/or upper management accounted for 46.7% of all frauds,
87% of fraudsters had never been charged or convicted of a crime; 83% had never been terminated from a prior job,
More than 50% of fraudsters had worked for their employer for more than 5 years,
Fraudsters were typically men (59%), but women (41%) were commonly culprits too, and
Organizations who had invested in anti-fraud controls suffered substantially less damages than those who had not.

Why me

As the economy continues to struggle, fraud investigators are expecting an increase in fraudulent financial activity. To this end, the FBI recently announced it is doubling the number of special agents focusing on financial crimes. Why should your organization be worried about preventing fraudulent activity Because the risk is real. Many victims have experienced the unpleasant shift from the confident assertion It will never happen to me to the humble question, Why me

Whats a Person to do

Heres a cluenothing is not the right answer! Through employee training, improvements to internal controls and policy implementation, damages can be reduced substantially. For example, the ACFEs 2008 report noted that:

Organizations conducting surprise audits averaged $70,000 in losses when victimized by fraud; those who did not averaged $207,000,
Organizations with fraud hotlines averaged $100,000 in losses when victimized by fraud; those without averaged $250,000,
Organizations training employees averaged $100,000 in losses when victimized by fraud; those not providing training averaged $208,000.

These are just a few of many practical and cost effective procedures a Company can implement.

The Economy is Bad I Dont have $ for That

Really With one small exception, the most we have ever charged a Company to improve its anti-fraud stature is less than the least we have ever charged to investigate a fraud after it occurredand our fees for the investigation obviously did not include the losses associated with the fraud itself. One client best put it this way, We have fire insurance, as we should, but we will probably never use it. We did nothing to try to prevent fraud, and the odds were high that wed fall victim to it. I could not have said it better myself.

In the End

In the end, business owners and managers are faced with important decisions. On one hand, the economy is tight and funds are too. On the other, a down economy leads to increased pressures for employeesa driver of fraudulent activity. On one hand, employees in the accounting department may be resistant to change. On the other, they are the leading source of fraudulent activity. On one hand, employers may be afraid to offend long-time employees. On the other, victims would never suspect the fraudsterthat is how they become victims. When dealing with the Soviet Union, Ronald Reagan was famous for his signature line Trust but verify. When dealing with employees trust but verifyit may save your business.

Disclaimer: These articles are intended for our friends in the legal, banking and professional services community and merely reflect our observations. These articles should not be construed as legal counsel. Contact an attorney whenever legal advice is needed.

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