BUSINESS VALUATION & LITIGATION: Forensic Accounting
Forensic accounting involves the application of special skills in accounting, auditing, finance, quantitative methods, research, and investigative skills to collect, analyze, and evaluate evidential matter, and to interpret and communicate findings.
Gettry Marcus' litigation services professionals have extensive forensic accounting experience. We combine advanced data analysis and data mining techniques with strong investigative skills. The result highlights our keen ability to "follow the people and the money" in developing our findings for a wide range of applications:
- Alter ego
- Asset tracing
- Breach of fiduciary duty
- Breach of contract
- Business disputes
- Buy sell agreements and disputes
- Civil and criminal tax controversy
- Criminal investigations
- Critiquing opposing expert’s report
- Cross examination of adversary experts
- Damage calculations
- Due diligence
- Financial misrepresentation
- Fraudulent conveyance
- Healthcare fraud
- Insurance fraud
- Intellectual property
- Lost profits calculations
- Misappropriation of funds
- Not-for-profits fraud
- Oppressed shareholder actions
- Professional malpractice claims
- Royalty engagements
- Trust and estate litigation
- White-collar criminal investigations
We maintain active roles in professional organizations in our disciplines, and contribute articles to leading peer reviewed journals and publications. We have attained the highest level of credentials within our profession, serve as national instructors and lecturers to various professional groups, including state CPA organizations, on various business valuation and forensic accounting topics.
We maintain active memberships in many professional associations, including:
- American Bankruptcy Institute
- American Bar Association
- American College of Forensic Examiners
- American Institute of Certified Public Accountants
- American Society of Appraisers
- Association of Certified Fraud Examiners
- Financial Consulting Group
- Institute of Business Appraisers
- National Association of Certified Valuators and Analysts
- New York State Society of Certified Public Accountants
- Turnaround Management Association
ACCOUNTING & AUDITING Case Studies
Bank Financing [+]
A major client with sales volume of over thirty million dollars, wanted to, simultaneously, obtain an increase in an existing line of credit, and secure financing for the purchase of two parcels of real estate. The client presented multiple challenges, including a lack of senior management, renewal and expansion of the credit line that also would permit the company to purchase the two real estate parcels. And, everything needed to be completed in a four month period.
To help the client overcome these challenges, we developed and implemented a three part strategy. First, we focused on the credit line, then on securing a financing commitment for the purchasing of tow parcels of land and finally on reviewing all loan covenants. This was a prudent course of action due to the complexity of the transactions and the time constraints faced by the client.
We obtained various proposals for the credit line with contingent financing to enable our client to purchase the two parcels of real estate. By obtaining alternative financing proposals, the client was able to reduce the cost of the credit line by half a point and obtained an increase in the operating line of five million dollars. Over the next two months we prepared, reviewed and assisted with all the financial documentation to successfully obtain an IDA loan and complete the commercial financing. We completed the project by reviewing financial aspects of all loan documents to ensure that they were consistent with the terms negotiated.
Benchmarking Analysis [+]
We were engaged to perform a review of an apparel company’s financial statements. The review consists of inquiry and analytical procedures promulgated by the AICPA’s Statement of Standards Accounting Review Services.
We analyzed the client’s financial information and compared the results to relevant industry benchmarks. Also, we performed various trend analysis of the company’s performance over a several year period. Based on our analysis, our client was able to renegotiate better pricing with its vendors and increase the selling price of premium products to certain of its customers. This resulted in significant improvements in its revenue and operations.
CFO Fraud [+]
We were engaged to perform an initial audit to satisfy bank requirements of a wholesale/distributor of office products. Our experienced team performed the required audit procedures. As is our process, we always look beyond the required steps. Upon finding some inconsistencies and unusual increases in certain balance sheet accounts, we began making inquiries by first developing strong relationships with the owner and obtaining the trust of other key personnel. Then through our strong analytical procedures and review of certain invoices we uncovered an embezzlement of funds committed by the CFO.
Upon uncovering our suspicions, the CFO admitted to stealing $100,000. Our fraud examination discovered the funds actually stolen to be five times that amount. After terminating the employee, the owner was able to recoup a significant amount of the funds lost. We assisted in interviewing and hiring the new CFO as well as implementing stronger internal controls to help prevent this or other improprieties from occurring in the future.
CO-OP Audit [+]
A cooperative housing corporation (Corporation) engaged us to perform an audit. The Corporation, located in Manhattan, owned a parking garage for use by its shareholders. During our review of the predecessor accounting firm's work papers, we noticed that a considerable amount of time was spent accounting for and reconciling garage rental income, and amounts due to the garage operator each month.
During the audit, we investigated this matter. Under the terms of the lease, the garage operator was obligated to pay a fixed monthly rent to the Corporation. The garage operator was supposed to then bill the shareholders for the rent applicable to the occupied parking spaces. However, the monthly billing became the obligation of the Corporation. In addition, the garage operator's obligation to pay its monthly fixed rent would be offset by the rent received from those shareholders who occupied the parking spaces. In the event the amount of rent applicable to the shareholders' parking spaces exceeded the amount of fixed rent due from the garage operator, the Corporation was required to refund the excess to the garage operator.
We determined that, in effect, each month the Corporation was providing the accounting for the garage operator, including billing and collections. This function was very time consuming both for the client as well as the auditors at the end of the year. The reason for this arrangement was attributable to a 6% New York City Sales Tax on parking. Under prior law, rent paid directly to a garage operator was subject to sales tax. However, if rent was charged by the cooperative housing corporation, the sales tax was not applicable. We researched this and determined that the law had changed. Rent paid by a shareholder directly to a garage operator under the terms of a master lease was not subject to the 6% sales tax.
Based on our findings we advised the Board on a recommended course of action. Effective immediately, the garage operator began billing the shareholders directly, and paying the Corporation its monthly fixed rent. The client was very appreciative because we improved their cash flow and also reduced the time, cost and resources required to provide the monthly accounting.
Corporate Restructuring [+]
We were engaged by a shareholder of a domestic corporation (Corporation) that had two equal shareholders. Our client, one of the shareholders, planned to retire and have his son continue in his capacity as the company's salesman and be able to purchase an equity position. At the same time, the shareholders were approached by a private investment company (PIC) who was interested in purchasing a minority interest in the Corporation. The shareholders agreed to the sale of the minority interest in the Corporation. An additional relevant fact was that the shareholders and several related individuals owned the stock of a foreign based corporation.
We developed a plan to have the Corporation contribute it's assets to a new company (“NEWCO”) and have equity partners make capital contributions. In addition, NEWCO needed additional financing to buy the shares of the Corporation and also to buy the stock of the foreign corporation.
There were two complex issues our plan needed to address. First, a transfer of net assets or an exchange of shares between entities under common control is accounted for on a historical cost basis. The corporation would be transferring its net assets and its operation to NEWCO. Under accounting rules the two companies were considered to be held under common control.
Second, the bank financing the transaction wanted NEWCO to show a balance sheet with net worth that included the goodwill purchased. This was substantially greater than the contributed net assets and contributed capital.
Our plan called for the formation of a Family Limited Partnership (FLP) that would own NEWCO, in conjunction with the PIC, and the two original shareholders. This structure allowed the creation of a defective trust and the gifting of stock by both partners. Further, the structure met accounting rules and allowed for the use of Fair Market Value (FMR) accounting rather than historical cost.
Ultimately, the new entities were formed in which the PIC, the FLP and the original owners held equity in NEWCO and meet the rules of not being considered under common control.
The IRS audited all aspects of the transaction and passed it without exception. This resulted in significant savings for our client and an effective corporate structure for NEWCO.
DOL targets union Benefit Plan [+]
Gettry Marcus was engaged to perform a re-audit of a multi-employer union health and Welfare Benefit Plan, with over 2,500 members, under circumstances that carried a high level of exposure to the Plan for significant penalties and enforcement action. The Plan’s financial statements, which were attached to the form 5500 that had been filed with the DOL, had been audited by another independent qualified public accountant. The DOL selected the Plan’s audit for examination. After examining the financial statements and work papers of the prior accountant, the DOL rejected the filing, stating that there were numerous significant deficiencies in the financial statements and that the audit of the financial statements was not performed in accordance with Generally accepted accounting standards (GAAS) as required under the employee retirement security act of 1974 (ERISA).
Gettry Marcus was required to, in a very compressed period of time, establish a complete understanding of the Plan and it’s accounting and financial reporting structure, perform a complete re-audit of the financial statements of the Plan, correct all deficiencies in the financial statements noted by the DOL and submit a complete set of work papers to the DOL that not only support the opinion on the financial statements, but that could stand up under intense scrutiny. This entailed Gettry Marcus committing the necessary experienced personnel to make certain that the outcome would be a positive one for the client.
As a result of working closely with the management of the Plan and maintaining an open line of communication with the DOL on the client’s behalf, an amended form 5500, along with the financial statements audited by Gettry Marcus, were filed within the time frame allowed by the DOL. a complete set of work papers was submitted and was subjected to the DOL’s review process. The DOL indicated that there were no deficiencies noted as a result of its in depth review of the amended form 5500, financial statements and the audit procedures and documentation thereon performed by Gettry Marcus. The DOL therefore accepted the filing as submitted and issued a notice of satisfactory Filing and immediately discontinued any action against the Plan, saving it from onerous penalties.
Due Diligence On Merger & Acquisitions [+]
On behalf of the seller of a large medical equipment distributor, we prepared the company’s balance sheet at the closing date for the purpose of a purchase price adjustment. The buyer's accountants prepared their own balance sheet to be used to calculate any purchase price adjustment which was based on an agreed upon amount of working capital.
The buyer's accountants arrived at a balance sheet which reflected a shortage of required working capital totaling $1.5 million, while Gettry Marcus's balance sheet reflected a shortage of $200,000. We were able to prove that our working capital calculation was correct and highlighted many errors and items not properly considered by the buyer's accountants. Based on our findings we were able to save our client $1.3 million on the purchase price adjustment.
Forecasts & Projections [+]
We worked closely with a consortium of importers to develop comprehensive forecasts that were to be used by both management and lenders to better understand and monitor the importers' profitability, cash flows and financing needs. When creating the forecasts we considered accounts receivable, inventory, payable levels and seasonality.
As a result of our efforts, management developed credible forecasts that allowed them to better monitor and understand the financial results of their businesses. Lenders were able to enhance the monitoring of their borrowers, which gave them a greater comfort level with and better understanding of their borrowers' needs. This resulted in a closer working relationship between lender and borrower, actual loans being approved and provided for continued financing, even in challenging times.
Fraud Investigation - Case Study #1 [+]
We were retained by twenty two insurance companies to review thousands of transactions, read and analyze numerous agreements to determine whether a medical practice was "truly owned" by the doctor named on the certificate of incorporation. Our analysis of the financial transactions resulted in us recreating the books and records of the medical practice, allowing us to apply benchmarking statistics. We also read and interpreted numerous depositions totaling more than 3,000 pages.
In a landmark unanimous jury verdict, we were able to successfully assert the “Corporate Practice of Medicine Prohibition” principles in demonstrating that the medial practice was owned and controlled by the non-physicians. Our testimony covered the interaction between bank accounts in question, as well as, the business reasonableness of the agreements entered into between the parties. The verdict delivered by the jury relieved our clients of several thousand pending individual no-fault lawsuits totaling more than $20 million.
Outsourced Accounting [+]
We were retained by a $108 million mezzanine lender and real estate fund to perform all bookkeeping and accounting functions, compile quarterly financial statements and provide a big four accounting firm with all documentation supporting the year end financial statements for them to perform an annual audit.
By the Fund outsourcing all the accounting functions to Gettry Marcus it did not have to hire an entire internal accounting department which would have included a chief financial officer and additional staff and incur costs for salaries and benefits. A better fit for them was to pay for accounting services strictly based on time and utilize Gettry Marcus to provide these various accounting functions on its behalf while keeping operating costs down and being able to focus on running the operations of the Fund.
Payroll Preparation [+]
A Gettry Marcus staffing client had specific needs to enter very detailed payroll information for 500 employees into QuickBooks every two weeks. The client was using a payroll service provider to prepare their payroll however, it took them several days to enter the information into QuickBooks. Our team worked with the payroll service provider to map the payroll information into QuickBooks so that the data went almost instantaneously into the program.
The client made a decision to switch to a new payroll service provider. However, the new payroll service provider did not have the same mapping capabilities. To reconcile this issue and help our client achieve their goals, Gettry Marcus' QuickBooks team worked with a third party add-on product to create custom interfaces from the new payroll service provider.
Sales Commissions [+]
Using a combination of QuickBooks and manual entry, a Gettry Marcus client calculated commissions for their salespeople based upon a complicated formula that varied by salesperson.
Gettry Marcus found and implemented a third party add-on application which integrated the entire process using QuickBooks.
FORENSIC ACCOUNTING & LITIGATION Case Studies
We were retained as a court appointed arbitrator, as part of a tribunal, in a commercial litigation case to hear the business complaint of a shareholder/president of a company, who was abruptly terminated by the respondent shareholders. The proceedings included several hearings with attorneys from both sides to set the ground rules regarding discovery procedures. The Gettry Marcus partner was the sole forensic accountant presiding on the panel with two veteran arbitration attorneys.
We were able to explain to the legal arbitrators why the respondent needed to produce certain company financial documents to allow the claimant’s expert to perform the required forensic review and subsequent business valuation. As a result of Gettry Marcus’s guidance, the tribunal ruled to release certain documents to the claimant, which forced the respondent to settle the case rather than release the documents.
We were retained by counsel to assist the unsecured creditor’s committee of a well-known department store chain, to strategize and prepare claims against the corporate controlling shareholder for the return of $500 million through equitable subordination and the reclassification of debt to equity. We analyzed the ramifications of the shareholder’s liquidation scenarios for counsel and prepared for and participated in the depositions of the top-level executives and court ordered mediations.
Our work for the creditor’s committee was instrumental in its receipt of a significant settlement from the parent shareholder, which was substantially in excess of amounts traditionally received in department store industry bankruptcy settlements.
Bankruptcy-Forensic Accounting [+]
We were engaged by an international financial institution, which was the main secured creditor in a Chapter 11 proceeding, to verify the accuracy of the debtor’s collateral reports, review monthly bankruptcy report filings and prepare an analysis of potential preferential payments.
During our analysis of the accounts receivable, we uncovered major defalcations in the aging schedule and a lack of disclosure that the two largest customer receivable balances were being disputed in litigations. Our physical examination and review of the accounting records of the inventory revealed that a large percentage of the company’s inventory was obsolete. Our preference analysis concluded that a majority of the preferential payments were to insiders. As the result of our findings, the financial institution was able to minimize further exposure of its loan and have a receiver appointed.
Buy/Sell Agreement [+]
The owners of an established, successful business needed to determine the fair market value of their company. They wanted to incorporate this value into their shareholder’s agreement relating to the dissociation clauses which may affect either owner in the future. Their existing agreement had a value definition and formula which failed to properly represent the true value of the company.
Through our application of the appropriate methods and value calculations, we were able to provide the owners and their families with the future protection they needed by establishing the entity’s fair market value, which was almost twice the amount calculated under the original shareholder’s agreement value formula.
Civil Suit Defense [+]
We were retained to assist the attorneys defending the CEO and CFO, minority shareholders of a large private company, against accusations concerning theft of funds and disbursements for personal use. These accusations were a result of the minority shareholders’ dispute over the contract to purchase the remaining shares of stock from the majority shareholder.
Through interviews with company personnel and analyses of the information gathered by our team, we were able to prove that all the alleged improper expenditures were for bonafide business purposes. We developed charts and graphs used by our clients’ counsel that clearly explained our position to the jury. Through Gettry Marcus’s forensic efforts and effective presentation, we were able to assist our clients in receiving a favorable settlement with regard to the unfounded accusations and their purchase of the stock.
Collateral Audit [+]
We were retained by a major financial institution to examine the accounting books and records of a $100 million food distributor with outstanding credit obligations of $10 million.
Gettry Marcus uncovered $3 million of food products that were past the expiration date. This expired inventory was included in the collateral base calculation at full value. Based upon our findings, the financial institution revised its borrowing base formula providing itself with additional loan protection.
Estate Litigation [+]
On behalf of the beneficiaries of an estate, we were engaged to perform investigative procedures related to the sale of real estate owned by 13 different family partnerships, managed by a single family member who unilaterally decided to sell the properties valued at approximately $90 million. We examined the management and partnership agreements to verify the accuracy of the management fees and distributions of the sales proceeds to each of the family partners. It was also necessary to perform a detailed review of the accounting records to assure that there were no improper disbursements.
Our investigation disclosed that the single family member had overpaid himself $500,000 of management fees prior to the sale of the properties and that he initially received sales proceeds of $1 million in excess of his rightful ownership percentage.
Estate Tax [+]
We were engaged to value a decedent’s 50% interest in a wholesale distributorship in order to establish the value to be reported on the estate tax return.
Based on our research and interviews with the company’s personnel, we determined the decedent was the key person in the company, responsible for managing all relationships with their major customer and overseas manufacturing contractor. We applied a significant key-man discount to the fair market value of the company and reduced the taxable estate by $1.4 million. Upon subsequent challenge by the Internal Revenue Service, our key-man discount was accepted without change.
Fraud Investigation - Case Study #2 [+]
A rapidly growing healthcare facility with over 200 employees retained us to review its existing internal controls. We interviewed key personnel; examined the company’s cash disbursements, cash receipts, payroll records, and purchasing policies; and designed and performed analytical procedures based on our research.
Through the use of state-of-the-art forensic software, we discovered several hundred thousand dollars per year of fraudulent activity relating to questionable purchase transactions. Our client replaced certain vendors and implemented our recommended internal control procedures, particularly, the proper segregation of duties related to purchasing and cash disbursements. As a result, our client is experiencing substantial savings on its purchases.
As part of his overall estate plan, our client wished to gift limited interests in the family limited partnership to his children and grandchildren. The partnership’s assets included residential buildings in New York City and a portfolio of marketable securities valued in total at $6.5 million. In addition, appraisals of the real estate were obtained and incorporated in our overall valuation.
Through our research and experience we valued the gifted interests applying an appropriate minority discount which will provide future tax savings to our client’s estate.
Insurance Claim [+]
As the basis for an insurance claim, we performed a business valuation of a restaurant that was destroyed by a fire. The restaurant was located in lower Manhattan and had been adversely affected by the events of September 11, 2001.
By using normalization and weighting techniques, we were able to increase the value of the restaurant and our client’s settlement.
Internal Control Review [+]
We performed a quality assessment review of the internal audit functions of a $500 million not-for-profit organization under contract with New York City and also reviewed their accounting systems and existing internal controls with various members of their management team.
We presented to their audit committee our findings and recommendations for additional procedures and controls, which are in the process of being adopted. An important procedure being implemented is the use of computerized data mining techniques which will help them uncover potential discrepancies and defalcations.
Lost Profit Claim [+]
We were retained to calculate the economic loss suffered by a corporation from a breach of a non-compete clause in an employment contract. A senior executive left the company to work for a competitor. In violation of the non-compete clause, he began soliciting our client’s customers causing a significant loss of customers and revenue.
In preparing the lost profit analysis, Gettry Marcus developed a loss calculation formula based on the longevity of the company’s customers. The court adopted our method and cited it in its decision in favor of our client.
This litigation engagement involved an individual whose spouse died during the course of the matrimonial action, leaving this individual in charge of the family business. Our investigation surrounded the alleged theft of business assets and the unauthorized use of corporate funds by a key financial employee of the deceased spouse’s business. We traced the movement of monies through dozens of personal and business accounts controlled by the deceased, in an attempt to recover diverted marital assets.
Our investigation revealed that the key employee had signed checks from several business accounts totaling hundreds of thousands of dollars to pay personal expenses. We provided counsel with the supporting documentation necessary to recover the diverted assets.
We were retained by a non-owner spouse to perform a forensic accounting investigation and business valuation of the other spouse’s business in a marital dissolution case. Historically, the business reported minimal net income resulting in nominal value.
While performing our forensic accounting review we uncovered sizeable undocumented disbursements, which resulted in a reduction of the company’s net income. By adding back these disbursements to net income, the value of the company was increased by approximately $1 million and our client’s equitable distribution by approximately $500,000.
Mergers And Acquisitions [+]
On behalf of the buyer, we performed due diligence on the financial operations of a large retail store to determine its fair market value for a potential acquisition. Working with the client, we prepared projections of the company’s future earnings, including appropriate adjustments.
Based on our findings, we determined the seller’s asking price was 40% greater than the fair market value of the company, leading our client to withdraw from the transaction.
Partnership Appreciation Rights [+]
We were retained by a well-known weekly New York entertainment magazine publisher to value both the 100% interest and a 1% limited partnership interest for the purpose of determining the amount to be paid to a departing executive.
Working with the company’s CFO and the treasurer from its controlling foreign partner, we calculated a range of values based on different terminal value scenarios, which offered our client the needed flexibility to negotiate the executive’s payout.
Royalty Dispute [+]
A public company allegedly breached its royalty agreement with one of its licensees. As the defendant, the public company was sued for $1.6 million and retained us to provide expert testimony as to any damages incurred by the plaintiff.
Through our research and forensic accounting procedures, we uncovered critical defects in the concepts applied by the opposing expert. Based on these findings and our expert testimony, the case was settled to our client’s benefit.
Shareholder Dispute [+]
We were retained, in an arbitration case, by a dissenting minority shareholder of a fitness club who was being forced out by the majority shareholders. The majority shareholders were intentionally not soliciting new members in order to reduce the value of the business until the minority shareholder’s interest was purchased. The majority shareholders’ expert valued the business at zero based strictly on the book value from historical financial statements.
We were able to obtain operating information of fitness clubs similar in size and geographic location to the subject club and prepared pro-forma income statements based on member- ship levels of comparable facilities. In addition, we prepared our report according to New York State’s standard of fair value which does not recognize discounts for minority interests in dissenting shareholder actions. From this, the arbitrator determined that if the company was managed properly it would have significant value, and ruled in favor of our client.