Remember the case of Enron in 2001? Their reported revenues of over $100 billion ended up being a fiction. But fraud isn’t limited to the corporate world. In September 2014, Matthew Wada and Jennifer York were indicted on fraud charges for renting out occupied apartments, cheating victims out of more than $60,000. Whatever the intensity or scope of a fraudulent activity, the elements behind a person’s decision to commit fraud remain universal. Forensic accountants utilize the Fraud Triangle as the standard tool in their investigation of fraudulent activities. Researchers Edwin Sutherland and Donald Cressey provided the seeds of the Fraud Triangle. Cressey extended Sutherland’s ideas behind “Differential Association” (which analyzed why people commit crimes), pinning down three elements which must be present for embezzlement to occur: A non-sharable problem, An opportunity for trust violation, and A set of rationalizations that define the behavior as appropriate. However, it wasn’t until a 1979 study that the variables leading to fraud were directly investigated. These researchers refined and broadened Cressey’s three points further: Situational pressures, Opportunities to commit fraud, and Personal integrity (character). These researchers also found that these aspects were interactive, showing that if more of one element is present, less of the other two are needed. This list would be later refined by one of the original co-authors, W. Steve Albrecht. He included perception into the elements, as well as finding that a return to one of Cressey’s original points was a better fit. He came up with the final sides […]
Yearly Archives: 2014
We have distilled decades of experience at the intersection of law, business and finance into a suite of articles to help our clients make sense of business valuation, forensic accounting, and litigation support. Please visit our site regularly for our latest content.
In December 2013, Tippi Hedren, star of Alfred Hitchcock’s 1963 “The Birds,” received good news. After six years of litigation over an injury on the set of “Fashion House,” Hedren received a $1.5 million judgment in her favor, of which $653,708 was Hedren’s calculated lost earnings. Lost earnings must be computed in cases of personal injury, wrongful death, and employment discrimination. Forensic accountants are often brought on to accurately determine these damages. When beginning to figure losses, a worklife expectancy must first be determined. The worklife of a person varies according to age, ethnicity, gender, and education level. Once a worklife expectancy has been determined, potential lost earnings can begin to be calculated. There are two types of earnings which can be calculated: Unimpaired earnings: These are estimated earnings a claimant would receive if the incident had never happened. Impaired earnings: These are any potential actual earnings a claimant will receive if able to work in a limited capacity. If a claimant is deceased, or wholly unable to work, only unimpaired earnings will be calculated. This is done by looking at such measures as historical earnings, likelihood of future advancement, and comparable earnings of people in the same industry, among other criterion. While an individual is employed there are other assets besides base wages. These fringe benefits are sometimes employer contributions to social security, retirement plans, paid time off, and insurance premiums. These too are added to the economic losses of a claimant. Other sources of income can be affected […]
After Colorado instituted Amendment 64 in early 2014, a profitable industry sprouted up around the legalization of marijuana. However, despite these new businesses generating roughly $3 million in state taxes in January 2014 alone, they have encountered serious problems with reliable accountability. Because marijuana still violates federal law, banks remain hesitant to associate with marijuana businesses. This has forced many Colorado shops to remain cash-only businesses which, tax collectors worry, may result in understatements of sales and income. If this occurs, Colorado could be short-changed on a large portion of taxes. In fact, most cash-only businesses lend themselves to potential fraud. This can have damaging effects not only for tax collectors, but also for litigants in a matrimonial action. While child support is calculated differently by each state, spousal support depends on a variety of factors and is often up to the court. One key element that helps calibrate support is the spouses’ income, assets, and the total marital estate. Ideally, financial and tax records accurately reflect monetary resources and the need of both spouses. However, this is often not true—especially in cases involving cash-based businesses. Cash-based businesses are enterprises where customers make a large percentage of payments in cash. These transactions have great potential for bypassing proper documentation and taxation. Property bought with cash can also help conceal unreported income. In a divorce, therefore, the suspicion of unreported income is potentially detrimental to a non-business-owner spouse and the couple’s children, and must be investigated. The first step a non-business-owner […]
Normalizing Owners’ Compensation in Business Valuation
Posted in Business Valuation, on Sep 2014, By: Mark S. GottliebShare
Recently released and on parole, Tyco’s former CEO Dennis Kozlowski was the epitome of excess compensation in the beginning of the millennium. Despite the fact he transformed a small enterprise into a billion-dollar giant, he was convicted of fraud for using Tyco as his “personal piggy bank.” This and other white-collar crimes have led to the creation of better monitoring parameters and resources to help define employees’ salaries, especially those of top executives. Often, owners of closely-held businesses can easily manipulate their business’s profitability by paying themselves more or less than reasonable compensation. Business valuation experts can serve as a reliable professional resource whose contribution goes beyond tests and industry-specific statistics. IRS Guidelines and Parameters Section 162(m)(4)(C) and Section 162(m)(4)(E) of the Internal Revenue Code are both used as guidelines in tracking performance-based compensation. From describing the roles of the board of directors in determining compensation, to establishing further forms of compensation, such as bonuses, these two codes give an outline for investigating an executive or owner’s proper compensation. In addition to the Revenue Code, the IRS’s Fringe Benefits Audit Technique Guide assists by listing the benefits commonly provided to executives, potential issues, and also provides steps to help examine same. Both bonuses and benefits received by owners can be complex and ambiguous depending on the case. Bonuses can be clearly recorded, or simply rely on a handshake. Benefits, similarly, can often not be taxed to the recipient, but rather recorded within the operating expenses of the business. This concept […]
A Panel Discussion on Proposed Maintenance Guidelines
Posted in Financial Advisory, on Mar 2014, By: Mark S. GottliebShare
While the panel and the audience primarily agreed the intent of the proposed legislation has merit – there was some concern whether the proposed legislation addresses the need of a mechanism to calculate maintenance awards.Emily Ruben, Esq. (Attorney-in Charge of the Brooklyn Neighborhood Office of The Legal Aid Society) pointed out that many couples going through a divorce do not have substantial assets to divide and that their greatest asset of the marriage is frequently the income of the more-monied spouse. That being said, moderate and low-income spouses usually cannot afford the often costly litigation required to establish a right to maintenance.Considering the unpredictable and inconsistent climate of maintenance awards, the less-monied spouse will usually settle, albeit under some pressure, to avoid costly litigation.The New York legislative houses are each considering possible legislation to establish guidelines for post-marital income sharing not dissimilar to the Child Support Standards Act. By establishing guidelines for both the amount of maintenance to be awarded and the duration of the award, post-marital guidelines would provide the consistency and predictability for spousal support that the Child Support Standards Act has provided for child support. So we are prompted to ask: Is this Bill a long-awaited solution? Is it indeed the new approach consistent with Chief Judge Judith Kaye’s call for a “cultural revolution” to reduce drastically the time and costs—both financial and emotional—of matrimonial cases? Senator Hassell-Thompson, who introduced the Bill in the Senate, has said, “Neither spouse should feel financially compelled into accepting potentially detrimental or […]
Uncovering & Understanding Hidden Fees in a 401(K) Plan with Miriam Schindel, Esq.
Posted in Financial Advisory, on Feb 2014, By: Mark S. GottliebShare
What does it really cost to invest in a 401(k) plan? A recent AARP survey found that more than 80% of plan participants did not know the answer to that question. Most employees have no idea how much their plan is charging. According to the Government Accountability Office (GAO), the information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide for an easy comparison among investment options. Annual fees ranging from 3% to 6%–even as some plans still charge 1%–have not been disclosed, and often simply ignored, because, as one attorney who specializes in employment law has said, “everyone was making money.” Fees are one of the biggest issues in the trillion dollar industry, and many believe the industry is long overdue for transparency. According to the Department of Labor’s estimates, a one-percentage point difference in fees reduces overall retirement income by 28% over the course of a lifetime. As it has become increasingly clear that many companies have been breaching their fiduciary duty by offering plans with excessive or hidden fees, employees have an obligation ask the right questions–and have every right to know “What are we paying for, and what are we getting?” Unfortunately, administrative fees usually don’t appear on quarterly or annual statements. It can be quite a challenge for employees to find out how much in fees they are actually paying out annually; and it has come to light that many people—providers, third -party consultants—are getting generous […]
An Attorney's Guide to Same-Sex Marriage Tax Issues
Posted in Divorce & Matrimony, on Feb 2014, By: Mark S. GottliebShare
ATTENTION MATRIMONIAL LAW ATTORNEYS Couples who are involved in a same-sex union have a number of different tax issues that must be addressed that are not applicable to heterosexual married couples. These tax issues will vary depending upon whether the individual couple lives in a state that recognizes same-sex marriage or its equivalent, or whether they live in a state that does not recognize any type of legal union for same-sex couples. When the marriage is recognized by the state, while the couple may have more tax benefits in some cases, more tax issues may arise than exist in situations where no marriage or marriage equivalent is acknowledged on a state level. Because the federal government does not recognize homosexual marriage nor any equivalent thereto as of 2011, some couples may have tax returns and tax identities that differ significantly on the state and federal level. –Why are there tax issues for same-sex marriages? – What are the differences between federal and state income tax rules? – How should income be claimed? – Can marital assets be transferred or gifted? – How should children be claimed? Please click here to instantly obtain a free copy of this whitepaper.