Blog

The admissibility of expert witness testimony serves as a cornerstone in modern legal proceedings, offering a lens through which complex, specialized knowledge can enlighten the trier of fact. As an expert witness for over 30 years, I have seen the standards for admissibility of expert testimony grow increasingly stringent over time. But who now bears the responsibility of ensuring an expert is fit to serve in that particular legal proceeding? The recent amendment to Rule 702 of the Federal Rules of Evidence, effective as of December 1, 2023, underscores a pivotal shift: elevating the burden of proof on the proponent of the expert witness and amplifying the role of judges in determining admissibility. See below for the amendment: Rule 702.  Testimony by expert witnesses. A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if the proponent has demonstrated by a preponderance of the evidence that: a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue b) the testimony is based on sufficient facts or data c) the testimony is the product of reliable principles and methods d) the expert has reliably applied the expert’s opinion reflects a reliable application of the principles and methods to the facts of the case This slight change in verbiage places a much clearer burden on the party offering the expert and makes […]

“I know nothing about GAAP and I’ll leave it to my accountants.” said Donald Trump Jr. in court yesterday, testifying in the ongoing civil case against former president Donald Trump. GAAP, according to the Financial Accounting Standards Board (FASB), stands for “Generally Accepted Accounting Principles.” GAAP represents a common set of accounting principles, standards, and procedures used in the United States for financial reporting. GAAP encompasses a wide range of rules and guidelines related to accounting, financial reporting, and disclosure. These principles guide how companies prepare their financial statements, including the balance sheet, income statement, and cash flow statement. In litigation cases involving financial fraud or misrepresentation, understanding GAAP requirements provide important context for building and arguing the case. Knowing where GAAP was violated or misapplied can reveal intent and liability. Current principles are based on a number of underlying assumptions. Although these points aren’t codified, they represent generalized assumptions and apply to most financial statements: Regularity – Transactions should be supported by verifiable documentation such as invoices or receipts, ensuring a robust audit trail. Consistency – Consistent accounting treatments and methods must be applied across reporting periods, with any unexplained changes warranting scrutiny. Sincerity – Financial reports must genuinely represent the company’s actual performance and position, avoiding biased estimates and subjective interpretations. Permanence – It is crucial to assume reasonable business continuity rather than liquidation, and any concerns about viability should be thoroughly investigated. Non-Compensation – Assets and liabilities should be treated independently, without offsetting against each other, except […]

Twitter, or “X”, taken private after Elon Musk’s $44 billion acquisition just over a year ago, is now valued at only $19 billion. A new internal memo is cited offering employees restricted stock units (RSUs) at a share price of $45. When private companies offer stock-like compensation options, the IRS advises them to use a 409A valuation – an independent assessment of how much a company is worth. These appraisals tend to be more conservative than valuations based on recent funding rounds or offers from potential acquirers, for example. X itself is “still negative cash flow,” Musk shared in July, citing a “50% drop in advertising revenue plus heavy debt load”. So, it’s not unsurprising that X’s 409A valuation came in lower than the $54.20 per share that Musk paid to take the company private. Because of this conservative approach, it’s common for companies’ 409A valuations to come in lower than their previous private market valuations. Last year, Stripe and Instacart saw their valuations slashed by 28% and 38%, respectively after new 409A appraisals. There are a few reasons why private companies incentivized by employee stock compensation may actually prefer to have lower 409A valuations: Lower strike prices on stock options give employees more potential upside and incentive to join and stay. With a lower valuation, the same number of shares granted or optioned to employees represents less dilution percentage-wise for existing shareholders. Companies can reduce stock-based compensation expenses with a lower 409A valuation. Employees only pay taxes when they […]

As the baby boomer generation continues to reach retirement age, with 10,000 individuals turning 65 every day, the United States is facing a “silver tsunami” of business owners looking to exit their companies. This mass exodus of entrepreneurial talent has made exit planning for retirees an increasingly pressing issue, especially for closely-held businesses.   When advising clients on retirement and ownership transition, forensic accountants and business valuators provide invaluable expertise by highlighting crucial financial considerations that can profoundly impact the success of the process. In this blog post, we will explore five key points that business owners should keep top of mind when starting their exit plans. From stock options and business valuations to tax implications and ESOPs, our goal is to provide attorneys and their clients with the financial clarity needed to help navigate the choppy waters of retirement and ownership transition. Stock Options: Stock options are a cornerstone of exit planning. Clients must grasp the significance of these financial instruments, and this is where the expertise of forensic accountants and business valuators becomes crucial. These professionals can elucidate the nuances of restricted stock, stock appreciation rights, and employee stock ownership plans (ESOPs), shedding light on the potential advantages and disadvantages of each option, including intricate details such as control retention and tax implications. Business Valuation: The accuracy of business valuation is paramount in exit planning. Forensic accountants and business valuators possess the specialized skills required to determine the true value of a business. Their expertise in employing diverse […]

Occupational fraud continues to wreak havoc on businesses, with annual business losses reported to exceed $4.7 trillion worldwide. Fraud experts have long suggested that the presence of three conditions, known as the “fraud triangle,” greatly increases the likelihood that an organization will be defrauded. The classic fraud triangle, as conceived by criminologist Donald Cressey, consists of Pressure, Rationalization, and Opportunity. The Fraud Triangle, Cressey Pressure A perpetrator experiences some type of pressure that motivates fraud. Pressure can come from within the organization – for example, pressure to meet aggressive earnings or revenue growth targets. Alternatively, the pressure could be personal, such as the need to maintain a high standard of living, pay off debt, medical bills, or gambling. Rationalization Perpetrators often mentally justify their fraudulent conduct. They might tell themselves that they’ll pay back the money before anyone misses it, or reason that: They’re underpaid and deserve the stolen funds, Their employers can afford the financial loss, They’ll lose everything (or someone) if they don’t commit fraud, “Everybody” does it, or No other solution or help is available for their problems. Most employees who commit fraud are first-time offenders who don’t view themselves as criminals, but as honest people caught up by circumstances beyond their control. By rationalizing, perpetrators overcome ethical barriers that generally guide their conduct. Opportunity Without opportunity, even motivated and rationalized perpetrators can’t commit fraud. Occupational thieves exploit perceived opportunities that they believe will allow them to go undetected. Weak internal controls, oversight, and auditing create opportunities […]

Yesterday, New York Supreme Court judge Arthur Engoron ruled in the ongoing lawsuit alleging former President Donald Trump and his businesses provided false financial statements to obtain loans and other benefits. This case piqued my interest as a credentialed business valuation expert, forensic accountant, and expert witness. Yesterday’s decision was over thirty pages long, and I wanted to break down the extent of the document for those following these ongoing legal battles.   The New York Attorney General’s office had brought claims against President Trump, his family members, and corporate entities under a statute prohibiting persistent fraudulent conduct in business. The AG submitted evidence that President Trump inflated the valuations of his assets on financial statements from 2011 to 2021. For instance, President Trump claimed his apartment in Trump Tower was 30,000 square feet, later learned to be about three times its actual size. This overstatement led to an overvaluation of over $100 million! The Court also found evidence that other Trump assets, such as branding premiums, shared the same misstatement. President Trump’s legal team asked the Court to dismiss the entire case, arguing the financial statements contained disclaimers and that determining value is subjective. Those requests were later denied. The Court ruled yesterday that the Attorney General provided sufficient evidence that President Trump knowingly submitted false financial statements over multiple years. The judge ordered the dissolution of several corporate entities owned by the Trumps and the appointment of an independent monitor for the Trump Organization. While further potential penalties […]

Picture as you may, a matter that requires testimony regarding the fair market value of a closely held business. Like most cases of this instance, the matter will be highly contentious. I am not writing about either side’s expected arguments or their respective merits. In this instance, I want to discuss how counsel for each party organizes their material before the Court. Specifically, the income tax returns the financial experts used to form their underlying opinions. We have all witnessed this scene before. Counsel for each party rolls in boxes of documents in anticipation of a lengthy trial and proudly lines the front of their desk with their respective “Trial Binders.” Each binder is indexed, labeled, and, if lucky, already pre-marked as Exhibits. And, of course, courtesy hard or electronic copies are provided for the Court. Amongst these documents are the Subject’s personal and business income tax returns. The Subject’s income tax returns are pivotal to all stakeholders: the Plaintiff, Defendant, and even the tax preparer, who may be called to testify as a fact witness –  not to mention your valuation expert who has written a report and will testify to their opinion of fair market value. Now comes the purpose of this article. The Plaintiff begins their case and refers to a specific page and tax return within their trial binder. You turn to that page and find identifying the referenced line item impossible. You ask your adversary and the Court for clarification, hoping a negative reference to […]

For the better of the past two years, we have been working on a shareholder buyout dispute centered on the value of a fifty percent interest in a business and its ability to support the buyout provisions. The shareholder’s agreement outlined the valuation standard and the terms of its payment. Despite this direction, each party’s valuation proposed at arbitration was millions of dollars apart. I will save the particulars of this case for another time but share with you that the value opined in our report was accepted in the arbitrator’s binding decision. One of the reasons for this favorable business divorce case outcome was that our client’s attorney respected our focus on essential valuation fundamentals. In return, his direct case and cross-examination led to a well-versed presentation of the issues at bar. Attorneys tend to many issues in a shareholder dissolution case; having a command of opposing valuation reports is just one. Here are five key considerations attorneys should consider when reviewing their experts’ reports and those of the opposing side. 1. Standard of Value The choice of a standard of value is fundamental to the valuation process. Two common standards often considered are fair market value and fair value. Fair market value is defined in Revenue Ruling 59-60 of the Internal Revenue Code: The amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to […]

Have you seen the bank advertisements looking to lure account holders to open short-term CDs at 4.5% or 4.9%? You may have read this article in the Wall Street Journal tracking the increasing treasury bill rates over the past few months. Where is this coming from, and how will this recent increase in Treasury Yield rates impact the valuations of closely held businesses? Figure 1. Adapted from Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis.  FRED | St. Louis Fed. The short answer to this question: It may profoundly impact various aspects of the economy – including the valuations of closely held businesses. The complex relationship between financial variables can reverberate across different sectors. We will delve into the mechanisms behind some of these interactions and explore how rising treasury yields can influence the valuation landscape of closely held businesses. Treasury Yields 101 First, it’s essential to understand what treasury yields are and how they function. Treasury yields represent the expected return from investing in government bonds. This return is often called a “risk-free rate” since the government guarantees it. When yields rise, it generally indicates that the market demands higher compensation for lending money to the government due to factors like inflation and changes in monetary policy. Discount Rate And Present Value An increase in treasury yields directly affects the computation of the discount rate and, in turn, affects the valuation of closely held businesses. In business valuation, the discount rate is […]

  Thirty years ago, when I was a real accountant (haha), January was one of the most hectic months of the year. The preparation of annual payroll tax returns marks the quiet beginning of tax season.  You should now start to receive W-2’s, 1099’s, and other tax forms to be set aside for the preparation of your 2020 individual income tax return. Many of our regular readers are now working from home on either an intermittent or permanent basis.  For those of you in this category, you may be able to take advantage of the employee home office deduction. In the past, the standards for deducting home office use have proven notoriously prohibitive. Pursuant to the 2018 Tax Cuts and Jobs Act, requirements for W-2 wage earners clearly stipulate that for its costs to qualify, a given home office must: Be used at the convenience of the employer Constitute a specifically allocated area used expressly for work-related purposes and Have space for storing work-related materials. There are of course numerous other requirements, but historically these have proven sufficient barriers for many remote employees. But since the advent of COVID-19, two novel legislative pathways have opened up: Section 139 (Disaster Relief Payments) and Section 165 (Losses) The primary purpose of this blog post is to briefly discuss both of these two sections of the Internal Revenue Code. Section 139 (Disaster Relief Payments) Section 139 provides that any funds an individual may receive as Qualified Disaster Relief Payments cannot be included in […]