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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.

Lifestyle Analysis

Posted in Divorce & Matrimony, on Oct 2014, By: Mark S. Gottlieb

Go through financial documents in a divorce is a task that many wish to avoid, though it is a necessary evil.  This exercise is called a Lifestyle Analysis. Years ago it was common for one spouse to seek large monthly support, the other spouse to plea a fraction of that, and the court to “split the pie in half.”  Today the court is equipped to understand how the couple’s lifestyle relates to support determination.  In fact, this process not only identifies the ordinary living expenses, it also identifies unusual, occasional, seasonal, and non-recurring expenses. Today this analysis is required not only by the “non-money” spouses seeking Pendente Lite relief, but often by both parties. The investigation of the couple’s “marital lifestyle” has become a hot topic.  In fact, the court has welcomed this exercise as a valuable tool that has influenced both Pendente Lite support orders and the final financial divorce judgment.  At the very least, the investigation of the couple’s lifestyle keeps the litigants and their counsel on their toes when it comes to submitting net worth statements. The laborious chore of locating and interpreting documents is not attractive. Many are not truly aware of their economic situation, particularly those not in control or responsible for the household finances. Even a slight miscalculation can influence the Court’s judgment. Support in this tedious chore is a welcomed relief by many in the midst of divorce and their counsel.  This effort generally includes: Analyzing personal and business income tax returns, Analyzing […]


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Goodwill Impairment Testing

Posted in Financial Advisory, on Oct 2014, By: Mark S. Gottlieb

Many companies carry “goodwill” on their balance sheet as an asset. As a result, like all assets, goodwill must be valued correctly on the company’s balance sheet in order for it to provide accurate information to investors and the public. When the “carrying value” of goodwill is less than fair market value, the goodwill is “impaired” and its value must be reduced. Goodwill impairment testing is thus required annually by financial accounting standards in order to make sure the value of goodwill is accurately reported. To ensure accurate financial information, the Financial Accounting Standards Board (FASB) requires regular annual re-evaluation of the value of goodwill to determine if the value of goodwill was overstated initially or if the value of goodwill has changed due to various market conditions. The re-evaluation process is referred to as goodwill impairment testing.  This requirement has been codified by the FASB in Accounting Standards Codification (ASC) 350, as have the protocol for the method of testing and for responding to results. When this re-evaluation reveals that goodwill is not worth what it is listed as, it must be written down, which means that the carrying value must be adjusted to the new accurate valuation. Attorneys whose clients are involved in business and/or have goodwill as an asset, must be informed of the requirements for a goodwill impairment test so that they can be in compliance with regulations. The law is evolving in this field so attorneys should take steps to ensure clients are following the […]


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Hidden Treasures in Tax Returns

Posted in Divorce & Matrimony, on Oct 2014, By: Mark S. Gottlieb

During my first experience as an litigation support expert in a matrimonial matter, there was barely any information on the search for omitted income or hidden assets.  Much of what we now call forensic accounting was performed intuitively by those with strong auditing backgrounds. In that first case, the “money spouse” was in a family business.  Income, sales, and payroll tax returns were all filed on time and appeared to be complete and accurate.  But when the reported income was compared to the ordinary living expenses on the “non-money spouse’s” Certified Net Worth Statement, the expenses exceeded the funds earned.  Two questions emerged: (1) Were the expenses on the statement actually paid or merely a wish list?; and (2) Were other funds, such as loans, credit card debt, or gifts, etc., to account for this difference? You don’t have to be a certified forensic accountant to smell a thief.  However, to catch the culprit you need the skills of a gumshoe. Business tax returns report the assets, liabilities, equity, revenues, and expenses of an entity.  The balance sheet lists the historical cost of what the entity owns (assets) and its obligations (liabilities).  Commonly referred to as the business’s resources, assets can be cash, inventory, fixed assets, and real estate.  Liabilities represent amounts owed, such as amounts due to vendors, mortgage obligations, and other debts. One must verify that assets and liabilities are truly business related and not personal.  Some personal assets hidden within businesses are automobiles, real estate, or investments.  […]


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A Guide to Fairness Opinions

Posted in Financial Advisory, on Oct 2014, By: Mark S. Gottlieb

A fairness opinion provides important information in a variety of financial transactions, such as: mergers, buyouts, business privatization, or employee stock options transactions. They offer protection for shareholders and can be imperative in hostile takeovers and distress sales. Fairness opinions address the fairness of the purchase price in an anticipated transaction. They are not generally required by the SEC or by statute or law, but have been considered best practice since the case of Smith v. Van Gorkom (488 A. 2d 858 – 1985), where a corporation’s board of directors was subject to liability for breaching the fiduciary duty owed to shareholders. Fairness opinions may also be included in proxy material provided to shareholders in charge of control transactions. The purpose of a fairness opinion is to provide an assessment of whether an offered price is fair. However, the best definition may be in what it does, not provide. A fairness opinion: Does not give advice on whether the company should enter into a transaction; Does not provide detailed business valuation information; Does not take into account the strategic purposes of a transaction or the political and social implications of a transaction; Does not report of solvency or a company’s capital structure; Does not indicate a company’s credit rating; Does not tell a company whether to enter into a transaction; and Does not inform a company as to whether the transaction is the best possible option. Further, because reports are made after negotiations are underway or completed, the report is […]


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Identifying Business Perks

Posted in Business Valuation, on Oct 2014, By: Mark S. Gottlieb

24/7 Wall St, published, “Eight Outrageous CEO Perks” which detailed various executive perquisites, or “perks.” From Oracle’s Larry Nelson’s $1.53 million security team, to Dow Chemical’s Andrew Liveris’s $98,000 for financial planning, the article revealed some expensive perks of corporate CEOs. In the case of closely-held businesses with a single owner, perquisites provide benefits to owners and reduce business taxes. By placing some company profit into perquisites, they can not only enjoy these perks, but can deduct these costs from the business’s reported income. When valuing a business or determining the normalized compensation of the owner, it is imperative to identify these issues. Perquisites are compensation beyond a normal salary and benefits. These items are discretionary, meaning they are extra compensation and would not necessarily have to be paid to someone else with the same position. Unlike bonuses, which are a lump-sum, perquisites are often in the form of pre-paid services or goods. Perquisites generally fall into a set of common categories: Retirement Plans, Insurance Plans, Pensions, Financial planning services, Tax services, Education, Memberships, Entertainment, Automobile Expenses, Company credit cards, Family Costs, and others. Some perquisites, such as a Supplemental Executive Retirement Plan (SERP), can be rather straightforward to find within a business’s accounts. However, there are some perks are trickier. While many forms of entertainment, such as lunches, are legitimate costs, others can be in excess, or altogether unneeded. One way to examine entertainment perks is to match the costs against industry data. If an executive’s entertainment perquisites are […]


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The reality show, “Jersey Shore,” may not interest legal professionals, yet the case of its star, Mike Sorrentino—AKA “The Situation”—may be. Among his tax fraud charges, he was accused of false documenting his imputed income through one of his companies. If you’re involved in tax fraud litigation, matrimonial actions, and shareholder or partnership disputes, advice about imputed income and its calculations is crucial. The IRS defines imputed income as the value of any benefits or services provided to an employee. The value of this cash or non-cash compensation must be considered in order to accurately reflect an individual’s taxable income. Employees can have income tax withheld for their imputed income or pay the amount due with their tax installment payments. Examples of imputed income are: Dependent care assistance exceeding the tax-free amount, Health and dental insurance for non-dependent domestic partners or same-sex partners or spouses, Basic or group life insurance in excess of $50,000, Personal use of company or employer-provided car, Non-deductible moving expense reimbursements, Educational assistance exceeding the excluded amount, and Below market rate loans. There are three approaches in determining imputed income: Detailed Transaction Listing and Analysis, Proof of luxury spending inappropriate for the claimed income, and The Net Worth Method. A Detailed Transaction Listing and Analysis consists of a listing of everything a person spends. A thorough analysis of these lists can be approached in two different ways: Adding up all the deposits to calculate after-tax earnings, and then comparing this total to the claimed earnings. List […]


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The Fraud Triangle

Posted in Financial Advisory, on Oct 2014, By: Mark S. Gottlieb

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 […]


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Calculating Economic Damages

Posted in Economic Damages, on Oct 2014, By: Mark S. Gottlieb

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 […]


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Cash Businesses and Divorce

Posted in Divorce & Matrimony, on Sep 2014, By: Mark S. Gottlieb

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 […]


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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 […]


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