Forensic Accounting

The Deepening Crisis of Financial Elder Abuse

October 2018 America’s aging population, who hold trillions of dollars in assets, are a common target for financial abuse.  Every year, millions of American seniors are scammed by fraudsters who exploit their financial vulnerability, or in some cases diminished cognitive capacity, through a variety of financial schemes.  The National Adult Protective Services Association (“NAPSA”) describes [...]

IRS Confirms Continued Partial Deductibility of Business Meals

October 2018 For months, the American Institute of CPAs (AICPA) and American businesses have been requesting guidance from the U.S. Treasury Department and Internal Revenue Service ("IRS") regarding changes made by the Tax Cuts and Jobs Act (TCJA) (Pub. L. No. 115-97).  These changes disallowed the deductibility of entertainment, amusement, recreation and qualified transportation fringe expenses beginning [...]

Another Major Vendor Billing Fraud Hits The Entertainment Industry

May 2016 Vendor billing schemes can occur in any industry, but two recent cases demonstrate the particular risks of the entertainment industry, which relies heavily on services whose actual delivery and consumption may be harder to track. A fraudulent billing scheme using a shell company can sometimes be accomplished with little more than a fictitious name [...]

SEC Utilizes Big Data And Statistics To Target Trading Fraud

July 2015 The Securities and Exchange Commission recently announced its first fraud charges involving what some have called an attempt at “Robocop”, derived from tracking behavior using data analytics of large volumes of investment advisors’ trade allocation detail.  The enforcement target is Welhouse & Associates Inc. and its owner Mark P. Welhouse. Mr. Welhouse is [...]

GAO Tells SEC to Look in the Mirror Regarding Internal Control Failures

May 2015 The U.S. Government Accountability Office (“GAO”), a government watchdog group, recently reported the results of its 2014 audit of the Securities and Exchange Commission (“SEC”) financial statements.  The findings included (i) troubling reports of internal control failures at the very agency tasked with policing the reporting activities of others and (ii) warnings of [...]

Planning Should Continue Despite FASB’s New Revenue Recognition Standard Delay

April 2015 The Financial Accounting Standards Board (“FASB”) has announced a proposal to delay by one year the effective date of implementation of the new revenue recognition standard under Generally Accepted Accounting Principles (“GAAP”), making the new date of change for public companies those reporting periods beginning after December 15, 2017.  Private companies would have [...]

FASB Says There’s Nothing Extraordinary About Your Financials

January 2015 The Financial Accounting Standards Board (“FASB”) has issued its first accounting standards update of 2015.  Simply put, FASB wishes to inform preparers of financial statements that there is nothing special about the results they are reporting, i.e., the end of the concept of “Extraordinary Items” on Income Statements. Accounting Standards Update No. 2015-01, Income Statement—Extraordinary [...]

Fraudulent Revenue Recognition Order Causes Rift At The SEC

September 2014 A settlement agreement has been reached In the Matter of Lynn R. Blodgett, Adm. Proc. File No. 3-16045 (August 28, 2014), but without consensus on the part of the Securities Exchange Committee (“SEC”) as to the appropriate penalty. The underlying circumstances involve a financial fraud action against two executives at Affiliated Computer Services, Inc. [...]

Internal Control Failings At The IRS Contribute to Over $100 Billion in Improper Payments

July 2014 The U.S. Government Accountability Office (“GAO”) recently issued “Management Report: Improvements Are Needed to Enhance the Internal Revenue Service’s Internal Controls”, describing how the Internal Revenue Service (“IRS”) continues to have internal control deficiencies, both new and old. The purpose of the report is to present internal control deficiencies identified during the GAO’s [...]

New Rules Aimed At Increasing Auditor Scrutiny Of Critical Fraud Areas

June 2014 With its new audit standards and amendments aimed at specific transaction types, the Public Company Accounting Oversight Board (“PCAOB”) has targeted three critical areas in its ongoing efforts to combat financial reporting fraud. The new rules are intended to increase heighten auditor scrutiny regarding (i) related-party deals, (ii) significant unusual transactions, and (iii) [...]

Spring Break Turns Sour For Investor

May 2014 In the matter of Division Entertainments, LLC and Wicks Walker v. Spring Breakers LLC and Muse Productions, Inc. et al., Mr. Walker asserts that he was denied a return of his investment, along with an additional profit, because of Defendants’ breach of contract via improper business practices and faulty accounting.  Mr. Walker, a [...]

Recent SEC Cases Demonstrate A Desire To Hold Audit Committee Members Accountable

April 2014 The Securities Exchange Commission (“SEC”) has set its sights on audit committee chairs who fail to exercise appropriate oversight and stewardship over financial reporting, recently targeting two who allowed ongoing fraud in the organizations they were tasked with overseeing.  Audit committee chairs of two firms with major Chinese operations, L&L Energy (“L&L”) and [...]

CAQ Proposes Audit Quality Indicators To Assist Audit Committees With Oversight

April 2014 Regulators and standard setters, such as the Public Company Accounting Oversight Board (“PCAOB”) and the International Auditing and Assurance Standards Board (“IAASB”) have been working to develop and standardize a framework for evaluating and encouraging audit quality.  After a two year effort, the Center for Audit Quality (“CAQ”), an autonomous public policy organization [...]

The True Cost Of Lowering Audit Fees Is Increased Restatement Risk

March 2014 In association with general cost cutting measures over recent years, many companies have pressured their vendors to reduce fees.  This downward pressure has extended to the accounting firms hired to provide independent audit opinions, resulting in a significant drop in audit fees.  According to Audit Analytics, audit fees in 2012 were $472 per [...]

New Standard For Revenue Recognition Standards Is Coming

January 2014 The final touches are being put on the new single, principles-based standard that will update and converge revenue recognition under the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board.  The change will impact entities that use US generally accepted accounting principles (“GAAP”) or International Financial Reporting Standards (“IFRS”).  FASB describes the [...]

Failing to Properly Manage Licensing Agreements Leaves Royalties on the Table

October 2013 A patent and license portfolio can provide a consistent and reliable revenue stream. However, many companies have technology, trademarks, and merchandising opportunities that are not fully exploited. Even if fully licensed, there is often considerable upside available via vigilant enforcement of audit provisions to ensure all amounts due are paid. Unlike almost any [...]

Lack of Internal Controls Allows Repetitive Small Thefts To Really Add Up

October 2013 A recent article in the Los Angeles Times exemplifies how relatively small repetitive thefts can translate into large dollar amounts when allowed to perpetuate undetected over many years.  In this circumstance a Rialto school district accountant is accused of embezzling between $1.8 and $3.16 million of school lunch money, in weekly increments of [...]

Major Changes In Standard Audit Reports Coming?

August 2013 The Public Company Accounting Oversight Board (PCAOB) is considering changes to the standard auditor's report, which has remained relatively unchanged for decades.  The hope is that these changes will make the standard auditor’s report more informative, relevant and useful to investors and other financial statement users.  The proposed expanded language would require auditors to [...]

The International Community Has Different Opinions On Mandatory Auditor Rotation

July 2013 In the past year, the issue of mandatory auditor rotation has been an active area of debate, both domestically and abroad.  The idea of mandatory auditor rotation has been around for years, but has consistently (and successfully) been opposed by the public accounting profession and its large clients.  While the European Union still [...]

New Guidelines To Assist Companies With Fraud Deterrence

June 2013 Internal Control – Integrated Framework, is a new framework for fraud deterrence that was recently released by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  It provides expanded practical advice regarding effective implementation of internal controls.  COSO is a joint initiative of five private sector organizations with a shared interest in [...]

Battling Auditor Involvement In Fraudulent SEC Reporting

May 2013 Even after the increased regulation associated with the Sarbanes-Oxley Act (SOX) in July 2002, the audit profession continues to deal with questions of whether they are truly independent from the companies who employ them and overall audit effectiveness. A recent report commissioned by the Center for Audit Quality (“CAQ”) specifically examines Securities and [...]

Research On Compensation And Fraud Point to the Fraud Triangle

May 2013 A recent study in The Journal of Financial Economics suggests that a compensation structure that relies on financial performance measures can be tied to incidences of fraud.  Generally, the study concludes that individuals are more likely to engage in financial misstatements when the there is little downside and high upside.  The implication is that [...]

SEC Hesitating To Impose Internal Audit Function Requirement On NASDAQ Companies

April 2013 On March 4, 2013, NASDAQ issued a proposed new rule (Release No. 34-69030; File No. SR-NASDAQ-2013-032) which would require listed companies to have an internal audit function: “Each Company must establish and maintain an internal audit function to provide management and the audit committee with ongoing assessments of the Company’s risk management processes [...]

PCAOB Issues Second Mixed Report On Audits By Smaller Firms, But Ultimately Puts Them On Par With Larger Firms

April 2013 On February 25, 2013, the Public Company Accounting Oversight Board (PCAOB) issued its summary report on smaller accounting firms. The PCAOB described its inspections and related reporting here as follows: “This report covers domestic audit firms that audit the financial statements of issuers, and that regularly issue 100 or fewer audit reports each [...]

SEC To Utilize Data Analytics To Identify Accounting Irregularities

February 2013 Data is valuable.  The question is once you have it, how can you use it?  Data analytics uses processes to extract and evaluate information from large data sets and identify potential areas of risk, fraud, or error.  Among the often used data analytics activities is benchmarking or trending of data.  Developing these strategies [...]

DOJ & SEC Issue Guidance on Foreign Corrupt Practice Act

November 2012 The U.S. Justice Department (DOJ) and Securities and Exchange Commission (SEC) jointly published a much anticipated guidance on the U.S. Foreign Corrupt Practices Act (FCPA).  Entitled “A Resource Guide to the U.S. Foreign Corrupt Practices Act”, the “Guide” is 120 pages long, and is significantly more comprehensive than its predecessor, the “Lay Person’s [...]

Standard Charter Bank Still In Trouble Over Iranian Money Laundering Fraud

August 2012 In a quick settlement over Iranian-related illegal conduct, Standard Chartered Bank (SCB) agreed on August 14 to pay $340 million in a settlement with the New York State Department of Financial Services (DFS). The DFS settlement allows SCB to continue operating in New York, but requires an on-site monitor who will report directly [...]

Proposed Changes To Litigation Accounting And Disclosures Are Dropped

July 2012 In July 2012, the Financial Accounting Standards Board (FASB) voted to drop a controversial project that would have required companies to disclose more about contingent losses, including most notably those arising from litigation. The now-withdrawn proposal would have required significant additional disclosure of litigation. The vast majority of those commenting on the proposal [...]

Accounting Standard Will Require Significantly More Leases To Be Put On The Balance Sheet

June 2012 On June 13, 2012, after more than a year of deliberation, the International Accounting Standards Board (IASB) and U.S. Financial Accounting Standards Board (FASB) agreed on an approach for accounting for leases that generally will be simpler to implement than some of their earlier and more controversial proposals. The Boards plan to release [...]

California Passes Tough Law On Independent Contractor Misclassification

October 2011 On October 9, 2011, Governor Brown signed into law Senate Bill 459 regarding independent contractors.  The law significantly increases the risks and penalties for misclassifying workers as independent contractors by imposing significant penalties on employers found to have engaged in a misclassification, as well as on non-lawyer advisors (like accountants) who advise an [...]

IRS Payroll Tax Amnesty Regarding Independent Contractors Should Be Carefully Analyzed

October 2011 Many small businesses attempt to save taxes and employee benefit cost by classifying their workers as independent contractors.  When business owners classify workers as independent contractors they do not pay the employer’s share of Social Security and Medicare costs, state employer taxes, state unemployment insurance taxes, and workers’ compensation insurance premiums.  Independent contractors [...]

Getting More Money From Licenses

  Intellectual Property licensing is big business, and is getting bigger.  But most licensors do not earn as much as they should because they fail to perform royalty audits allowed under their license agreements.  The remedy is obvious, but is often not done for fear of the audit's cost or concern over disrupting the licensee [...]

Computer Forensics Deserve A Place In Your Human Resource Toolkit

June 2008   Computers contain evidence useful in many human resource circumstances. Allegations of discrimination, sexual harassment, and unfair discharge are serious threats that are better understood by knowing what an employee did. Since computers are such a pervasive part of most employees’ work lives, analysis of data stored on these computers helps address these [...]

FASB Toughens Off-Balance-Sheet Accounting

June 2009 Existing accounting guidance permits companies to report transfers of portions of financial assets as sales. The off-balance-sheet entities that enabled banks to keep securitized assets and other activities off their financial statements will now need to be included on their sponsor’s consolidated financial statements. An important accounting change which will be finalized this [...]

GAAP Reorganization Will Cause Short-Term Frustration, But Should Improve Research Capabilities

May 2009  On July 1, 2009, the Financial Accounting Standards Board (FASB) is expected to issue their “Accounting Standards Codification” (ASC) as the sole authoritative accounting guidance for U.S. generally accepted accounting principles (GAAP). The ASC will not change GAAP, but nevertheless represents a major shift in its organization and presentation. It is intended to [...]

More Resources Will Be Allocated To Financial Fraud Initiatives

February 2009 Government resources are usually allocated based on the political sentiment of the day. Those in charge of investigations understandably want to show that they are accomplishing something. Consequently, once resources are allocated to an investigative area, prosecutions invariably follow. White collar defense lawyers face improving business conditions. This is occurring because (i) increased [...]

Detailed Audit Provisions Save Headaches

February 2013 The audit provision within many licensing agreements is nothing more than a short paragraph in what may otherwise be a highly detailed document. We sometimes see audit provisions that are nothing more the following: Licensor, at their own expense, shall have the right to nominate an independent certified public accountant satisfactory to Licensee, [...]

Largest-Ever Ponzi Scheme Should Have Been Obvious To Anyone Who Looked Seriously

January 2009 In mid-December, Bernard Madoff was arrested for operating a giant ponzi scheme. After his two sons reported him to regulators, Madoff admitted that losses could be as much as $50 billion. Bloomberg tallied around $37 billion that is currently invested with Madoff, but the total numbers will obviously include amounts not subject to [...]

Electronic Data Is Always Difficult … If You Don’t Try

November 2008 Many times discovery is resisted or analyses are not pursued because of a misguided notion that the work would be too difficult or time consuming. The sheer volume of electronic data sometimes makes it appear that the data is too cumbersome to address. However, with the correct skills and tools, this initial perception [...]

Business Interruption and Related Insurance Claims

Updated November 2018 California is facing increasing losses from wildfires, which create special insurance claim issues.  Businesses are interrupted because of physical damage to their own facilities, as well as to their surrounding communities, transportation options or the operations of key suppliers and major clients. These insurance claims are often complex, requiring the assistance of [...]

Weak Credit and Economic Conditions Cause Litigation Over “Material Adverse Change” Clauses

February 2008 A number of current stalled deals involve material adverse change clauses. Litigation in this area will increase because of uncertainties involving (i) the credit markets and (ii) operating disappointments associated with an economic downturn. Regardless of whether you represent sellers, buyers, or lenders, lawyers are well-advised to pay greater attention to these “standard” [...]

Delaware Case Alters Existing Practice Regarding Use Of Special Committees

January 2008 The Delaware Chancery Court issued a ruling in Ryan v. Gifford, C.A. No. 2213-CC (Del. Ch. Nov. 30, 2007) that runs afoul of current common practice in dealing with investigations performed by a Special Committee of the Board of Directors. Although the case involves stock option backdating, the rationale applies equally to any [...]

Tax Accrual Workpapers Are Probably Safe From The IRS’s Probing Eyes

To maintain accounting records under generally accepted accounting principles, companies need to assess the likelihood of judgmental positions being sustained. The recent tax case United States vs. Textron, No. 06-198T (Aug. 29, 2007), is important in establishing a taxpayer’s right to prevent disclosure of (i) its internal analyses of these controversial tax positions, and (ii) [...]

IRS Loses Another Case Involving Auditor Work Papers

  In Regions Financial Corp. v. United States, (N.D. Ala., No. 2:06-CV-00895-RDP, 5/8/08), the IRS lost another battle in its effort to get information from outside accountants’ tax accrual work papers. This case could be particularly damaging to the IRS’s position because the Court’s rationale arguably would apply regardless of which split in authority is [...]

10b5-1 Plans Deserve Greater Scrutiny by Boards of Directors

July 2007 Stock option backdating scandals have grabbed headlines for quite some time. These scandals were initially identified by academic research that noted unexplained stock movements relative to option grant dates. A similar issue may exist with 10b5-1 plans. The volume of potential insider trading is substantial. For example, in late July, the former CEO [...]

The FASB’s Gift To The IRS

Updated January 2007 In June 2006, the Financial Accounting Standards Board (FASB) issued FIN 48, an amendment to existing standard no. 109, "Accounting for Income Taxes."  At first blush, the pronouncement seems simple, fair, and straightforward, but it will have a huge unintended consequence.  The pronouncement requires that, starting in 2007, corporations that took aggressive [...]

Alter-Ego Allegations Require Expert Accounting Assistance

March 2013 Alter-ego is one of the most commonly alleged equity-based principals.  Where the facts warrant, courts will disregard the separate legal existence of corporations (including LLCs) and its shareholders (or members).  The purpose of "piercing the corporate veil" is to prevent the abuse of corporations, and thereby protect creditors who might otherwise not be [...]

Claim Preparation Tips For Business Interruption Insurance

September 2012 Beyond the physical property loss, your business will incur significant additional costs and will not be as profitable as before.  Most businesses have business interruption (BI) insurance to address these risks.  However, getting a proper claim prepared and paid will likely be a challenge.  The tragedy that caused your business interruption may have [...]

New Accounting Rule Requires Lawyer Input

June 2005 Lawyers issuing legal confirmation letters to their client's auditor will have one more item to consider.  No later than December 31, 2005, companies with future environmental cleanup obligations may (depending upon the practices previously adopted) face a major change.  Because the new rule requires complex judgments and estimates, lawyers and their clients should [...]

How Principles-Based Accounting Affects Lawyers

August 2003 In late July 2003, the Securities and Exchange Commission (SEC) released a staff study required by Section 108(d) of the Sarbanes-Oxley Act.  The study strongly recommends that accounting standards be developed using a principles-based approach.  In several prior articles, we encouraged this change.  Although the full impact will take years to occur, the [...]

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