Forensic Articles of Interest

The following are recommended articles that we have published in recent newsletters. Each discusses important issues in forensic accounting.

Watch out for financial misstatement
A valuation is only as accurate as its underlying financial data. Some unscrupulous business owners employ creative accounting techniques to hide assets or lower profits.

Court rejects expert testimony
In September 2000, Rainforest Cafe Inc., a struggling “eatertainment” operator, entered into a two-part merger with Landry’s Restaurants Inc. At the time of the merger, Rainforest’s stock was trading on NASDAQ for around $2 per share.

Black and Blue, Inc.
Impaired businesses need a thorough assessment of economic damages from breach of contract and patent infringement to outright negligence, commercial torts often give rise to economic damages. In these cases, it’s critical to put a precise dollar amount on how much business the company stands to lose. And many factors go into this assessment.

Shareholder disputes: Involve a valuator early
Disputing shareholders frequently hold off calling in an expert as they try to rein in mounting professional fees and optimistically hope to settle their differences amicably. But this can lead to unnecessary haste and expense. The proactive use of valuators promotes efficient strategy and, ultimately, saves time and money. Valuators can help in the early stages of a shareholder dispute in several ways.

Going on the offensive - 3 issues to raise during depositions and cross-examinations
Depositions and cross-examinations provide an opportunity for attorneys to discredit opposing experts and poke holes in their valuation analyses, assumptions and conclusions. A successful offensive against a valuator compromises the reliability of his or her qualifications and report, regardless of a subject company’s “true” value.

Whodunit — and how much is at stake?
When a company is a victim of a civil wrongdoing — such as breach of contract, negligence or patent infringement — profits frequently suffer. Courts may award monetary damages to make the injured party “whole” again.

Estimating lost profits for new businesses
Historic financial statements provide a logical starting point for estimating lost profits. But how does an appraiser estimate lost profits for startups or early-stage businesses without historic data? A recent case, Parlour Enterprises Inc. v. Kirin Group Inc., outlines factors to consider when calculating damages for unestablished businesses.

Third time’s a charm - An additional opinion can help resolve disputes
Suppose two competent experts are hired to value a privately held business. Even if both appraisers are unbiased and equally qualified, and apply sound appraisal practices, they are unlikely to arrive at the same number. In fact, valuation differences of 10% or more are common — even under ideal circumstances.

What To Look for in a Rebuttal Report
Valuators usually prepare standard valuation reports for clients. But they can also prepare rebuttal reports to convey expert opinions in legal matters. Rebuttal reports are a special subset of valuation reports that valuators prepare exclusively for litigation purposes. Typically, they provide either a critique of another expert’s valuation report or a response to the opposition’s criticisms.