banner ad
Experts Logo

articles

A Forensic Engagement

By: Michael Pakter
Tel: 312-229-1720
Email Mr. Pakter

Website: www.litcpa.com

View Profile on Experts.com.

As originally Published by Litigation Forensics Board of NACVA, 2014.


Mr. Bad Actor is a 61-year-old male who is the senior executive of the Unlucky Transportation Company. He has been in that position for more than ten years. Before his employment at the company, he worked for a series of unsuccessful transportation companies, where both he and other stakeholders lost most of their investment. He has ongoing legal and financial problems resulting from these prior business failures and from his failed marriage.

Mr. Bad Actor's responsibilities at the Unlucky Transportation Company are split between the company's accounting and operations departments, where much of his time is spent on dealing with billing adjustments that may arise due to customer complaints, products being shipped to incorrect locations, and credits given to special customers. No one checks his adjustments and Ms. Dutiful Employee processes all billing adjustments so long as she sees Mr. Bad Actor's initials on the billing adjustment request form.

After processing any credit voucher, Ms. Dutiful Employee scans the documentation and saves them in a file folder in the company's server that only she and Mr. Bad Actor can access. It is rumored that both Mr. Bad Actor and Ms. Dutiful Employee have personal financial difficulties and are living beyond their means. They often go drinking together after work.

Mr. Bad Actor is unusually close to certain company vendors and customers. Ms. Dutiful Employee has control issues and is unwilling to share any of her duties with others. Both employees have opted to have their unused vacation days paid in cash during the last few years-in fact, records show they have not taken any vacation or sick days for several years.

Several executives of the Unlucky Transportation Company and most of its employees are terrified of dealing with Mr. Bad Actor and Ms. Dutiful Employee because of his tendency to bully and intimidate others and her tendency to ignore requests for information and/or documentation-or to simply refer inquiries to him. One of those executives recently contacted Ms. Labor Lawyer, the company's general counsel to express concern about a rumor that one customer paid a kickback to Mr. Bad Actor in return for the Unlucky Transportation Company issuing it a large undeserved credit.

The company is owned by Mr. Absentee Owner, a passive investor who rarely gets involved with day-to-day affairs. The company managed to keep making small profits during the "Great Recession," but these profits have not increased as the economy has improved.

Mr. Absentee Owner recently discussed these issues with Ms. Labor Lawyer. She recently read your press release that the National Association of Certified Valuators and Analysts (NACVA) had credentialed you as a Master Analyst in Financial Forensics (MAFF). She called you to ask you to meet with her to establish if there were any "red flags" that she should be concerned with.

While Ms. Labor Lawyer decides her next steps regarding the Unlucky Transportation Company, she is concerned with several other significant issues relating to this client. She sees no "red flags" and believes any investigation is a waste of time and money and will only get in the way of other issues. Nonetheless, she has asked you to identify any "red flags" and explain what forensic investigations you intend to perform.

After completing your conflict check and obtaining your engagement letter and retainer check, you prepare the following memorandum:

Image

Image


The above-contemplated communication to retaining counsel follows a methodology that, generally, is useful and valuable to corporate legal counsel performing internal investigations at companies. First, it lists the problem and/or current risks faced by the corporation. Second, it proposes a set or range of solutions to address those problems and/or risks.

Practitioners educated, skilled, and experienced in fraud investigations and financial forensics are uniquely positioned to assist the legal counsel of companies to identify "red flags" related to occupational fraud and to develop the requisite forensic investigative procedures. These practitioners should have the required special skills, training, and knowledge to design and implement procedures that properly investigate in order to uncover these frauds. However, care should be taken both in identifying and memorializing the scope of the engagement and designing and implementing the nature, timing, and extent of the procedures reasonably intended to meet engagement needs.


Michael D. Pakter CPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV focuses on accounting, forensic accounting, financial analysis, financial forensics, economic damages, business valuation and investigations. He has experience in lost profits / earnings, business interruption claims, analysis of financial transactions and balances, Court-ordered accounting, bankruptcy, fraud examinations, investigations and the reconstruction of incomplete, misstated and/or falsified financial information.

©Copyright - All Rights Reserved

DO NOT REPRODUCE WITHOUT WRITTEN PERMISSION BY AUTHOR.

Related articles

Michael-Pakter-Forensic-Accounting-Expert-Photo.jpg

11/1/2017· Accounting

Determining a Distressed Debtor Company Discount Rate, Part 2

By: Michael D. Pakter

This is Part 2 of a two-part article. The first part (published in the January 2014 issue of Business Valuation Update) discussed valuations of distressed debtor companies based on discounted cash flows and considered the impact of the date and stage of distress. This part describes how the financial analyst derives the cost of capital for a distressed debtor company.

Fulcrum-Inquiry-Logo.jpg

7/16/2014· Accounting

The True Cost Of Lowering Audit Fees Is Increased Restatement Risk

By: David Nolte

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 $1 million of revenue, the lowest amount since 2004. The question is whether audit quality has been sacrificed in order to achieve these reductions.

Fulcrum-Inquiry-Logo.jpg

8/16/2014· Accounting

Ninth Circuit Overturns Daubert Exclusion, Again Noting Trial Court Is A Gatekeeper, Not A Fact Finder

By: David Nolte

In a recent case involving the City of Pomona ("Pomona") v. SQM North America Corporation ("SQM"), Pomona alleged that SQM's importation of sodium nitrate for fertilizer caused a perchlorate contamination in the city. Although the district court excluded under Daubert the expert testimony of Pomona's expert witness on causation, the Ninth Circuit reversed the ruling, stating that "facts casting doubt on the credibility of an expert witness and contested facts regarding the strength of a particular scientific method are questions reserved for the fact finder". The case was remanded for trial.

;
Experts.com-No broker Movie Ad
Unicourt Logo Button

Follow us

linkedin logo youtube logo rss feed logo