The best example of an advocate is your client’s attorney. That attorney’s job is to do whatever is necessary (legally, of course) to present the client’s case in such a light that the client wins the lawsuit and ends up with as large a settlement as possible. The advocate will omit items that do not help the client’s cause and take the position that if opposing counsel does not raise an issue, it will be left unsaid.

The business valuation practitioner can assume the role of an advocate when hired to support the attorney and client in the litigation, although this is generally done only when expert testimony is not a possibility.
 
When testimony is expected to be given, the practitioner must remain objective, even though instinct dictates that he or she should fight for the client’s benefit. In this type of situation, the practitioner will actually be a greater benefit to the client for at least two reasons:

1. Although the client may not be happy, the truth may save your client from the emotional and financial costs of a protracted litigation. An extreme position may convince the client that there is a false “pot of gold” at the end of the litigation that may never be realized.

2. The practitioner that serves as an expert witness will lack credibility in the eyes of a judge or jury if the position taken by the practitioner is that of an advocate.

During litigation, there is rarely a client who does not feel the emotional impact of the issue that caused the lawsuit to be filed originally, as well as the impact of the ongoing proceedings. It does not matter if the case involves a divorce, a stockholder breakup (which in many respects is similar to a divorce), damages litigation, or a breach of contract litigation. The client is angry because he or she feels that a wrongful act has been committed, either forcing the client to file a lawsuit or having a lawsuit filed against him or her.
 
To illustrate the painful effect of an advocate’s position, let’s look at a business valuation issue in a divorce. 
 
Harry and Sally are going through a divorce. Harry owns a business that he had appraised by an independent appraiser for $1 million. Sally’s attorney recommends Joe Appraiser who values Harry’s business at $5 million. During the valuation, Joe Appraiser ignores the fact that Harry’s largest customer, who accounts for 63 percent of his business, died of a heart attack. Joe Appraiser also determines Harry’s reasonable compensation to be $25,000 per year despite industry statistics, and Harry’s work habits, which justify a salary of approximately $150,000.
 
Joe Appraiser meets with the attorney and Sally and convinces Sally that his salary position “could be” (rather than “is”) justified and says nothing about the main customer’s death. The end result is that Harry and Sally cannot reach a settlement because of the great disparity in the values of Harry’s business and they go to trial.
 
The trial does not take place for almost two years due to the backlog in the court system. During that period, Harry and Sally are bitter over their perception that they were each being cheated out of a fair settlement by the other party.
 
At the time of trial, both attorneys prepare for trial, meet with their respective expert witnesses and proceed with their case. The legal and expert fees incurred by Harry and Sally are in excess of $50,000. The judge accepts the value of Harry’s business as being $1 million based on the testimony of the independent appraiser.
 
What did Joe Appraiser’s position of advocacy do to Sally? First, she waited for more than two years to be finished with the divorce and go on with her life. During that period, her life was in turmoil, she was dependent on Harry’s temporary support and did not know where she would be living after the divorce if the marital house was ordered to be sold. In addition, she became more and more agitated at the thought of Harry trying to “stick it to her” and she became a very bitter person. Let’s also not lose sight of the fact that her legal and expert fees were about $30,000. Worst of all, she ended up with the same amount of marital property (less legal and expert fees) as she would have two years ago.
 
In this situation, the appraiser, although good intentioned, hurt the client with a position of advocacy. Granted, this situation sounds extreme, but it happens more often than can be imagined.
 
Let’s also look at what advocacy does for the appraiser. After this matter gets to court, the judge finds Joe Appraiser’s position to be that of a “hired gun” and determines that he lacks credibility. The independent appraisal expert remains objective and assists the other side with a victory. Joe Appraiser, or any other expert for that matter, should not believe that attorneys and judges do not talk about experts.
 
Our experience has been such that word gets around fast about the reputation of an expert. As an expert, the business valuator must demonstrate a particular level of knowledge about the subject matter for which testimony will be given, but the reputation of that expert is critical, particularly where the opposing expert communicates well.

Gary Ringel, CGREA

The source for this article is FCG Business Valuation Newsletter, Volume XI, Issue.  It was written by Gary R. Trugman, CPA/ABV, MCBA, ASA, MVS, Trugman Valuation Associates, Plantation, Florida

The authors explain that the Internal Revenue Service has long held the belief that it has the regulatory authority to restrict or eliminate discounts on intra-family transfers under Chapter 14 of the Internal Revenue Code. In addition, the Obama Administration has promoted the “We Can’t Wait” doctrine to justify the use of regulatory actions to bypass Congress. Two other factors may play a role in this as well. It may be more difficult to challenge IRS regulations since a 2011 Supreme Court case and there is a willingness of the Administration to increase taxes on the wealthy.

The authors expect that IRS regulations restricting or eliminating these discounts could be issued at any time and that the regulations will be effective immediately on issuance.  They believe that time is running very short to take advantage of intra-family discounts and to modify estate planning appropriately. Will the IRS actually issue regulations to restrict or eliminate these discounts? I cannot foretell. However, the article is worth considering.

Steve Koons, CPA, ABV, ASA, CFF

* The “death knell” for family discounts? By Gordon A. Schaller and Scott A. Harshman, Jeffer Mangels Butler & Mitchell, LLP, published here, April 24, 2013.

This actually happened to me early in my career providing litigation support services as a CPA expert witness.  As a former police officer and detective on the Tucson, Arizona Police Department I had testified at criminal trials many times.  I never noticed any jury members dozing then – maybe because the cases were a bit more scintillating than those concerning accounting-related issues. 

By the time I started testifying at trials involving civil litigation I thought I was pretty used to the process and would never be so dull as to actually have folks go to sleep as I testified.  I decided that I had to do more to keep the jury involved – and interested, in what I had to say on the witness stand.

 I made a mental checklist that I try to adhere to before and during every trial where I am to testify as an expert CPA witness:   Before trial – a) study my files well before going into court; b) meet with the attorney on my case prior to the trial;  At trial -  a) dress in a professional manner expected of someone testifying at my level of education and experience; b) don’t argue with the opposing attorney; c) don’t go off on tangents talking about issues not asked by the questioning attorney; d) don’t lose my temper; e) be respectful of my questioner no matter how inept he or she tries to make me look to the jury; f) be thoughtful about each question asked of me, but don’t allow too much time to lapse before I answer; g) be a good teacher and  try not to talk over the heads of the jury members with a lot of technical jargon – or, conversely not to talk too far below their intelligence level;  and, h) provide eye contact to the jury members while testifying at a jury trial, or to the judge if I’m testifying at a bench trial.

I found that eye contact was extremely important – whether looking at jury members when I testified or to the judge if no jury was involved.  I challenged myself to speak with an energy and enthusiasm that would be so riveting no jury member would slumber during my testimony.  As I look at the jury I try to imagine myself in a casual one-on-one conversation with them while sitting at my kitchen table.   I’m not saying I’ve never put a jury member to sleep since.  However, I like to think I am now more engaging with the jury, or judge, than I was before.

Don R. Bays, CPA/ABV, CVA, CFF

Below are a few estate planning tools and strategies presently being recommended by estate planners, accountants, and financial planners.

1. Incorporating a protection provision in your trust documents which facilitates amendments to comply with any type of new legislation in the future.

2. Lock in the “Dynasty” planning options in your trust documents that enable wealth to be insulated from taxes and other hazards over multiple generations.  Non-tax issues like divorce, substance abuse, litigation, medical disasters, and business failure destroy as much wealth as taxes.

3. Be aware and prepared should legislators adopt devices to increase taxes in order to avoid bankruptcy of the U.S. such as:

~Phasing out more exemptions;
~Implementing means testing for retirement plan withdrawals;
~Placing caps on deductions such as charitable giving;
~Limiting the duration of grantor retained annuity trusts;
~Limiting the number of years a trust can skip generations without transfer taxes;
~Implementing carry-forward cost basis at death enabling the IRS to collect more  capital gains taxes;
~Eliminating grantor status for trusts resulting in taxes at the higher trust rate;
~Including “grantor trusts” in the taxable estate which would make many life insurance trusts taxable; and
~Eliminating installment payments of estate taxes. 

4. Make sure you confer with all of your professional advisors before amending your estate planning documents.  Too many so-called estate plans leave gaps in the protection because there is little or no connection between the business and property structures and the estate structures, or because the accounting, legal, investment and insurance advisers are each doing their own thing without coordinating with each other.  Effective planning is a team event that covers the whole field for the entire game.  One star player making one good shot may look good for the moment, but it won’t win the game.  Don’t ever forget that you are the quarterback regardless of your level of knowledge.  Keep your advisors in the game.

Gary Ringel, CGREA

A recent article written by Bruce Hilby, who has purchased and developed land in the West Valley over the last 35 years, stated “Metro Phoenix’s 2.7% population growth projected for 2013 is the fourth highest of any city in the nation. This is the primary driver of housing demand and if true, it suggests to me that we are not currently building nearly enough housing in the area to cope with the influx. The Phoenix Metro Area had a population of 4,192,887 in the 2010 Census. 2.7% growth represents more than 113,000 people who would typically require more than 43,000 homes.

To put this in perspective, in 2012 developers sold fewer than 10,000 new homes (single family & condo) in Maricopa and Pinal counties. Even though this was a 34% increase over 2011 and growth is expected in 2013, the Forbes projection implies a significant housing shortage.”

Is the Phoenix Metro Area poised for an economic recovery? 

I believe the answer is yes.  Historically housing shortages caused by population growth have led us, the Metro Phoenix Area, out of recessions because each new home built creates an average of three jobs for a year and generates about $90,000 in tax revenue.  Let’s hope that Forbes’ projections are accurate.

Gary Ringel, CGREA

Metro Phoenix Vacancy and Lease Rates

The Metro Phoenix retail market has recorded positive absorption in five of the last six quarters.  At year end, the market absorbed 1.9 million square feet of space compared to negative absorption of 152,647 square feet at the end 2011.  

Retail centers under construction in metropolitan Phoenix total 463,775 square feet compared to 395,281 in the fourth quarter of 2011.

At the end of the fourth quarter the metropolitan Phoenix retail vacancy rate was at 11.0 percent, compared to 12.2 percent one year ago.  As frame of reference, the vacancy rate in year end 2008 was 7.5 percent reflecting an increase of 450 basis points.

The average net asking lease rate for existing retail centers in metropolitan Phoenix at the end of the fourth quarter was $15.83 per square foot, compared to $15.90 per square foot at year-end 2011 and $15.53 two years ago. The submarkets with the highest average asking rates were Paradise Valley and North Scottsdale and Tempe/Ahwatukee which posted respective rates of $21.94, $19.13 and $18.53 per square foot in the fourth quarter and the submarkets with the lowest asking rental rates were Northwest Phoenix, North Phoenix and Mesa/Chandler/Gilbert which had average asking lease rates between $12.34 and $14.19 per square foot.

At the end of the fourth quarter, the average net asking rates for existing space in power centers, neighborhood centers, community centers and strip centers were $18.67, $14.72, $16.24, and $13.19. per square foot. We believe the retail market, with the exception certain submarkets, has reached bottom. 

Gary Ringel, CGREA

Small business owners and management in small non-profit organizations often feel that their employees would never steal from them.  Some owners don’t think they have enough worth stealing.  Some develop a sense of family with their employees resulting in a higher level of trust.  Others just don’t think they have the time or resources to invest in the controls to prevent fraud.  What they fail to see is that any amount of theft can be detrimental to a business or organization. 

It doesn’t have to cost a lot to deter fraud.  Owners and managers should recognize where the risks exist in their organizations.  Then they should consider the best approach to mitigate those risks.  Pre-employment screening for personnel in higher risk positions could be implemented.  Mandatory vacations or job sharing are low cost options.  A practice of having bank statements mailed to the owners home address for his/her review monthly doesn’t take a lot of time but could prevent someone from diverting funds.

Owners and managers should not stick their heads in the sand and blindly trust their employees.  An employee who knows the likelihood of getting caught is slim is much more likely to commit a crime than one who believes the chances of getting caught are high.  The perception of detection is sometimes all that is needed to prevent an unfortunate occurrence.

For a real life case study, see my article here.

Melissa Loughlin-Sines

The five recommendations are summarized as follows:

• Judges should implement early and consistent active case management
• Clients and attorneys should involve experts early in the process
• Attorneys should target, focus and streamline expert depositions and discovery
• Attorneys’ Daubert-like challenges should be appropriately targeted and acted upon promptly by the Court
• Attorneys and the Court should develop a process for the collaboration and cooperation of opposing experts where appropriate

To read the full report click on the link below.

http://www.aicpa.org/InterestAreas/ForensicAndValuation/NewsAndPublications/DownloadableDocuments/FVS%20Consulting%20Digest%20November%20Issue%202012.pdf

Steve Koons, CPA, ABV, ASA, CFF

Recently the ACFE released its 2012 Report to the Nation on Occupational Fraud and Abuse.  This bi-annual report surveys Certified Fraud Examiners (CFE) from around the world to learn more about the costs associated with fraud within all types of organizations.  The survey also looks at the methodologies used by the perpetrators as well as facts about the perpetrators.  The 2012 Report was compiled from nearly 1,400 cases of fraud from almost 100 countries around the world.  The victim companies ranged in size from less than 100 employees to over 10,000 employees.  Many interesting facts regarding fraud in small businesses (less than 100 employees) are included in the report and highlighted below.

• Nearly one –third of the cases reported involved small businesses
• Organizations with 100 – 999 employees accounted for another 20 percent
• The median loss suffered by all size organizations was $140,000
• The median loss suffered by small business was $147,000.
• Billing schemes were the most common method of fraud in small businesses
• Check tampering occurred in 20 percent of the cases in small businesses while only occurring in 7 percent of cases involving businesses with greater than 100 employees
• Lack of internal controls was cited as the primary weakness contributing to fraud in almost half of the cases that occurred in small businesses
• Across all size organizations, perpetrators displayed at least one red flag in 81 percent of the cases.  Red flags include:

1. Living beyond your means
2. Financial difficulties
3. Unusually close association with vendors or customers
4. Displaying excessive control issues.

Small business owners can’t keep their heads in the sand.   Cost effective anti-fraud measures can be implemented.  Examples include an organization code of conduct, anti-fraud training programs for employees that educate them on the red flags and types of frauds, formal management review of controls and processes.  Owners and managers also need to set a proper ethical tone for the organization.  Small business owners should not let their employees use them as a rationalization. 

Proactive measures to assist in preventing fraud are crucial and ongoing.  Management should be continually assessing its risk of fraud and its prevention programs.

Small business owners shouldn’t think they are invincible, it could cost them.

The complete 2012 Report to the Nation can be found on the Associated of Certified Fraud Examiner’s website at www.acfe.com.

Melissa Loughlin-Sines, CPA, CVA, CFE