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Forensic Accounting
- 1. ASWA, SF Chapter,01/13/2010 Litigation Consulting and Forensic Accounting American Society of Women Accountants San Francisco Bay Area Chapter #11 By George Fruehan of Numbers Talk GeoFru@usa.net 510-558-1999 510- 558- January 13, 2010 What is Litigation Support, -- Litigation Consulting? • Litigation Support: Transcription, copying, indexing, database for retrieval, prepare poster board exhibits, prepare videos, Powerpoints, etc. • Litigation Consulting: • expert – to teach the court • in most technical topics • failure analysis, accident reconstruction, the professional “standard of care”, computer performance, document examination 2 George Fruehan, 510-558-1999 1
- 2. ASWA, SF Chapter,01/13/2010 San Francisco Bar, directory of experts in, … • accidents (investigation, analysis, reconstruction, reenactment) • Chemical • Commercial Trucking • Construction • Elevator/Escalator • General • Industrial/Manufacturing • Other (slips, trips and falls, household and power tool accidents) • Psychological Trauma • Transportation — Aviation • Transportation — Bicycle • Transportation — Boating • Transportation — Highway/Traffic/Vehicular • Transportation — Pedestrian • Transportation — Railroad • accounting • actuarial • ada compliance • agricultural sciences 3 Forensic Accounting, examples • Accounting issues: – Monetary Damages: Loss of profit from lost sales, lost customers, product costs – Wage, Pension loss from: ‘wrongful termination’, discrimination, injury – Loss of profits from IP: Patent, trademark, copyright, trade secrets 4 George Fruehan, 510-558-1999 2
- 3. ASWA, SF Chapter,01/13/2010 What is Forensic Accounting? • Accounting done to a standard suitable for legal review • Anticipates that the accounting will be used in an adversarial proceeding • Thoughts: > How is this different from popular CSI-type programs on television? > How is this different from the practice of an accountant in the commercial, legal environment of today? 5 Landscape of Forensic Cases • Civil Cases parties: natural persons, corporations Contract disputes – lost profits Wrongful termination, discrimination, death or disability Intellectual Property – owner’s lost profits, infringer’s profits Criminal Cases a crime “against the state” IP – copyright, Federal sentencing guidelines 6 George Fruehan, 510-558-1999 3
- 4. ASWA, SF Chapter,01/13/2010 Forensic Standards, 1923 • The Frye standard, Frye test, or general acceptance test provides that expert opinion based on a scientific technique is admissible in United States Federal courts only where the technique is generally accepted as reliable in the relevant scientific community. • This standard comes from Frye v. United States , 293 F. 1013 (D.C. Cir. 1923), a case discussing the admissibility of polygraph test as evidence. … requiring the trial judge to ensure that an expert's testimony rests on a reliable foundation. 7 Forensic Standards, 1993 • A Daubert challenge (rare) is a hearing conducted before the judge where the expert is required to demonstrate that his/her methodology and reasoning are scientifically valid and can be applied to the facts of the case. • The term comes from the 1993 U.S. Supreme Court case, Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), in which the Court articulated a new set of criteria for the admissibility of scientific expert testimony. • In its 1999 Kumho Tire v. Carmichael opinion, the Court extended Daubert' general holding to include non-scientific expert testimony s as well. 8 George Fruehan, 510-558-1999 4
- 5. ASWA, SF Chapter,01/13/2010 Forensic Standards, 2000 In 2000, Rule 702 was amended in an attempt to codify and structure the "Daubert trilogy." Rule 702 now includes the additional provisions which state that a witness may only testify if: 1) the testimony is based upon sufficient facts or data 2) the testimony is the product of reliable principles and methods, and 3) the witness has applied the principles and methods reliably to the facts of the case. 9 Cases From Headlines, 1 of 100’s May 28, 2004, (AP) Former Rite Aid Corp. chief executive Martin L. Grass was sentenced to eight years in prison Thursday for conspiring to falsely inflate the value of the company his father founded and cover up the scheme. Grass, 50, who headed up the nation' third-largest s pharmacy chain in the late 1990s before being forced out in October 1999, also was fined $500,000 and given three years' probation for his role in a billion dollar accounting fraud that sent the company's stock tumbling. 10 George Fruehan, 510-558-1999 5
- 6. ASWA, SF Chapter,01/13/2010 Enron' Financial Fraud, 1 s • Most Wall Street firms had Enron as a strong buy up until the company filed for bankruptcy. Apparently, the analysts weren'doing t much analyzing during this period. Instead, they were mostly cheerleading—on the company' behalf, their firm' and, ultimately, s s, their own. • Enron' balance sheet smelled a bit overcooked as far back as s 1997. Looking at the comparison of Enron's EPS to the cash flow that the company generated, earnings were positive 15 out of 16 quarters, but cash flow was in the black only three times during the same period. • Remember that net income from the income statement appears at the top of the statement of cash flows. So, where did the earnings go? • Spot Hanky Panky with Cash Flow Analysis, such as at: http://oreilly.com/pub/h/1868 11 Enron' Financial Fraud, 2 s Let' take a closer look at the September 1997 quarter, in which earnings per s share were a positive 17 cents a share, whereas free cash flow was a whopping negative $7.82. 12 George Fruehan, 510-558-1999 6
- 7. ASWA, SF Chapter,01/13/2010 Enron' Financial Fraud, 3 s • Dec. 21, 2001: UNIVERSITY OF CALIFORNIA JOINS FEDERAL CLASS ACTION SUIT. The suit is pending in the U.S. District Court for the Southern District of Texas in Houston. It alleges that investors who purchased Enron securities between Oct. 19, 1998, and Nov. 27, 2001, were the victims of a fraudulent scheme whereby the defendants disseminated false financial statements that artificially inflated the price of Enron securities and allowed the defendants to engage in $1.1 billion of illegal insider trading. • Dec. 18, 2008: UC begins distributing Enron settlement to victimized investors 13 Personal Cases: “Simple” Wage Loss • Young man, ~ minimum wage, married, 3 children, “spotty background – getting straight”, enlists in CA National Guard. • Before assignment to training, auto accident, serious injury to back with surgery, misses his deployment. • What loss does he experience from the military discharge? 14 George Fruehan, 510-558-1999 7
- 8. ASWA, SF Chapter,01/13/2010 Personal Cases: Construction Loss • Construction contractor, 20 year history of growth; public sector, school buildings, low profit margin (1.6%) • Roof blows off Science Building in winter, additional water damage to building shell. • School withholds “Retainage” ~ $1mm • Insurance Co denies coverage ~ $1mm • Contractor repairs building; declares bankruptcy 15 In Summary Forensic Accounting: • Demands good accounting that will stand up to criticism by a “peer”, in an adversarial setting • Combines elements of teaching in a restricted forum of protocol, objections, deadlines, etc. • “The Forum” has opportunities for drama and persuasion, but you must not even appear to be an advocate for your party. • Q&A 16 George Fruehan, 510-558-1999 8