In the previous issue of Forensic Accounting Today, I consisely clarified the key reasons why Forensic Accountants request certain documents for business valuations. These included financial statements, tax returns, general ledgers and journals, paid bills, bank statements, canceled checks and brokerage statements, income tax audits, and stockholder and director minutes. (If you do not have a copy of our previous newsletter, you can download a PDF version from our blog: www.blog.anfusocpa.com).
As I pointed out in the previous newsletter, Forensic Accountants need to review a multitude of documents to perform an accurate business valuation. I believe attorneys and their clients benefit from understanding why we do so. Presented here are some additional documents Forensic Accountants usually request.
Salary, bonus and personal expense records (perquisites) paid for by the business: These documents help evaluate whether the community was sufficiently funded during the period of the marriage, and assist in establishing the income available for spousal and child support.
Insurance policies: In some instances, studying insurance policies may reveal assets not on the books, such as boats, rental properties, vacation homes or RVs. Additionally, if the owner claims business volume is low when the company is paying premiums for a high volume of business, it usually justifies further investigation of the business’s financial records. Insurance policies occasionally also uncover assets being insured that the spouse was unaware existed and may also help determine the value of perquisites.
Accounts receivable: Receivable records help ascertain the amount of collectibles that should be included in a valuation. An aging analysis can determine the collectibility of accounts, thus establishing their value. Studying accounts receivable can also determine whether all income has been recorded and whether any income may have been deposited into undisclosed bank accounts. In addition, studying receivables allows Forensic Accountants to uncover situations whereby a business owner may have collaborated with devoted clients to write off balances during the year of the divorce and mutually agree for these clients to pay the remainders owed later off the books.
Accounts payable: This is a place where business owners can overstate items. For example, when a business owner uses business credit lines to pay personal credit card balances, it overstates debt and downplays the value of the business. Profit sharing and pensions: In some cases, profit sharing agreements and pensions disclose marital assets that aid in establishing portions that are separate and community. These also help establish the value of the benefits received by the individual.
Company websites, brochures and advertisements: The company’s promotion may provide a history of the business, and reveal changes in products or services made over time. Marketing materials may indicate places of business that were never disclosed, as well as reveal their competitive position in the marketplace. In addition, promotion may uncover products or services that were previously unknown, or indicate that a business has purposely dropped prices to reduce profits during the year of the divorce.
The business’s direct competitors: Evaluating the degree of risk is a key factor in determining the value of a business. For example, Forensic Accountants can ascertain the degree of strength of a business’s rivals and whether some are generating significant risk. Likewise, the Forensic Accountant can assess whether the competitive environment is weak and if there lies an opportunity for substantial growth. Factored into this also is an assessment of the potential of entry of new competitors and how these players might impact the business’s future.
Work in progress: Careful evaluation of the financial worth of a business must also include the value of work in progress, as this may appreciably influence the profitability of the business. In addition, this analysis may lead to the discovery of hidden assets.