The red flags of fraud

United States organizations lose 7 percent of their annual revenues to fraud,
according to a study by the Association of Certified Fraud Examiners, Inc.
(ACFE).* The report goes on to state that
“applied to the estimated 2008 U.S. gross
domestic product, this 7 percent figure
would translate to approximately $994 billion in fraud losses.”

“Organizations can cut these losses by
instituting good internal controls and
detecting fraud at its earliest stages,” says
John Schoendorf, partner and Litigation
Support leader at Berenfeld Spritzer
Shechter & Sheer LLP. “The study highlights how important it is for organizations
to develop a system for anonymous fraud
reporting. It is also important to have internal auditing procedures and to conduct
surprise audits occasionally. Training on
fraud detection and avoidance should be
provided to employees and managers.”

Smart Business asked Schoendorf for his
insight into detecting occupational fraud
and steps to take when it’s discovered.

What are the common types of fraud?

The most prevalent is asset misappropriation, which includes fraudulent invoicing,
payroll fraud and skimming revenues.
According to the ACFE, this occurred in
88.7 percent of cases with a median loss of
$150,000. Corruption, including accepting
or paying a bribe and engaging in business
transactions where there is an undisclosed
conflict of interest, occurred in 27.4 percent
of the cases. The median loss in these cases
was $375,000. Financial statement fraud
occurred in 10.3 percent of the cases but
had a median loss of $2 million. Financial
statement fraud includes booking fictitious
sales and recording expenses in the wrong
period. Percentages exceed 100 percent
because some cases involve schemes that
fall into more than one category.

At what management level is fraud most
prevalent?

According to the ACFE study, 29 percent
of the fraud took place in the accounting
department. Slightly more than 18 percent
of the cases were committed by upper-level
management or executive-level employees.
Seventeen percent of the cases involved the
sales department.

Fraud quite often occurs when trusted
employees are financially pressured by
changing personal circumstances. They see
an opportunity to commit fraud, then justify their behavior by rationalizing it away.
Look for common danger signals, such as
medical issues within an employee’s family,
finding excuses for not taking a vacation or
living beyond his or her means. In short, get
to know your employees and recognize
their lifestyles.

What steps should be taken to prevent occupational fraud?

Most fraud is detected accidentally or by
tips from employees. Customers and vendors may also provide information that can
lead to fraud detection. Because only a
small fraction (7 percent in the study) of
the perpetrators had convictions prior to
committing their frauds, background
checks aren’t as useful as many think, at
least in this area. The most effective deterrent is open communication. Make it easy
for employees to provide tips, especially
anonymously. Develop a system that
encourages reporting actions that might
indicate fraud. Tip hot lines can be very
useful.

Another good tool is fraud training. Inform
employees of what to watch for. Conducting
surprise audits can prevent or limit losses.
Involve as many people as possible in
processes. For example, the person cutting
checks should be different from the one
approving invoices, and the person approving invoices should not be the one issuing
purchase orders or checking in shipments.
The more people involved, the less chance
there is for fraud. In small businesses,
where it might be difficult to segregate
duties, one tool would be having the bank
statement sent to the owner’s home to allow
independent comparison to the records.

What should be done if fraud is discovered or
highly suspected?

The first thing is to contact your professional advisers, attorney and certified public accountant. You need to make sure that
all the proper steps are taken to document
any losses and their causes in ways that
will hold up in court if that becomes necessary. In fact, you should proceed as
though a court proceeding is a certainty.
You can’t undo procedures that might prevent valuable evidence from being admissible. You can’t make accusations without
adequate proof. Your attorney can help
assure discovery is conducted properly.

Your accountant should refer you to a
forensic accounting specialist, preferably a
certified fraud examiner who has the training and experience to work with your
attorney and the authorities to assure the
best outcome for recouping any losses you
may incur.

*Statistics in this article are credited to the
ACFE Report to the Nation on Occupational
Fraud & Abuse, ©2008 by the Association of
Certified Fraud Examiners, Inc.

JOHN SCHOENDORF is a partner in the Litigation Support practice of Berenfeld Spritzer Shechter & Sheer LLP. He specializes in forensic accounting, fraud examinations, commercial and civil damages, bankruptcy and restructuring. Reach him at (305) 669-7051 or
[email protected].

401(k) liabilities

Are you aware that individual participants in your 401(k) plan can personally sue if they feel they have suffered a loss due to a lapse in your
administration of the plan?

Prior to the Feb. 20, 2008, U.S. Supreme
Court unanimous ruling in LaRue v.
DeWolff et al., such suits had to be class-action suits. Companies that are not properly documenting all the details of their
plan and not following individual participant’s instructions can open themselves
up to multiple suits from the individuals
within their plan.

“The days of having nonspecialized
401(k) brokers are over,” says David C.
Ortiz, CFP, a director at Berenfeld
Financial Services LLC. “You need a specialist that knows the ins and outs of the
laws now and as they emerge to help you
make sure that your plan and the fiduciary
responsibilities are carried out properly.”

Smart Business spoke to Ortiz about
how to comply with all fiduciary responsibilities in today’s environment.

What are the fiduciary responsibilities of
firms offering 401(k) plans?

401(k) plans are supposed to be for the
exclusive benefit of the participants.
Prior to LaRue, the consensus was that
ERISA Section 502(a)(2) provided a remedy for fiduciary breach claims only for
relief sought for the plan as a whole.
LaRue makes it easier for individual participants in a plan to sue employers,
financial firms and brokers in cases
where these participants feel any of these
individuals didn’t carry out responsibilities as they should have been. These
could include, but are not limited to,
employees not being enrolled in the
401(k) plan promptly, situations where
their investment changes weren’t carried
out as directed or where the participants
put money into investments touted by the
company or someone within the company that later plunged in value.

LaRue also exposes fiduciaries to personal liability under ERISA 409(a) which
states that ‘[a]ny person who is a fiduciary with respect to a plan … shall be personally liable to make good to such plan
any losses to the plan resulting from each
[fiduciary] breach, and to restore to such
plan any profits of such fiduciary which
have been made through use of assets of
the plan by the fiduciary.’

What can companies and fiduciaries do to
protect themselves?

The good news is that by putting together a fiduciary process, much of the exposure can be mitigated. Most plan sponsors are not doing that and are thus
exposing themselves to litigation. There
is a list of 20 items to guide you to compliance. This must be an ongoing process.
It is a journey not a destination. By complying with these items you have a
defense against employee lawsuits based
on bad investments.

What are some of the most important steps
a plan sponsor can take?

There are many things the plan sponsor
must do. You need to complete due diligence on investments offered. You need
to document the processes you used to
select the investments and how they are
going to be monitored. This is done
through an investment policy statement
(IPS). The fees the plan charges have to
be reasonable for the services provided.
You need to have three to five vendors bid
on your plan through an RFP. This must
be done every three years.

Education of the plan participants is
another crucial point. If you don’t educate
participants properly they could come
back on you even if there is no loss if they
are in wrong investments. They could
claim that they might have earned more if
they had been in the right investments.

In addition, it is important to be aware
that there are required disclosure notices
that must go out to employees on a timely basis. Many employers are failing to
meet this step correctly. You must establish remedies with well-documented
records maintained over the life of the
plan. Detailed documentation of investment committee meetings and actions
must be maintained also.

The plan must be operated for the
exclusive benefit of the participant. Any
potential conflicts of interest must be
avoided. The sponsor must clearly make
the participant aware of the fact that the
participant is paying for the plan. While
the company may contribute also, the
investments have to be treated as the participant’s investments. Incomplete disclosure of this could be construed as a
breach of fiduciary responsibility.

The Department of Labor is going to
want to know first and foremost your
process and how you are keeping yourself and your employees current. It is up
to you to secure the help you need to stay
in compliance.

DAVID C. ORTIZ, CFP, is a director at Berenfeld Financial Services LLC, an affiliate of Berenfeld Spritzer Shechter & Sheer LLP. Reach
him at (305) 254-4455 x3 or [email protected]. Securities and advisory services offered through National Planning Corporation of
America (NPCOA), Member FINRA/SIPC, a Registered Investment Adviser.

Financing today

Most businesses have a need for new
or additional financing, whether it is
short term or long term. Whatever the need, it is especially important in today’s
market to utilize all possible tools to obtain
the necessary financing to grow your business to its best potential.

“Don’t go it alone,” says Kevin J. Gordon,
senior managing director of Berenfeld
Capital Markets LLC. “There are professionals to help you with banking matters. You
have a lawyer, accountant and others. And,
your investment banker is another important
resource and adviser for you.”

Smart Business spoke to Gordon about
how to locate financing in today’s market.

What is the current lending environment for
small and midsized businesses?

There are still many ways in which to
finance a business in today’s market. Using
traditional financing sources, such as banks,
is becoming an increasingly difficult way to
secure an adequate amount with the proper
structure. In today’s market, business owners
must be open to both nontraditional lenders
and a variety of potential financing structures. The key is having solid relationships at
a variety of financial institutions that are
actively closing financing transactions at the
time your company is in the market.

What should a business owner expect for the
near and distant future?

It is not going to get any better. We will be
in a ‘lenders’ market’ for the foreseeable
future. Business owners need to be better
prepared and flexible when approaching
financing sources. Knowing who is lending
to a particular industry and how best to survive the underwriting process will be paramount to success. The days of having
lenders knocking at your door and letting
details sort themselves out during due diligence is over for now.

What are banks and lenders looking for when
considering a financing request?

A lender is looking at a transaction focused
on how it is going to be repaid. A business
case needs to be made in which you can justify your ability to repay using historic and
projected scenarios. You must factor in the
borrowing request as well as traditional lending covenants when making the assumptions. In addition, you need to be able to articulate your position in an almost educating
fashion so the relationship manager/calling
officer can clearly communicate your goals
while championing your request in their
respective institutions.

What are the different types of lending organizations that lend to businesses?

Traditional banks, various finance companies, factors, funds and hedge funds should
all be considered. There are a number of different entities that may look similar on the
surface, but it is important to know how
they differ.

How do they differ?

Banks are regulated entities. They have to
be somewhat similar in their lending methods. The rest are unregulated. They each
have different criteria on how they look at
things. These include rates, payback plan,
timing and various financial and operating
covenants. With a full gamut of different
lenders, each with their own needs and
requirements, the uninformed CEO or
owner can get in a situation that is very difficult to handle.

What can a business owner do in preparation
before approaching a financing source?

It is critical to know what the financing
source is willing to lend and under what
terms. Can you fulfill everything that is going
to be requested? Are there intercompany,
stockholder or receivables issues that may
come into play? Do you even know what
they might ask? You have to know the criteria and know how your needs fit. Without
that knowledge your deal may die before
you even know why.

What if my current relationship with my
financing source is troubled?

You are not going to beat your bank or
lender. Find out what the trouble is. It might
not be you. It could be that the lender has
issues of its own. Be proactive in figuring out
what the problem is. Get things ironed out
before you are placed on a list of problem
accounts or worse. Don’t be afraid to reach
out to your accountant, attorney or investment banker. Get the emotion out of the situation. Your lender will see that you are trying
to get the issue resolved.

How does an investment banker work with a
business to obtain financing?

An investment banker has experience and
contacts to know what might be available,
what different lenders are looking for and
their appetite for the business (or transaction) at a given time. They can help bridge the
needs of the lenders and those needing
financing. For this to work, your interests
must be aligned with your investment
banker’s. He or she has the responsibility to
help you properly prepare to obtain the needed funds and to work with you throughout
the life of your transaction.

KEVIN J. GORDON is senior managing director of Berenfeld Capital Markets LLC. Reach him at [email protected] or
(305) 274-4600 x1143.

Stock options and divorce

You are about to set up or review
your stock option incentive plan.
Are you giving any thought to the stated purpose of the plan, and how it
might affect the outcome of any divorce
proceedings for participants in the plan?

“Most companies setting up a stock
option plan pay little attention to the
purpose of the plan,” says Phil Shechter,
CPA/ABV, CVA, a partner at Berenfeld
Spritzer Shechter & Sheer LLP.

“When the executives of a company
adopt a stock option plan they need to
focus on the purpose of the plan and
consider how it will affect their lives
should they divorce.”

Smart Business spoke with Shechter
for his insights into how stock option
plans are treated in divorce proceedings.

Why should executives consider divorce
when setting up stock option plans?

According to the U.S. Census Bureau,
National Center for Health Statistics, 50
percent of all first marriages, 67 percent
of all second marriages and 73 percent
of all third marriages end in divorce.
Most often, the biggest marital assets
subject to division between divorcing
spouses are the parties’ retirement
accounts, marital residence and stock
options. Since the marital residence and
retirement accounts are easily valued,
the more hotly contested issue is the
stock options owned by the executive.
The issue of contention between the parties is often whether the stock option is
a marital asset to be split by the parties
or a nonmarital asset to be kept by the
executive. The answer lies in the purpose of the stock option plan.

How does the purpose of the plan affect the
division of those assets?

The purpose of the plan is the most
important issue in determining if the
executive is to earn the stock option
benefit after divorcing a spouse. Is the
stock option a ‘post’ divorce asset the
executive gets to keep or was it ‘earned’
during the marriage, which makes the
stock option a marital asset equally divided with the executive’s spouse?

The Florida Supreme Court case
Ruberg v. Ruberg is the law in Florida as
it relates to the determination of the
marital component of stock options
when an executive is getting a divorce.
According to Ruberg, an analysis of the
purpose of the stock option plan must be
identified in order to determine whether
the executive’s spouse is entitled to one-half of the stock options, regardless of
whether they are fully vested. If the purpose of the stock option plan is to
reward the executive for services that
were provided to the company prior to
the divorce action with his/her spouse,
then the stock option is a marital asset
subject to equal division between the
spouses, even if the executive is
required to work at the company after
the filing of the divorce.

If the purpose of the stock option plan
is to incentivize the executive to help
promote the future profitability of the
company, then those stock options that
have not vested are not marital property
(subject to a covertures formula) and
the executive is not required to give his
or her spouse one-half of the options.

Can you cite an actual example of how this
law is applied?

Yes, I can cite a very recent case. In this
case, the executive was awarded stock
options worth more than $6 million and
would have owed his wife more than $3
million in stock options. The review of
the plan documents reflected a plan purpose to retain and to provide the executive with an incentive to make the company profitable. Both parties’ counsel, in
this case, agreed that this wording met
the Ruberg test for future services after
the filing of the divorce and only the
vested shares were to be split with the
executive’s spouse. Accordingly, the
executive retained $5.5 million of stock
options and his spouse received
$500,000 of options.

Can prenuptial agreements affect the division of stock options?

A prenuptial or postnuptial agreement
can be drafted to allow the executive to
maintain or keep his or her stock option
plan, rather than relying on an interpretation of the Ruberg case. The agreement has to be drafted to have the executive’s spouse waive any interest in the
stock option plan. In addition, in an
abundance of caution, the executive’s
spouse must specifically waive any interest in the appreciation of assets within
the stock option plan that are created
during the marriage, especially created
by one spouse’s employment activities
during the marriage.

PHIL SHECHTER, CPA/ABV, CVA, is a partner at Berenfeld Spritzer Shechter & Sheer LLP. Reach him at (305) 274-4600 or
[email protected].

Volatile situations

Volatility has many causes. Volatility
causes a variety of consequences.
Managing business risks can reduce the spikes in volatility if they are
properly thought out, planned for and
prepared for.

Volatility involves more than the capital markets. There is a volatility of
changes within the economy. There can
be a volatility caused by customers’
experiences. Precariousness can be
caused by natural disasters. Instability
can have an effect on sales, collections,
inventory, products or any combination
of these.

“Cash is one aspect of the business that
can be seriously impacted by volatility,”
says Emery B. Sheer, CPA/ABV, CVA, a
partner and head of the advisory services practice at Berenfeld Spritzer
Shechter & Sheer LLP. “You must look at
cash reserves and make sure that they
are adequate to ensure against unexpected downturns. You must plan for all
contingencies.”

Smart Business spoke with Sheer
about what steps your company should
take to manage risks and avoid volatility.

How can a company plan to avoid the risks of
volatility?

There are a number of things to take
into consideration. They include cash
reserves, diversification, strategic planning, employees, borrowing ability,
internal controls and vendors. One of
the first ways to guard against the
effects of volatility is to take a close look
at your cash reserves and make sure that
they are adequate to sustain you through
any downturns. Many conservative individuals feel that they need enough cash
in reserve to allow them to get by for six
months on their cash and no income.

You have to determine what the right
amount of time is for your business. If
the cash reserves are not in place, you
must determine how you are going to
build them up to that level. You must
anticipate as many potential areas as
possible that might cut off your cash
flow and plan how you would operate
during those times.

How does diversification affect volatility?

You don’t want to be relying on one
customer or even a small group of customers to sustain you during a downturn. If that one or a few are going
through the same type of situation, it is
going to be much harder to recover.

You should also not rely on one particular segment of the business. The more
you can diversify your business lines and
your customer base, the more you can
offset natural or manmade tragedy.

How does strategic planning enter into the
equation?

Strategic planning helps you look at
your overall business and all aspects of
it to determine the best course of action
under a variety of scenarios. It should
give you clear direction for the next
three years and broaden out to some
generalities for the next five to 10 years.
Your plan should be reviewed every
three years.

Your plan should also be discussed in
detail with all key management to make
sure everyone is on the same page. Part
of your plan should include preparing
for volatility.

How can you prepare for natural disasters?

You need to review all potential disasters and insure against those likely to
occur. As you review insurance, you
must continually upgrade it to cover any
acquisitions or other changes in your
business. You should plan for business
interruption and insure against it. Take
into consideration potential costs for
relocation in case your present facilities
are rendered inoperable for a limited or
extended period of time. Also consider
the need for a permanent move.

How do employees affect your planning?

Losing a key employee is a potential
disaster. If one or more individuals are
key to the operation of the business and,
because of illness or accident, are
unavailable for a period of time, the
business is going to suffer. Key-man
insurance can provide some protection.
Many businesses are requiring mandatory sabbaticals for key employees. One
purpose of these sabbaticals is to help
the client base and customers become
comfortable with others in the company.
The sabbaticals usually last two or three
months and occur every three to five
years. No contact by the key person with
the company or clients is allowed during
the sabbatical.

Are there other areas that should be
watched?

It is a good idea to regularly review
internal controls and vendors. Internal
controls should be reviewed in order to
make sure that they are adequate and
that proper segregation of duties is in
place. Internal theft can be especially
devastating during periods of volatility.
Vendor lists should be reviewed to make
sure that your vendors are giving you the
best combination of price and quality.

EMERY B. SHEER, CPA/ABV, CVA, is a partner and head of the advisory services practice at Berenfeld Spritzer Shechter & Sheer LLP.
Reach him at (305) 274-4600 or [email protected].

Mediating circumstances

Disagreements happen and misunderstandings take place. Occasionally
unethical or even illegal transactions occur. While percentages are low compared
to all the transactions that take place every
day, when disputes occur, they need to be
resolved. Thus, mediation, arbitration and
alternative dispute resolution are spreading
to all aspects of the business and government landscape.

“Mediation is an important tool in dispute
resolution,” says Richard A. Cahlin, CPA, a
partner in the Financial Services Practice at
Berenfeld Spritzer Shechter & Sheer LLP. “It
is imperative that the entire process be handled correctly, especially selecting the right
mediator.”

Smart Business spoke with Cahlin about
the mediation process, what’s involved with
it and why it’s so important in today’s business climate.

What is the process to be followed in taking
a dispute to mediation?

When it comes to disputes involving securities, the Financial Industry Regulatory
Authority (FINRA) has developed a detailed
course of action to follow. Full details can be
found at FINRA’s Web site (www.finra.org).
Mediation is usually the first step if the dispute can’t be settled between the individuals
and companies involved.

What is mediation?

Mediation is the process of getting the parties involved together with a third party, the
mediator, to work out a solution. The mediator does not represent either party but is
merely a facilitator of the process. The parties are free to confer with their own attorneys and are encouraged to do so. The mediator does not make any decisions, but guides
the conversation to keep it on track and to
remove the emotion. While the mediator
defines the terms and rules, the decisions are
made by the respective parties in the dispute.

What is the difference between mediation
and arbitration?

In arbitration, the arbitrator makes the
decision and that decision is final. The parties present their respective cases, and the
arbitrator reviews all the information. Testimony can be in written form or may be given
in person. Arbitration could be the next step
if mediation is not successful.

What are some of the benefits of mediation?

It can be less time consuming and less
expensive than going to court. While preparation should be as complete and concise as
if you were going to court, the case is discussed more informally and, usually, with
much less time needed for attorneys’ time
and fees. According to FINRA, business disputes submitted to professional mediation
services have had a settlement rate of about
80 percent.

Even if mediation doesn’t resolve everything, it may narrow the scope of things to
the extent that arbitration or litigation could
be more focused and satisfactory results
more easily obtained. It is important to keep
in mind, though, that mediation isn’t always
a quick and easy process. According to
FINRA, the turnaround time for cases
through April 2008 was 139 days.

Why is it important for businesses to select
the right mediator?

As this form of reconciliation grows, the
issues being disputed are becoming more
significant and complex. It is unwise to
assume that because mediation is becoming
more commonplace that all mediators are
equally qualified to undertake a particular
matter. Do not retain an individual to mediate sophisticated issues without first thoroughly checking to see if he or she definitely
has the expertise to understand the issues
being presented. Just as doctors and attorneys have specific areas of expertise, so
should mediators.

How is the mediator selected?

If working through the FINRA process, a
list of mediators, selected randomly, will be
supplied with a complete dossier. To select a
mediator with the expertise to be of value to
your case and the mediation process, inquire
into and study the following areas: education, work experience, areas of expertise,
employment, additional degrees or certifications, compliance with continuing education
requirements and general mediation experience. The benefits of the process are best
achieved if the mediation is conducted in an
informed, balanced and timely fashion.
Frequently, well-prepared advocates will
develop a mediation summary for the mediator, clients and opposing counsel to review
before the mediation. This is the wrong time
to learn that the mediator does not have the
background necessary to understand the
issues presented.

What is the future of mediation?

In the future, mediation will become an
even more attractive alternative for resolving disputes in our increasingly litigious society. It can only benefit us all if the attorneys
involved in the process select certified mediators with credentials that are appropriate
for the cases before them.

RICHARD A. CAHLIN, CPA, is a partner in the Financial Services Practice at Berenfeld Spritzer Shechter & Sheer LLP. Reach him at
(305) 274-4600. Richard A. Cahlin offers securities and advisory services through NPC of America (NPCOA), member FINRA/SIPC, a
registered investment adviser. Berenfeld Spritzer Shechter & Sheer LLP and NPCOA are separate and unrelated companies.

Richard A. Cahlin, CPA
Partner, Financial Services Practice
Berenfeld Spritzer Shechter & Sheer LLP

Fair value accounting

Whether you are considering the sale
of your business or complying
with annual or periodic financial reporting requirements, it is imperative
that all assets and liabilities are properly
valued. Valuation techniques vary with the
type of asset and liability being measured.

“It is the long-term goal of the Financial
Accounting Standards Board (FASB) to
have all companies report most assets and
liabilities at their fair market value (FV),”
says Robert P. Bedwell, audit partner at
Berenfeld Spritzer Shechter & Sheer LLP.
“This goal is getting closer to being attained
as the FASB issues new standards.”

Smart Business talked with Bedwell
about the newest standards in this area.

What are the recent changes in standards?

FASB has issued three recent standards:
Statement No. 157, on Fair Value Measurements; Statement No. 159, on the Fair Value
Option for Financial Assets and Financial
Liabilities; and Statement No. 141(R), revised standard on Business Combinations.

Statements No. 157 and 159 became effective on Jan. 1, 2008. Statement No. 141R applies to business combinations for which the
acquisition date is on or after Dec. 15, 2008.

Statement No. 157 provides for a uniform
definition of fair value and establishes a
framework for measurement. It also provides for more expanded disclosures about
FV measurements in a company’s financial
reporting. The new standard applies under
other accounting pronouncements that
required or permitted FV measurements, so
the standard does not require any new FV
measurements.

The definition of FV focuses on the price
that would be received to sell the asset or
paid to transfer the liability (the so-called
‘exit price’), not the price that would be
paid to acquire the asset or received to
assume the liability (‘an entry price’).

Statement No. 159 permits companies to
choose to measure many financial instruments and certain other items at FV at specified election dates, where historical cost
(or the lower of cost or market) was the former valuation method.

A company will be required to report
unrealized gains and losses in earnings on items for which the FV option has been
elected at each subsequent reporting date.

The FV option may be applied instrument
by instrument, with a few exceptions, such
as investments otherwise accounted for by
the equity method. The election is irrevocable (unless a new election date occurs), and
is applied only to entire instruments and
not to portions of instruments.

What prompted these changes?

The new standards were issued to provide for greater consistency in financial
reporting for FV measurement.

As to business combinations, such as
acquisitions and mergers, there was divergent practice in terms of valuing and
reporting acquired assets and assumed liabilities in an acquisition, including goodwill
and other purchased intangible assets. This
standard (141R) requires that acquirers
recognize assets acquired and liabilities
assumed at their acquisition date FV.

What does a business owner need to know
about these changes?

The new standards are expected to lead to
expanded FV measurement of qualifying assets and liabilities. It is also expected to
have a significant future impact on the
accounting and reporting for other financial
areas, such as pensions and employee benefits, lease accounting and sales accounting.

Second, the business owner should be
aware that FV measurement of qualifying
assets and liabilities is available at his or
her option, and should consider it where
such measurement would be advantageous to the company. For example, a
company that is considering the sale of
assets (or the entire business) should prepare an appropriate valuation of such
assets to establish its asking price.
Companies shoul be aware of specified
election dates for the FV election and
become familiar with these dates.

What is the impact on the business?

The business owner will be required to
provide more expanded disclosure in his
or her company’s financial reporting about
FV measurement for assets and liabilities.
Since FV measurement is to be determined
based on assumptions that market participants (buyer or seller) would use in pricing
an asset or liability, the company will need
to provide more detailed explanation
about those market participant assumptions. Those disclosures will include a
more detailed discussion of whether FV
measurement is based on market data
obtained from sources independent of the
reporting entity (known as observable
inputs) or based on the company’s own
assumptions about market participant
assumptions developed based on best
information available in the circumstances
(unobservable inputs).

The FV option of reporting assets and liabilities will certainly have a significant
effect on reported financial position and
results of operations. The carrying value of
certain assets may increase or decrease
depending on the company’s choice of the
assets and liabilities to which it applies FV
measurement.

ROBERT P. BEDWELL, CPA, is an audit partner at Berenfeld Spritzer Shechter & Sheer LLP. Reach him at [email protected] or
(954) 728-3742.

The value of teamwork

In today’s business world, we are constantly reminded of the value of team-work. We read about it in books and articles and hear about it in speeches.
Whether it is for business, sports or politics, society is looking for the best way to
operate as a team. According to Merriam-Webster, teamwork is defined as “work
done by several associates with each
doing a part but all subordinating personal
prominence to the efficiency of the
whole.” True success is achieved at the
highest of levels when all roles are working together as a team.

Transwestern South Florida Industrial, a
five-person team whose core group has
been together for almost 15 years, is composed of Walter Byrd, managing director;
Ben Eisenberg, managing director;
Thomas Kresse, vice president; Meredith
Clarke, marketing coordinator; and
Valderine Preal, administrative associate.
Each team member offers a different talent
and is responsible for his or her own role.

Smart Business spoke with the five
team members to get their perspectives on
teamwork and how they work together
every day to accomplish their team’s goals
and mission.

How would you describe your team to others
and what makes your team unique?

Preal: While any number of people can
make up and be called a team, I feel our
team is different due to our tenure. Ben,
Walter and I have been together for almost
15 years, with Thomas for eight and with
our rookie Meredith for a year. The team is
composed of very knowledgeable, experienced and expert people. I admire their
dedication and respect toward one another and toward me. Through the years of
working together, there is much shared
loyalty. Many long-term clients are a true
testament to this loyalty and the high
regard in which this team is held.

How can a team work together toward the
successful completion of transactions?

Byrd: In any transaction within the
team, it is important to recognize each person’s strengths. Everyone on the team
is different in his or her skill and personality, which in effect has a lot to do with
the role that the individual plays on the
team. When working together as a team,
it is important for each member to know
his or her role and responsibilities. Even
though there are designated roles, when
the team collectively uses the strengths
of each member and is working together,
it operates more efficiently. Teamwork
empowers individuals to perform their
best for the needs of the client.

What are the benefits of working as a team?

Clarke: The benefits are summed up in
three words — creativity, service and balance. Five minds are better than one.
When working collectively, there is more
diversity. We all have different backgrounds and experiences and look at
client issues differently to come up with
the most creative solution to meet the
client’s needs. With five minds, we can
leverage off each other’s strengths to provide the best service. And because we are all dividing responsibilities, this allows for
balance and the ability to allocate our
time for the best work environment and
home life.

Does the team have to agree on all the decisions?

Eisenberg: It is actually beneficial if
there are disagreements between team
members. As Stephen Covey says,
‘Strength lies in differences not in similarities.’ Each team member is allowed to
express his or her opinion regarding an
important decision. While all have the
same goal in mind, there may be different
ideas on how the goal can be achieved.
We are all passionate about our positions, and even though Walter and I, both
in the managing director role, have final
say, we take into consideration what
each individual has had to say. By carefully listening to each person’s thoughts
and concerns, the team is better able to
agree on the best course of action. We
have a few mottos for our team,
‘Enhance value,’ ‘Help the client’s business/property financial stake’ and ‘Make
the client look good.’

How do you measure your success at the end
of the day?

Kresse: Success in the business varies
depending on the goal. Many would
assume that it is based off of the size of
the transaction/total square footage.
Others may think it is based on the sale
amount. To us, we always measure our
success based on the client’s overall satisfaction. If we have exceeded or even met
the client’s expectations, we were successful. At the end of the day, if we are
operating as a team, we will be able to
please our clients. And when the client is
happy, we are happy.

You may contact MEREDITH CLARKE at (305) 808-7310 or [email protected].

The red flags of fraud

United States organizations lose 5 percent of their annual revenues to fraud,
according to a study by the Association of Certified Fraud Examiners, Inc.
(ACFE).* The report goes on to state that
“applied to the estimated 2006 U.S. gross
domestic product, this 5 percent figure
would translate to approximately $652 billion in fraud losses.”

“Organizations can cut these losses by
detecting fraud at its earliest stages,” says
John Schoendorf, partner and Litigation
Support leader at Berenfeld Spritzer
Shechter & Sheer LLP. “The study highlights how important it is for organizations
to develop a system for anonymous fraud
reporting. It is also important to have internal auditing procedures and to conduct
surprise audits occasionally. Training on
fraud detection and avoidance should be
provided to employees and managers.”

Smart Business asked Schoendorf for his
insight into detecting occupational fraud
and steps to take when it’s discovered.

What are the common types of fraud?

The most prevalent is asset misappropriation, which includes fraudulent invoicing,
payroll fraud and skimming revenues.
According to the ACFE, this occurred in
91.5 percent of cases with a median loss of
$150,000. Corruption, including accepting
or paying a bribe and engaging in business
transactions where there is an undisclosed
conflict of interest, occurred in 30.8 percent
of the cases. The median loss in these cases
was $538,000. Financial statement fraud
occurred in 10.6 percent of the cases but
had a median loss of $2 million. Financial
statement fraud includes booking fictitious
sales and recording expenses in the wrong
period. Percentages exceed 100 percent
because some cases involve schemes that
fall into more than one category.

At what management level is fraud most
prevalent?

According to the ACFE study, 30 percent
of the fraud took place in the accounting
department. Slightly more than 20 percent
of the cases were committed by upper-level
management or executive-level employees.

Fourteen percent of the cases involved the
sales department.

Fraud quite often occurs when trusted
employees are financially pressured by
changing personal circumstances. They see
an opportunity to commit fraud, then justify their behavior by rationalizing it away.
Look for common danger signals, such as
medical issues within an employee’s family,
finding excuses for not taking a vacation or
living beyond his or her means. In short, get
to know your employees and recognize
their lifestyles.

What steps should be taken to prevent occupational fraud?

Most fraud is detected accidentally or by
tips from employees. Customers and vendors may also provide information that can
lead to fraud detection. Because only a
small fraction (8 percent in the study) of the
perpetrators had convictions prior to committing their frauds, background checks
aren’t as useful as many think, at least in
this area.

The most effective deterrent is open communication. Make it easy for employees to
provide tips, especially anonymously.
Develop a system that encourages reporting actions that might indicate fraud. Tip
hot lines can be very useful.

Another good tool is fraud training. Inform
employees of what to watch for. Conducting
surprise audits can prevent or limit losses.
Involve as many people as possible in
processes. For example, the person cutting
checks should be different from the one
approving invoices, and the person approving invoices should not be the one issuing
purchase orders or checking in shipments.
The more people involved, the less chance
there is for fraud. In small businesses,
where it might be difficult to segregate
duties, one tool would be having the bank
statement sent to the owner’s home to allow
independent comparison to the records.

What should be done if fraud is discovered or
highly suspected?

The first thing is to contact your professional advisers, attorney and certified public accountant. You need to make sure that
all the proper steps are taken to document
any losses and their causes in ways that
will hold up in court if that becomes necessary. In fact, you should proceed as
though a court proceeding is a certainty.
You can’t undo procedures that might prevent valuable evidence from being admissible. You can’t make accusations without
adequate proof. Your attorney can help
assure discovery is conducted properly.

Your accountant should refer you to a
forensic accounting specialist, preferably a
certified fraud examiner who has the training and experience to work with your
attorney and the authorities to assure the
best outcome for recouping any losses you
may incur.

*Statistics in this article are credited to the
ACFE Report to the Nation on Occupational
Fraud & Abuse, ©2006 by the Association of
Certified Fraud Examiners, Inc.

JOHN SCHOENDORF is a partner in the Litigation Support practice of Berenfeld Spritzer Shechter & Sheer LLP. He specializes in forensic accounting, fraud examinations, commercial and civil damages, bankruptcy and restructuring. Reach him at (305) 669-7051 or
[email protected].

Discovery requests

If you or your company is involved in
any type of legal matter, you are going
to receive a discovery request. Whether that request seems quite daunting or
relatively simple, your next step can
mean the difference between winning
and losing, and it can greatly impact the
cost of supplying what is requested.

“Waiting to handle it later is not an
option,” says Robert Moody, partner and
forensic technology practice leader at
Berenfeld Spritzer Shechter & Sheer
LLP. “It is almost certain these days that
the discovery process is going to include
electronic media. You need to make sure
you are providing all the data requested,
in the proper form, without providing
unneeded information that adds to your
costs. You need to know what you can
and can’t delete. It takes time and
expertise to do it right.”

Smart Business talked with Moody for
his insight into the steps to take once a
discovery request is received.

What is the first thing to do upon receipt of
a discovery request?

Call your attorney and ask for a meeting to discuss what your obligations are
and how to meet them. Too many people
put off the request or don’t start the
process immediately because they feel
they’ve done nothing wrong and they
can get what is needed by the deadline.
That approach can create considerable
extra expense and add to the potential of
losing the case. It is also important to
know how to respond if the request is
too vague or broad. If the request is too
narrow, you might miss essential information. The ‘give me everything’ approach, if not handled properly, can
cause unnecessary work.

It should be noted that while your IT
department can help provide essential
information, it usually doesn’t have the
understanding or appreciation for litigation. You need to get help from those
that work with these situations on an
ongoing basis.

You may have read about cases like
the recent Morgan Stanley case, where a
company relied on internal people more
than it should have. If the company had
involved electronic forensics from the
start, it would not have suffered as
it did.

How should I prepare for this meeting?

Bring your IT person and anyone else
who might have information and works
with the files and stores information.
Map out your IT infrastructure. This map
should include all data stores, including
servers, workstations, mobile and
remote devices, software, Internet and
intranet applications, and the connections between them all.

During the meeting, expect to have
questions asked about how your company works, how paper and electronic files
are handled and especially areas that
pertain to the case. This meeting should
be broad to make sure that everything is
discussed. The scope can be narrowed from there. Develop a work plan from
this point forward.

What should the work plan include?

The work plan should help to identify
and map out a strategy for collecting and
preserving the information needed.
Specific custodians need to be identified. Specific locations of electronic and
hard data must be determined. How
everything is going to be preserved must
also be nailed down. A general budget
should also be started. It can best be
completed after the identification phase.

Isn’t this going to be an expensive process?

Not nearly as expensive as it might be
without proper planning. The most
expensive portion of the discovery
process is attorney review. That review
can account for up to two-thirds of the
total e-discovery costs. The next most
expensive cost is usually housing the
data. The least expensive costs are identification, collection and preservation.
When these three are done well, the cost
of housing production and review are
more controllable. If you determine that
only 50 files are needed instead of the
100 files you initially thought, it is easy
to see the potential savings.

If you spend the time and money needed on the first phases, you can reduce
expenses throughout the rest of the
process. Time will be spent on pouring
over relevant data rather than irrelevant
data.

Early discovery could also lead to an
earlier settlement. If there is a smoking
gun in the data, knowing it exists and
being able to use it can help you minimize the cost and time involved in closing the matter.

ROBERT D. MOODY, JD, CISM, CISA, is a partner and forensic technology practice leader in Berenfeld Spritzer Shechter & Sheer LLP.
Reach him at (954) 370-2727 (O), (954) 854-6004 (M) or [email protected].