Many companies undertake an acquisition using only a financial due diligence process. However, for a greater chance of detecting potential misrepresentations, companies need to incorporate forensic investigative tools into their standard due diligence process.
“Forensic techniques will help point out and isolate areas of potential fraud as well as any irregular or suspicious activity,” says Michael Maloziec, an accountant at Cendrowski Corporate Advisors LLC.
Forensic analysis during the due diligence process can uncover accounting improprieties that could overinflate the value of a target company. Performing these two services together will give increased assurance that projected performance is achievable, Maloziec says.
“Adding in forensic analysis is a crucial step toward assuring your acquisition is successful. It can allow you to see past ‘closed doors’ into areas you might not think to look,” he says.
Smart Business spoke with Maloziec about forensic techniques and their benefits during the acquisition process.
How large of a role can fraud play?
It’s huge. The Association of Certified Fraud Examiners Report to the Nations found a typical organization loses some 5 percent of its revenue to fraud each year. Even though that does not sound like a significant number, when applied to the Gross World Product, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion.
What are some caveats to keep in mind?
Companies will always showcase their business in the best possible light. Managers will ‘polish the apple’ so to speak. Bear in mind the sales numbers might be misstated, which can overinflate the value of the company. Also, companies will not disclose everything, so it is important to proceed forensically during your due diligence process. Always be aware of potential manipulation in reserves and estimates. Reserves are one of the most common areas for fraud to occur because it is under management’s discretion. These caveats will help you recognize and point out areas that raise red flags.
How can you protect yourself from fraud?
One method is to look behind the numbers. You should always carry a certain sense of forensic skepticism and never make assumptions during any part of the due diligence process. Be sure to ask questions that will dig into transaction details and note any instances that provoke uncertainty. Don’t forget about applying simple common sense. Ask yourself, ‘Do the numbers flow with the current business plan that is set in place? Do management’s representations make sense?’ You can also utilize a number of analytical tools to spot any anomalies.
What analytical tests should be performed?
A great way to start would be to forensically analyze the financial statements over the past few years. During analytical testing, it is important to review current and past events in order to isolate anomalies from known events. You can utilize a variety of different ratio analyses, which can be an excellent tool in detecting red flags. Ratio analysis measures the relationship between various financial statement amounts and tracks how past numbers are trending with current results. To gain some perspective, compare company financial information to similar industries that hold the same standards, such as size, geography or sector. There are also numerous computer software programs that will assist in narrowing the scope and provide the capability of recognizing potential fraud.
How should a company approach this issue?
Start by assessing the business processes. Processes provide guidance to employees and assure accurate reporting. Acquirers need to review and understand the capacity and capability of their target organization. As part of the due diligence process, the acquirer should examine the current processes and identify any weakness or holes that could allow for erroneous or unauthorized transactions. A great method to gain insight would be to perform an internal risk assessment, which can help identify industry risks that might not be so obvious. This allows managers to zero in on areas that might be susceptible to potential fraud before they become a problem.
Michael Maloziec is an accountant at Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or firstname.lastname@example.org.
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There had been much talk surrounding the fiscal cliff, or the triggering of automatic federal spending cuts if Congress did not act by the end of 2012.
“It was everywhere — you couldn’t escape a newscast or report without hearing about it as 2012 came to a close,” says Todd Jolicoeur, tax senior at Cendrowski Corporate Advisors LLC.
However, the crisis was averted when the U.S. Congress approved the American Taxpayer Relief Act (ATRA), which paved the way for President Obama to sign the bill into law a day later. While not much has changed because of the bill, it did lay out a plan, freezing some tax rates and deductions that will offer taxpayers some answers as to how to plan for the coming years.
Smart Business spoke with Jolicoeur about the act and its tax implications.
What are some of the highlights of ATRA?
The most discussed is the return of the 39.6 percent tax rate for taxable income above $400,000 for single tax filings and $450,000 for those filing jointly. There is also a change to the tax rate on capital gains and dividends, as well as estate and gift tax. Additionally, there is the needed patch for the Alternative Minimum Tax (AMT). Many enhanced education credits were also extended.
How will taxpayers be affected by the 39.6 percent rate?
The new rate only affects individual taxpayers with bottom-line taxable income above $400,000 — $425,000 for head of household filers, $450,000 for married taxpayers. The other marginal income tax rates, 10, 15, 25, 28 and 33 percent, will remain the same going forward. The 35 percent rate has been carved to include those taxpayers between the top of the 33 percent rate and the income threshold established for the new 39.6 percent bracket.
What about the tax rate increase on capital gains and dividends?
The top rate for capital gains and dividends was increased from 15 to 20 percent. The increase on the top rate comes with the same income threshold that applies to the 39.6 percent ordinary income rate — $400,000 for single filers, $425,000 for head of household filers and $450,000 for joint filers. The previous zero percent tax rate remains as it was. The previous 15 percent rate still applies to those taxpayers between the two income thresholds established for the zero and 20 percent tax rate. Qualified dividends for all taxpayers will continue to be taxed at capital gains rates instead of ordinary income tax rates.
You mentioned a new maximum rate for estate and gift taxes. How has that changed?
The maximum rate for estates of decedents dying after Dec. 31, 2010, and before Jan. 1, 2013, is 35 percent, but has increased to 40 percent for estates of decedents dying after Dec. 31, 2012. In addition, the annually inflation-adjusted $5 million exclusion was extended.
Did the AMT patch become a part of ATRA?
Yes, ATRA contains a provision that ‘patches’ AMT for 2012 and beyond. It has done this by increasing the exemption amounts while also allowing nonrefundable personal credits to the extent of a taxpayer’s regular and AMT tax. The exemption rates for 2012 increased to $50,600 for individual filers, $78,750 for taxpayers filing joint returns or those of a surviving spouse, and $39,375 for returns of married taxpayers filing separately.
Does ATRA affect small businesses at all?
There are a few tax provisions that are applicable to businesses. There is the extension of the dollar limit and investment limit when calculating Section 179 depreciation and the extension of the 50 percent bonus depreciation through 2013. Another business credit that is extended is the research tax credit.
Is that the extent of the ATRA changes?
No. In addition to other provisions that relate to individuals and businesses, the new tax on investment income remains in effect. Also, the employee portion of FICA taxes on wages was restored to 7.65 percent. Ask your CPA to look into the tax rates, deductions, credit, and extenders as part of your 2012 tax preparation and planning for 2013.
Todd Jolicoeur is tax senior at Cendrowski Corporate Advisors LLC. Reach him at (248) 540-5760 or email@example.com.
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