Lisa Murton Beets

Thursday, 25 September 2008 20:00

Issues in money laundering

Do the names Second Life, Club Penguin and Zwinktopia mean anything to you? These “virtual worlds” may seem like harmless places on the Internet that provide simple entertainment, but in reality, they are increasingly serving as money laundering hubs for criminals all around the globe.

“These are legitimate sites and legitimate business is conducted over these sites. However, if you do business with a launderer — who you thought was a legitimate customer — you’re involved even if you didn’t know it,” cautions Theresa Mack, CPA, CAMS (Certified Anti Money Laundering Specialist ) senior manager, investigations, for Cendrowski Corporate Advisors LLC. “Virtual banks are another high-risk area. Anonymity may be convenient, but you incur greater risk when you don’t do business face-to-face.”

Smart Business asked Mack about other emerging issues in money laundering.

What’s a simple definition of money laundering?

The conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin, or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his or her actions. Willful blindness is considered having knowledge in the U.S. courts.

Has it become more prevalent today?

The International Monetary Fund estimates the aggregate size of money laundering in the world could be between 2 and 5 percent of the world’s gross domestic product. Money launderers are always looking for new ways to launder their ill-gotten funds. Economies and countries with growing and developing economies but inadequate controls are especially vulnerable.

Why do companies need to be educated about this topic?

If you do business with a customer/client who is involved with money laundering, you are at risk of being involved in a money laundering investigation. If you are buying a company, money laundering could overstate sales or have a direct impact on the expenses. Crimes like this can infiltrate financial institutions, entwine businesses and acquire control of large sectors of the economy through investment, or bribes to businesses, public officials and governments. Money laundering can weaken the social fabric and ultimately decay the institutions of our society. In countries moving to democratic systems, this criminal influence can undermine the transition. Fundamentally, money laundering is linked to the underlying criminal activity. Willful blindness of entities/people who allow money laundering or turn a blind eye to it are often found to have knowledge in the eyes of the U.S. courts, hence criminal prosecution, jail time and hefty fines are the consequence of not being educated on this subject matter.

What are some of the newer things criminals are doing to launder money?


  1. Prepaid cards are currently the most significant money laundering threat. There is an estimated $30 billion in payments going to Latin America from the U.S. each year alone. These are branded by AMEX, MasterCard, or Visa and operate like traditional credit or debit cards. These cards facilitate the cross-border movement of funds without a declaration requirement. The funds can be loaded anywhere in the world, there often is no maximum load limit, they can be used at ATMs, no bank account is needed and they can be activated online.



  2. As mentioned above, virtual worlds on the Internet are high-threat areas. At sites like Second Life, users can buy and sell with money that can be ‘purchased.’ Activity is constant and unmonitored for the most part. Law enforcement has taken note as are these sites who are increasing their monitoring of the transactions.



  3. ATM businesses that are also issuing agents of money orders are using their independent ATMs in these stores with illicitly derived cash and allowing launders to use the ATM instead of using a bank ATM.



  4. Money services businesses. The USA PATRIOT Act of 2001 enhanced law enforcement organizations’ ability to combat money laundering through these businesses by amending federal statutes making it a crime to operate an unlicensed money service business under 18 USC Sect. 1960. Individual states have their own laws regarding licensure. Enforcement is trying to keep up.


How can a company protect itself?

Do proper due diligence on everyone you do business with. If you have any suspicions about a transaction involving a company or individual, protect yourself by anonymously filing a Suspicious Activity Report (SAR), and keep a copy for your own records should you ever be approached about the activity. You can download a SAR at the Financial Crimes Enforcement Network Web site at SARs can only be used by law enforcement for intelligence gathering and cannot be entered into a court of law.

THERESA MACK, CPA, CAMS, former Special Agent of the FBI, is senior manager, investigations, with Cendrowski Corporate Advisors LLC. Reach her at (866) 717-1607 or

Tuesday, 26 August 2008 20:00

Do your homework

Market research can help you effectively develop and launch new products and services. It can also tell you if you need to make changes to existing products and services and/or alter the way you are marketing them. Perhaps it will help you expand into new markets or identify new prospects based on age, income level, or location.

Research can be conducted in many ways: by mail, phone, online, in the form of surveys, interviews, focus groups and more. It can be qualitative and/or quantitative in nature, complicated or simple. Not only does it enable organizations to sell products, it also helps set policies, shape laws and promote ideas.

“As a society we are fascinated with marketing,” says Donald I. Shifter, a marketing professor in the department of business at Fontbonne University. “Almost every aspect of our lives — what we eat, wear, find entertaining — is influenced to some degree by marketing.”

Shifter defines marketing as the process of satisfying customer needs, adding that wants and needs are ever expanding with each generation — no matter what country one lives in. The key to this, says Shifter, is to research who customers are and what their needs are.

Smart Business spoke to Shifter about what companies and organizations need to know before they begin the actual process of conducting market research.

What is the best strategy for getting started on the right foot?

Know the demographics of your customers and how your products will match their needs. Additionally, the geographic location of customers often dictates their needs. The research you are contemplating also must accurately take into account the current positioning of similar products, so you can adopt the right prices and places to sell your products.

Why is this knowledge so important?

It is important, if not vital, to know the customers’ needs because we live in a time when product options are expanding exponentially and customer preferences are also growing. Thanks to the Internet and all the information it provides, as well as social networking, there also is a growing tendency for more interaction on the customer’s part in making purchase decisions. Today’s customers are becoming increasingly sophisticated and their behavior can change quickly and/or be difficult to predict.

How can knowing your customers help improve results?

Marketers need to identify and understand the characteristics of their targeted customers to avoid developing products that have no chance of succeeding. For example, baby boomers might be interested in new types of vodka or wine offerings but probably won’t be interested in expanding their beer preferences. In the music field, most symphony companies are struggling as the younger generation is pursuing a wide variety of new kinds of music as well as the ways in which it is delivered to them (there are choices between using an iPod or purchasing recorded music and listening to it on a CD).

How does market research help the bottom line in the long run?

It can help in many ways. For example, it can help avoid costly manufacturing investments that won’t pay off. For example, say you’re determining whether to begin manufacturing a new model SUV automobile; however, your research shows smaller, higher mileage, environmentally friendly models would represent a more profitable investment. Or it could be that a competitive analysis would reveal that potential customers are already being satisfied and that there would be no competitive advantage for your company’s production of this specific product for the marketplace.

How has the Internet changed the face of market research, and to what benefit?

The Internet has revolutionized the way information is gathered, in scope, accuracy and even costs. The researcher must be skilled in the Internet’s use and in his or her ability to interpret the results for the action plans that ultimately must follow. The Internet has opened a very wide, global market, and the implications of data gathering are important, especially in basic goods (sneakers, jeans, cookware). One of the major benefits of the Internet’s application is that a much wider net is being cast for reaching customers as well as the relative low-cost to achieve and process customer orders. Wherever possible, the use of the Internet can benefit a company in risk reduction. The customers’ responses can be analyzed for future product inventory investments and the improved calculations for customer demand forecasts.

Why and when does ‘good research go bad’? How can you prevent this from happening?

This can happen when the product itself is not trending up or has run its course. Also, the funding to support focus groups and mailings along with online interviews could fall short, resulting in conclusions that do not yield actionable results.

DONALD I. SHIFTER is a marketing professor in the department of business at Fontbonne University. Reach him at (314) 889-4522 or

Tuesday, 26 August 2008 20:00

Before you sell

If you are a privately held, middle-market company with $10 million to $100 million in annual sales and you are ready to sell but are concerned about the current economic climate, rest assured that this is still an acceptable time to move forward.

“Generally speaking, 2007 was a strong year for M&A in terms of the number of transactions and valuations, or ‘multiples’ — the amount of money buyers were willing to spend for a business,” says Michael J. Meaney, member of the business department and co-chair of the business transactions practice group at McDonald Hopkins LLC. “In 2008, the market is experiencing a drop-off in the number of transactions, and valuations are decreasing a bit as a result of the so-called credit crunch; however, based on historical values, they are still rather strong.”

Smart Business spoke to Meaney to gain some insight for those seeking to sell their middle-market companies in the near future.

What are some of the trends occurring in the M&A market for medium-sized businesses?

Tighter lending standards have reduced the amount of money banks might be willing to offer. As a result, buyers have to come up with more equity. This is not necessarily a problem because there is still a great deal of private equity capital available. However, when a greater percentage of a buying price has to be taken in equity, it means a lower return for the buyer, who, in turn, will not be as willing to pay as high a price. There are some positives, however. First, there is plenty of private equity capital just waiting to be invested. Second, the exchange rate for the dollar makes American companies attractive to foreign investors at this time.

What characteristics should owners look for in potential buyers for their businesses?

You want to find the buyer willing to pay the highest price, but there are other factors to consider. First, make sure the buyer is financially able to close. Second, make sure the buyer has enough additional money to fund the future growth of the business. Third, make sure this person will treat your employees and customers right. Fourth, make sure you have good chemistry — you will need it to get through the transaction process and after the sale. Often, a seller continues to be involved in the business as an executive or a minority shareholder, so you want someone you can trust and get along with.

What about hiring an investment banker to help sell the business?

There are several avenues to market your business for sale. One traditional way is through an investment banker. The Cleveland area is fortunate to have very well-qualified firms that operate in the middle market. An investment banker manages the process similar to a broker. He conducts a confidential auction process to identify the best possible buyers (private equity firms or strategic buyers in similar businesses), then requires them to sign a confidentiality agreement and provides them with information on the business. The potential buyers can then investigate the business and submit a bid. The investment banker and owner select the best bidder, who is not necessarily the highest bidder. After selecting the best bidder, the seller’s attorney negotiates the purchase agreement. The advantage is that the seller can be highly confident that he or she got the best possible price for the business, and that all interested parties had an opportunity to bid. The downside is that this process can be time-consuming. You must be willing to have discussions with multiple bidders and deal with numerous requests for information.

What about dealing directly with a private equity fund?

Northeast Ohio is also fortunate to have a number of high-quality private equity firms that are eager to buy middle market businesses. The owner may choose to approach such a buyer directly and engage in a one-onone discussion. The buyer investigates the company and then they negotiate. Some owners prefer this method because they don’t want an extended process. They might not get the highest price, but will still come close. Private equity firms realize that they need to be in a fair range and give a fairly strong bid. This route may be viewed as more confidential, as the seller is dealing only with one company. There is less risk of a private equity firm exploiting your confidential information, since it is usually not in your industry.

There are other advantages. A private equity firm is more likely to leave your business largely intact, since it has no other operations to consolidate with. Also, since an equity firm does not already have operational management in place, it will be more likely to allow and even encourage the seller to have a continuing role in the business post-closing.

How can a seller minimize liability to the buyer after the sale?

The seller’s attorney should carefully negotiate the purchase agreement, placing limitations on the buyer’s ability to make claims, including a time deadline and a maximum dollar amount. The attorney should negotiate deductibles to ensure that the buyer cannot bother the seller with minor claims. Also, the buyer may require the seller to put funds in escrow in case there are any future claims, so the seller’s attorney should minimize the amount required as well as how long the money must be held.

MICHAEL J. MEANEY is a member of the business department and co-chair of the business transactions practice group at McDonald Hopkins LLC. Reach him at (216) 348-5411 or

Wednesday, 25 June 2008 20:00

Identify future leaders now

From a business operations standpoint, succession planning is crucial for all sizes of companies, whether a one- or two-person organization or a multinational corporation.

“It’s been estimated that only half of public and private companies have a succession plan in place for key members of management,” says Steven Y. Patler, JD, CPA, managing director with The Prosperitas Group LLC in Bloomfield Hills. “The departure of key employees for expected or unexpected reasons can remove knowledge, leadership and even an organizational icon. Consider the retirement of Bill Gates from Microsoft. Careful planning is essential to ensure business operations can continue.”

Smart Business asked Patler how companies develop a succession plan that identifies future leaders.

What is the most important factor to consider prior to developing the plan?

The company’s future needs. While the existing needs are important, focus on the strategic direction of the organization. If a person in a key position leaves, it may or may not be ideal to replace him or her with someone with the same skill sets. Taking into account the company’s strategic direction is critical, as is identifying the desired qualities of future leaders long before there is an actual need.

For the succession plan to make sense, a broad base of representatives should be involved; for example, members of the board, the CEO, vice presidents, general counsel and human resources personnel. There is no cookie-cutter formula for a succession plan. Each company has its own strengths and weaknesses, which can be more easily identified if myriad people are involved with the process.

How can a company evaluate current personnel to identify successors?

In some companies, the most pressing need is to identify a successor to lead the company. But for most companies, there are several key people who are essential for survival. So there may be many positions that need a plan. You need to study and identify what positions and people are most critical. You have to evaluate their abilities in the context of the position.

After crucial people and positions are identified, the next step is to determine available sources of replacement. It is not always existing personnel. You may need to look externally. For example, say your marketing director has been with the company for many years and handles all the marketing functions, and no one else at the company knows his or her job in as great of depth. In that type of situation, you have to consider how easy or difficult it would be to identify a replacement from outside.

When considering replacements, it’s important that potential candidates are a good fit for the culture of the organization, or be ready for a long process to change that culture. Some people fit better in certain types of companies, and others fit well in certain roles within a company. Some don’t even want to be managers. There are sophisticated tools available to determine what types of positions people are best suited for or to help employees identify their strengths and weaknesses to pinpoint areas they need to improve upon in order to move up successfully to different positions.

How can a company ‘develop’ its potential successors?

Once you identify candidates, there needs to be mentoring and education. Job rotation is helpful, as well, to see how all the positions relate to each other. Equally important is to have an evaluation process to see how the person is progressing and performing. Is he or she, indeed, the good candidate you thought he or she would be?

Are there any special considerations?

In some situations, succession planning can get political. For example, look at the large brokerage firms that had to hire new external CEOs because of poor past performance. Shareholders demanded new talent, even if there were good, developed candidates on staff. So, sometimes, there are external forces beyond your control.

Another consideration is that you really need two types of succession plans: the long-term development plan, plus a contingency plan. Positions don’t just open due to planned retirement. Things happen. Or the CEO or other key personnel might change companies, leaving at the prime of their careers. Contingency plans are essential to maintain operations even in the sudden absence of a CEO or other key employee.

This brings us to a final point: Both internal and external factors can render a succession plan null and void. You can’t just have a plan; top management and the board must be committed to it and resolved to revisiting it at least annually and updating it on a continual basis.

STEVEN Y. PATLER, JD, CPA, is a managing director of The Prosperitas Group LLC, Bloomfield Hills. Reach him at (877) 540-5777 or For more information, go to

Monday, 26 May 2008 20:00

Charitable lead trusts

If you have a philanthropic heart and have not yet considered a charitable lead trust (CLT), now is an ideal time to review this strategy for giving either during your lifetime or upon your death through your will.

“A CLT is a very attractive option during the current low interest rate environment, enabling you to either take a sizeable income tax deduction now and/or reduce the size of your estate,” says Gregg R. Fortune, CFP®, CFS, AEP, managing member of Prosperitas Financial Advisors, LLC, Bloomfield Hills.

Smart Business asked Fortune for more information about this beneficial option for those seeking a creative way to give.

What types of charitable trusts are there?

There are two types: the charitable remainder trust (CRT) and the charitable lead trust (CLT). The CRT is more familiar, but the CLT offers many attractive benefits worth considering. A CLT lets you donate the income stream from an asset to a charity for a set number of years. You determine who gets what assets when and at what percentage. The remaining appreciation goes to the person who established the CLT or his or her family members.

Are there variables of CLTs?

Yes. There is a charitable lead unit trust (CLUT) and a charitable lead annuity trust (CLAT). A CLUT gets valued once a year and the proceeds are ‘sprinkled’ at the set percentage. Say you have a property worth $2 million. You sell it for cash. You specify the charity’s payout rate as 5 percent (so the charity gets $100,000). You invest the rest of the money in whatever you choose (securities, bonds, etc.). Every year, the charity gets 5 percent based on the investments’ performance, so the amount will vary every year.

With a CLAT, the valuation is done once, at the beginning. If you specify that 5 percent will go to the charity every year, the same amount goes to charity regardless of performance.

Are there different ways to set up the CLT?

There are two ways: grantor and non-grantor. You can set up a CLAT or a CLUT using either of the two. A grantor lead trust gives you a much larger tax deduction. The deduction is calculated based on the income stream going to the charity and is based on IRS tax tables that are tied to interest rates. Because we are in a low interest rate environment, the tax deduction is very high right now.

With a nongrantor lead trust, there is no income tax deduction currently, but it does allow you to reduce the size of your estate. With this method, you can specify that the charity receive income for a set number of years, at which point the asset will transfer to a family member(s).

Provide some specific examples of how a CLT works.

Say you purchased a lot on a lake many years ago. You built a summer house on the lot, which you rent out. Your grandchildren are in their late teens. You establish a CLT, which allows you to donate the stream of income coming in from the rental for 10 years. After that, the property will then go to your grandchildren, who by then will be old enough to manage it wisely. In this example, the CLT serves as a nice delay trigger to keep the asset in the family and also enables you to achieve some tax benefits.

Here’s another example: Say you own a growing business that is currently worth $20 million. Your shares are about $15 million. Your children are in their early 20s and are just beginning to work in the business. You can donate your ownership interest and distribute the income to charity for 10 or maybe 20 years, at which point it will transfer to your children who by then will be mature enough to take over the business. Estatewise, you’ve ‘frozen the value.’ If the business grows to $70 million during that time, your estate will not have to pay the tax on that growth when the children inherit the business.

How flexible are CLTs?

As we discussed, CLTs are very flexible upfront. However, once established, they are irrevocable. You can get very creative with a CLT. You can select one or more charities, pool a grouping, or even create your own foundation. You can even give jobs to your family members, working for a foundation that you create. Finally, while various types of property can be used to fund a CLT, consideration must be given to avoid UBTI (unrelated business taxable income) to maximize the charitable contribution.

GREGG R. FORTUNE, CFP®, CFS, AEP, is a managing member of Prosperitas Financial Advisors, LLC, Bloomfield Hills. Reach him at (877) 540-5777 or

Friday, 25 April 2008 20:00

Enhance your value

What are your goals for exiting your business? Will you need cash for your retirement? Do you plan to leave it to your children? Do you sell it to a competitor or your employees? Whatever your goals, it is important to start planning for the future now.

“Every owner should know the value of his or her business and have an exit strategy,” says John T. Alfonsi, CPA/ABV, CVA, CFE, a partner with Cendrowski Selecky PC, Bloomfield Hills. “Whether trying to minimize estate and gift taxes on a transfer to family members or reduce income taxes on a sale, the owner’s objective is to maximize value.”

Smart Business asked Alfonsi how owners can start focusing on value now to prepare for a successful outcome in the future.

What are value drivers, and why are they important to a company?

Value drivers are areas that have an effect on a business’s value — they enhance or preserve the value of the business and are unique for every business. While earnings before interest, depreciation, taxes and amortization (EBIDTA) — or cash flow — is important, it is not the only area to focus on. Value drivers impact an entity’s multiple and include such things as having a unique product or service. What differentiates you from competitors? Do you have something another company can’t create or is difficult to reproduce? A patent? A copyright? A coveted location? Unique distribution channels? Employees or work force in place can be a value driver for a service-oriented business. Do you have a skilled team in place in an industry where there is a high demand for talent?

What is a multiple, and how is it used to determine value?

EBIDTA is a close marker in regard to cash flow. Cash flow is a driving factor when valuing a business but so is the ‘multiple’ that someone is willing to pay for your business. A multiple is the inverse of a discount or capitalization rate that reflects the risks inherent in a business or what the acquirer perceives as risk. The lower the risk, the higher the value; the higher the risk, the lower the value.

Say your company generates $1 million of EBIDTA. Depending on the company’s value drivers, a seller might be willing to pay four to six times EBIDTA for your business. So the selling price could range from $4 million to $6 million. What moves the price from the $4 million to the $6 million? The nonmonetary factors.

How should an owner evaluate these non-monetary factors?

Make sure cash flow is existent and consistent, but look at all the factors a potential buyer would examine, as well. Of these, the most important may be strategic fit. Oftentimes, a purchaser is a competitor. How would your business fit with the purchaser’s? What do you have that would be difficult for the purchaser to get without obtaining your business?

Other factors include:

Management — A business that is highly reliant on one owner will probably be worth less than one with a strong management team in place. Far too many times we see businesses reliant on one owner. There may be good ‘lieutenants’ in place that could continue to function without the owner but not as effectively as they had with the owner at the helm (either due to the loss of the owner’s personal relationships and/or his or her unique knowledge). Owners should start grooming employees to take over in the future. If you have good people in place, offer them incentives to stay with the company.

Customer diversity — Your business should not rely solely on one key customer. Any single customer that represents more than 10 percent of revenue and/or profits may be viewed negatively. What happens if the customer is no longer there?

Recurring revenue stream — Long-term contracts are more predictable than those that go from year to year, month to month or job to job. They pose less risk and, therefore, create higher value.

Perceived industry leaders — Being perceived as an industry leader creates higher value. Get in front of the media however you can. Get quoted in articles in trade magazines, write a column about your area of expertise, go on a local radio talk show, be active in the community.

Have a strategic plan — Many small businesses overlook this, as do some larger, too. Your strategic plan doesn’t have to be long, but it should list your goals and provide a focus for the company. Where are you headed? What initiatives are in place to make your plan a reality? This will show that your business is focused, that you know where you’re going and that you have taken steps to achieve your goals.

JOHN T. ALFONSI, CPA/ABV, CVA, CFE, is a partner with Cendrowski Selecky PC, Bloomfield Hills. Reach him at (248) 540-5760 or

Wednesday, 26 December 2007 19:00

Guard your business secrets

There could be a lot more information about your company in the public domain — readily accessible to your competitors — than you may think. How your competitors might try to analyze this information in order to predict your next move is of obvious concern. There are many ways that business secrets and strategy can be leaked, sometimes in inadvertent ways. It’s important your employees — everyone from the receptionists to your salespeople to top management — are instructed about when, how and what they can and cannot discuss with company outsiders.

“When you have a strategic game plan, timing is critical,” says Harry Cendrowski, CPA/ABV, CFE, CVA, CFD, CFFA, the president of Cendrowski Corporate Advisors LLC. “You don’t want your competitors knowing what you are planning or it will leave the door open for the ‘me too’ factor. That is why it’s important that everyone in your organization is on the same page.”

If your competition makes an announcement of an initiative which is similar to yours both in substance and in timing, the result will be that you will lose any opportunity you once had at being unique in having a distinguished plan or strategy.

Smart Business asked Cendrowski about some not-so-commonly thought of places where clues about a company’s strategy might be found and how companies can more closely guard their business secrets.

How much information about a company’s activities can actually be obtained through public records?

There is a wealth of information in the public domain. Experienced information gatherers know where and how to obtain it quickly. Some Web sites offer information for free; others provide it at varying degrees of cost. Good business intelligence is available at public sites such as the U.S. Securities and Exchange Commission Web site,

Lawsuits also offer a plethora of information about corporations, individuals, fraud schemes, etc. Public access to the U.S. Court Records in real time can be found at: This is an electronic public access service that allows the public to obtain case and docket information from Federal Appellate, District, and Bankruptcy courts. The information available for a nominal fee consists of case related information such as cause of action, nature of suit, dollar amount, Appellate court opinions, Judgments, or case status as well as imaged copies of documents. In addition, comprehensive fraud resources can be found at as well as Both of these Web sites are funded and supported by the FBI. Information that is technically unpublished and not readily available on the Internet [e.g., civil filings, hearings, certain documents] can still be found at the local level in various databases that are connected to the Internet. Those adept at data mining can easily retrieve this information.

What other sources could reveal information indicating a company’s strategic direction?

In general, organizations leave information as they go about their business. Companies reveal information in their marketing materials, on their Web sites, at trade shows, while interviewing job candidates, while exploring opportunities to form joint ventures, etc. Another example is the company directory, which might list key employees with their job titles, locations, which can provide clues about what the company is doing overseas. Information is also present in publications, such as the Encyclopedia of Associations, National Organizations of the U.S., and Regional, State, and Local Organizations, and is available through providers of market intelligence, such as Standard & Poor’s. Activities with industry associations, suppliers, vendors, customers, etc. can also provide clues into a company’s direction, so employees should be cautious about what they do and say while participating in such activities.

How can companies avoid inadvertently disclosing too much?

Continually monitor the way your employees communicate information about your company’s trade secrets and initiatives. Monitor the information that makes its way to your Web site and to other places on the Internet, as well. Even if your competitors don’t have the specific details about an initiative, just knowing that something is about to happen can hurt the long-term success of your strategic plan. If you are a private company exploring a possible merger or sale with another private company, make sure the documents are not made public. If the company is public, work to control the timing of the disclosure. Timing is critical in regard to products and services. Disclosure by a party — even if it says there is a nondisclo-sure or confidentiality agreement — still indicates that something is going on. Develop a standard, pat response that everyone in the company should be instructed to use. Communicate on a regular basis with your employees. This not only assures everyone is on the same page, but it also serves as a mechanism whereby employees will more readily alert you to efforts that a competitor may use to obtain your company’s secret information.

HARRY CENDROWSKI, CPA/ABV, CFE, CVA, CFD, CFFA, is president of Cendrowski Corporate Advisors LLC, Bloomfield Hills, Mich. Reach him at (248) 540-5760 or or the company’s Web site at

Friday, 26 October 2007 20:00

Decision and risk analysis

Risk is inherent in many situations in both our professional and personal lives. Risk management helps organizations comply with regulations, monitor a wider range of emerging risks and make better decisions.

External risks are growing in importance in today’s world. “Risk management is becoming more strategic,” says Alain Bensoussan, Ph.D., distinguished research professor and director of the International Center for Decision and Risk Analysis at the School of Management, University of Texas at Dallas. “A more scientific approach is needed; new concepts and methods are necessary. When we know as much as possible about the probability of an event to occur, we can take the necessary actions to reduce the severity of the consequences.”

Smart Business asked Bensoussan about the emerging scientific field of Decision and Risk Analysis.

What new risks do we face?

Unfortunately, due to terrorist threats, in today’s world we face more security risks. We also face risks from natural disasters, such as Hurricane Katrina. Looking at business applications, corporations must deal with the reality of globalization. Their activity is less and less local. Markets and suppliers are located worldwide. Even R&D can be outsourced. The supply chain involves much more uncertainty and more complexity. Today, products are more and more embedded into services. They may perform better and make life easier, but they are more complex. In the future, we will see the process of the applications of nanotechnology, which raises many challenges. So we’re indeed expecting new risks. Of course, it is an evolution, a trend, and we have to adapt to this new situation.

Is decision and risk analysis a new scientific and academic topic?

Yes. If you have a common body of knowledge, concepts, methods and ideas with applications in many domains, then you have a science. But new science is not created from scratch. Decision and risk analysis as a new science has connections to many academic fields, in particular to economics and engineering. We can take the example of financial engineering. The techniques used on Wall Street are extremely sophisticated and complex, and they are based on deep economic and mathematical concepts. Insurance has also developed an advanced methodology called ‘actuarial science.’

What can practitioners expect from this new science?

Thanks to the body of knowledge, concepts, methods and ideas of decision and risk analysis, corporations and other entities facing risks will get useful tools to identify, assess and mitigate risk. In the context of a new science, one analyzes the types of problems to be solved obtaining a thorough understanding of them; then one develops the theory and its applications. What we can expect in the future is progress in quantifying risks. Moreover, this is extremely important to make optimal decisions. Quantifying is a key element of the scientific approach in general and for risk assessment and management in particular.

What industries can benefit the most?

Any industry can benefit, especially those with innovative, new products that require a high level of R&D and costly development. On complex projects, decision and risk analysis is indispensable. Supply chains that involve a great deal of uncertainty will also benefit. So the more complexity and uncertainty are present, the more risk is to be expected. One answer is to increase the flexibility as much as possible into the decision-making process. Risk management will provide tools to achieve this goal.

Are state departments and government agencies concerned?

Absolutely, by a lot of aspects. Government is responsible for mitigating the risks related to security and natural hazards. As another example, consider the areas of defense, energy and space. There are many large projects where government funding is involved. Decision and risk analysis tools will help in the design and development phases to stick with budgets and schedules and will provide estimates of the risk of drift. Another area is regulation. Governments regulate to mitigate financial risks in banks. Regulation in economic activity in general is necessary. To get to the right level of regulation and to define the right indicators strongly depends on an in-depth understanding of risk.

ALAIN BENSOUSSAN, Ph.D., is a distinguished research professor and director of the International Center for Decision and Risk Analysis at the School of Management, University of Texas at Dallas. Reach him at or (972) 883-6117. To learn more about the International Center for Decision and Risk Analysis, go to

Sunday, 26 August 2007 20:00

Technology-based entrepreneurship

Any individual or business looking for a way to access the research and technological resources of The University of Texas at Dallas need not look further than the Institute for Innovation & Entrepreneurship at UT Dallas.

“We’re a business-friendly university. The Institute serves as a gateway for accessing the products, research and technology developed here,” says Joseph C. Picken, Ph.D., executive director of the institute.

“We strive to provide real opportunities to turn ideas into products and businesses that add value,” says David Deeds, Ph.D., the institute’s academic director.

Smart Business asked Picken and Deeds for their input on the process of taking ideas and turning them into products — and how the Institute Innovation & Entrepreneurship can help.

What is the most important question that must be asked before trying to bring an idea to market?

Deeds: The key question is, ‘What value will there be for the customer?’ Whoever the customer might be, you have to give them enough value that they will be willing to shift their dollars from what they are currently doing. Entrepreneurs tend to forget this. Why will someone take a risk and pay you substantially more to acquire this product than what it costs you to make it?

Picken: It’s helpful to focus on a single customer. What value will you create for this person? Also, entrepreneurs need to be more realistic about the potential market. Many see a huge market and wrongly assume that even if they obtain one-tenth of 1 percent of that market, they will get rich. That’s not the case. They need to work from the bottom up — selling their idea one customer at a time.

What are some of the biggest mistakes entrepreneurs or companies make when determining whether an idea can successfully be brought to market?

Picken: They overestimate the value of the idea. They also assume they are the first to see the opportunity, when, in fact, they are frequently in a race to get there first. Another misconception is that ‘if you build it, they will come.’ Marketing, channel access and reaction of the competition are all important factors that must be thoroughly examined.

Deeds: Another mistake involves determining price. Price is determined by what the customer is willing to pay; it may have little relevance to the actual cost of producing the good. So you really need to think about pricing not from the cost standpoint but on the willingness factor. Properly managing cash flow is also crucial. Many entrepreneurs will tell you they ‘ran out of money.’ The key is to manage your resources to minimize the outflow and maximize the inflow.

Picken: Many entrepreneurs lose contact with their customers as they grow. As you grow and add layers you should be ensuring that everyone maintains contact with customers on a continual basis.

How does the Institute assist the general business community at large?

Deeds: The institute serves as an initial point of contact for entrepreneurs, start-up companies and individuals seeking assistance from the university, with respect to projects, programs and new ventures within the general domain of innovation and entrepreneurship. In addition to our academic programs that teach students how to think like entrepreneurs, we offer programs such as the Entrepreneurial Development Series and the Commercialization and Entrepreneurship Boot Camp. We also match students with local companies for special projects and internships.

Picken: In addition, we have an External Alliance program that brings together the broader community including businesses, incubators, investors, professional service firms, local, state and federal governments, and higher education institutions across the region.

How do businesses benefit by working with the Institute for Innovation & Entrepreneurship?

Picken: First, both large and small businesses need the entrepreneurial viewpoint. Our programs give executives a chance to learn those mindsets. Second, it gives companies the opportunity to attend the Research and Technology Showcases held at the university three times per year. Third, working with the institute gives managers the opportunity to interact with students. Finally, there are opportunities for sponsorships and networking.

Deeds: The institute itself is an entrepreneurial venture. We encourage local executives to keep an eye on our Web site, call us, visit our offices. We are continuing to evolve and always welcome the opportunity to work with the local business community.

JOSEPH C. PICKEN, Ph.D. is executive director of the Institute for Innovation & Entrepreneurship at The University of Texas at Dallas. Reach him at (972) 883-4986 or

DAVID DEEDS, Ph.D., is academic director. Reach him at (972) 883-5904 or Visit their Web site at

Thursday, 26 July 2007 20:00

Indicators of management fraud

According to the Web site for the Federal Bureau of Investigation, corporate fraud cases have risen every

year since 2002. For fiscal year 2006, the FBI investigated 490 corporate fraud cases resulting in 171 indictments and 124 convictions of corporate criminals.

By definition, management fraud involves falsifying financial information for the benefit of the person committing the crime. This includes false transactions and accounting entries, bogus trades, and self-dealing by corporate insiders, including insider trading, kickbacks, backdating of executive stock options, misuse of corporate property for personal gain and individual tax violations.

Smart Business asked Theresa Mack, CPA, for warning signs that management fraud is taking place. Mack, a former special agent of the FBI, is senior manager, investigations, for Cendrowski Corporate Advisors LLC, based in Bloomfield Hills.

What are the most telling signs that fraud is occurring?

Indicators usually exist before the crime is apparent. After the fact, people often look back and realize the signs were there. Perhaps the person was heavily in debt, living beyond their means, had expensive habits, spent a great deal of time socializing or had a problem with drinking, gambling or drugs. Maybe there was a change in his or her behavior. Perhaps there were family or emotional problems and the person started showing signs of desperation. Sometimes there are job performance problems — but not always.

What are some of the personal attributes associated with people who commit management fraud?

They are very self-centered. Their opinion of success equals money. They place a high value on money, and as such, they don’t treat people so much as humans, but more as tools they can use to achieve financial success. They are flashy and like to display their wealth. They also feel they are above being held accountable either because of their position or stature. They waive or override internal controls because they reason, ‘they don’t apply to me.’ They are usually in high positions within their organizations and usually take someone in their confidence. However, having certain personal attributes is not a sole indication that someone is more likely to commit fraud than others. It does occur that an individual who suffered a catastrophic loss in his or her own mind, say large stock losses or other financial losses, that he or she feels compelled to commit fraud in order to recoup the lost funds.

Of these, which are the most prevailing?

That the person lives above and beyond his or her means. Fraud is about greed. Those who commit fraud are very caught up in their need for money. This need drives many individuals. There are some cases where people will rationalize what they are doing — say because they need money to help a sick relative — but the norm is people who want more than they can afford.

Once fraud is suspected, what is the next step?

The company should retain an experienced, outside professional to conduct an investigation. This firm will review the company’s processes; conduct a thorough background investigation of the person suspected; and interview anyone involved to gather more evidence. While reviewing the company’s processes, the investigator will examine A/P, A/R, purchasing, payroll, cash receipts, inventory. They are looking for the ‘holes’ to figure out how the person defrauded the company.

During the background investigation, the examiner will look at the person’s standard of living, assets, indebtedness. What is this person all about? Do they have vacation homes, boats, expensive and/or numerous vehicles? Are there any judgments, legal problems? Are they being sued? There is a great deal you can access through public records on the Internet. The investigators will find out everything they can before the company confronts the suspect. This is just an overview of the areas to examine, it is not at all restricted to this, but rather each case is treated differently on a case-by-case basis due to the circumstances.

What can companies do to help prevent fraud in the first place?

Strong internal controls are the biggest factor in deterring fraud. Have your internal controls assessed by an outside, independent firm. The firm will ensure there are enough controls in place and that there are no holes and gaps. Equally important is a culture that does not condone fraud — one that requires internal controls to be adhered to. A code of ethics should be maintained from the top down. When the ethics are violated, make sure there are serious repercussions and that everyone knows it. In today’s business climate, all owners and board members need to have an in-depth knowledge of how the company runs. A hands-off approach no longer works. Too much is at stake.

THERESA MACK, CPA, is senior manager, investigations, with Cendrowski Corporate Advisors LLC, Bloomfield Hills. Reach her at (248) 540-5760 or