Forensic Accouting

Forensic Accounting Dispute Valuations

Forensic Accounting Valuing Economic Damages

Forensic Accounting Investigations & Forensic Analysis

Forensic Accounting Family Disputes

FORENSIC ACCOUNTING SERVICES … “taking a closer look”

Lotus Amity provide financial clarity in disputes

Lotus Amity provide a range of Forensic Accounting services, including: Business Valuations, Valuing Economic Damages and forensic investigations. Lotus Amity are based in Brisbane, Australia.

We assist in commercial and family disputes. We act as an expert, assist in mediations or act as a shadow expert.

The dynamic approach of Simon and the team under difficult circumstances made the difference between a report being prepared on best possible strengths and something less.  Opinions were expressed in clear, robust terms. The report ultimately contributed to a positive outcome for the client”

EXPERIENCE

Lotus Amity have extensive experience providing valuation and economic damages reports in disputes.  In matrimonial matters we assist in preparing the statements of assets & liabilities, tracing assets and establishing ownership of assets. In commercial disputes we assist in assessing damages claims. We also provide litigation services, such as assistance with e-discovery, fraud detection and detailed financial forensic analysis.

Chartered Accountant • Business Valuation Specialist • Certified Fraud Examiner

Click on the below links for selected specific case experience:

ARTICLES

Lessons from Madoff - the Ponzi Scheme mastermind

Uncle Bernie Madoff, at the time of his arrested in 2009, had a fund pretending to be worth USD$65bn.

Some of the key attractions of Bernie’s fund to investors was that:

  • Bernie offered consisted steady returns of about 12% a year, a good solid return. Not exuberant
  • Bernie gave the impression that he was exclusively dealing just with you, you were part of a VIP club (and don’t tell anyone)
  • Bernie had a long investing career and reputation and he also ran a bone fide stock trading business

Bernie offered a Split Strike Conversion strategy. The strategy simply involved buying blue chip stocks and puts and options to protect against some of the downside risk. What was strange about Bernie’s strategy was that each month he would sell the stocks, puts and options and convert the money to treasury bonds.

Some of the red flags of Bernie’s fund included:

  • No segregation of duty. Normally funds require a segregation of duty between the investment manager, the broker and the custodian. In Bernie’s case, there was no segregation of duty. He was all three. He looked after the money, made the investment decisions and brokered the deals
  • Despite being a $65 billion fund, it was audited by a tiny un-heard of audit firm which employed just one auditor (who didn’t have an audit license)
  • It made the consistent good 12% returns even when the markets were falling

But of Bernie was making it all up.

Bernie worked backwards, looked at stock prices over the month and then created false purchase and sales documents for buying those stocks at the lowest prices and selling at the highest. When the auditors checked the trail of transactions they would go on to Bloomberg look up the price of the stock on the relevant day and confirm, yes, the price does tie up to Bernie’s broker document. That is to say, there was market evidence that the prices Bernie had for his transactions were bone fide.

The unusual thing is that this went on for over thirty years. Over that time the auditors, the investors and the SEC never ever checked with the central depository to see if Bernie ever actually bought any the shares he said he did. Which of course he didn’t.

The key lessons to be learned from Bernie are

  • Look for evidence. Look for third party evidence that the ownership of investments exists.
  • No segregation of duty? You’re asking for trouble
  • A one-man band auditor? Really, what do you think
  • Returns too good to be believed? Well they are

Simon Cook, Director, Lotus Amity

Simon specialises in providing forensic accounting services. Prior to founding Lotus Amity, he was a Forensic Accounting and Corporate Finance partner with BDO Australia and led their national forensic practice. Simon has assisted in many legal matters, including transaction disputes, damages claims, shareholder disputes and matrimonial matters. Simon is a Fellow of the Institute of Chartered Accountants of England and Wales and a Certified Fraud Examiner.

Financial fraud - Monetising assets

What’s the point in having assets which you know are going to create great future profits streams, when what your investors want is profits now? What you need to do, according to Jeff Skilling (former CEO to Enron), is to “monetise” those assets.

Make your best guess of what cash flows you think that asset will generate in the future (don’t be too conservative), work out the present value of those cash flows and then recognise that value in your financial statements.

NB. In very simple terms, the prudent approach in accounting is to adopt a cost approach to valuing assets. In some cases though this approach isn’t appropriate, for example, for valuing financial investments like traded stocks. In this case, under accounting standards, those investments can be valued at Fair Value, that is to say their market value. This is also also known as mark-to-market accounting. If the market value of the investments has increased over the year, then this increase is recognised as a gain in the income statement. Conversely, if the value of the investments has fallen in the year, this is a loss and reduces your earnings.

Mr Skilling, together with the former Enron CFO Mr Fastow, were “Monetising” geniuses (or is that genies). They aggressively adopted mark-to-market accounting for contracts. That is they inflated asset values and thus artificially increased earnings.

The Blockbuster Agreement

As a simple example, in July 2000 Enron signed a highly innovative joint venture agreement with the then video rental global leader Blockbuster. Blockbuster at its peak had 60,000 employees and over 8,000 stores.

Blockbuster were to supply internet video content over Enron’s fibre network. Enron worked out the cash flow this content service would achieve (using “managements’ best estimates”). Enron calculated the present value of the Blockbuster contract at $125 million and then sold the contract to an off balance sheet, special purpose vehicle, named Hawaii 125-0!

The discussions (and the agreement) with Blockbusters quickly collapsed. One of the reasons for the collapse was that the management team at Blockbusters considered themselves a major player in Hollywood; where as Enron were perceived to be an upstart in the communications world.

After the collapse, instead of writing down the value of the deal, Enron wrote up the value of the content service concept by another $58 million. The logic behind this was that Enron now had the freedom to start discussions with any other supplier; which was deemed more valuable than an exclusive content supply agreement with Blockbusters!

Ironically, Blockbusters filed for bankruptcy in 2010 due to a significant competition from video on demand services, such as Netflix.

The end result

The problem with optimistically recognising future revenue, is that you then have more to do in the following year to meet earnings targets and support the share price, ie. you have to be even more devious. Which is ultimately what happened. The accounting web at Enron became more complex and convoluted until it imploded and Enron filed for bankruptcy.

Fastow pleaded guilty to two charges of conspiracy and was sentenced to ten years with no parole. Skilling was convicted of federal felony charges and sentenced to 23 years.

Skilling’s closest friend at Enron, Clifford Baxter, the chief strategy officer, was sued personally for $30 million due to selling his Enron stock prior to the bankruptcy. A month prior to giving testimony, Baxter was found dead in his Mercedes, having committed suicide with a gunshot to his head.

Next Week: #1 Make the numbers up – Uncle Bernie

Simon Cook, Director, Lotus Amity

Simon specialises in providing forensic accounting services. Prior to founding Lotus Amity, he was a Forensic Accounting and Corporate Finance partner with BDO Australia and led their national forensic practice. Simon has assisted in many legal matters, including transaction disputes, damages claims, shareholder disputes and matrimonial matters. Simon is a Fellow of the Institute of Chartered Accountants of England and Wales and a Certified Fraud Examiner.

Financial fraud - Off-balance sheet vehicles

Off balance sheet Special Purpose Vehicles (SPVs), allow a company to move assets and liabilities off a company’s balance sheet, whilst still potentially using those assets.

If you can transfer an asset off your balance sheet to a separate entity for more that the value it’s sitting on your books, then you can potentially recognise that difference as a gain in earnings. Voila. Increased earnings!

Andrew Fastow, once the CFO to Enron, is the off-balance sheet vehicle legend. At Enron he created 3,000 separate, off balance sheet, corporate entities! 

Smoke & mirrors

Fastow used the SPVs for a variety of purposes, including collateralizing debt and moving impaired assets. In simple terms, he created a web so complex that it was impossible to discern the true liability position of Enron and enabled him to inflate earnings. [To boot, Fastow invested his own money in some of the SPVs and took out $60 million in fees!]

How it should work

According to International Financial Reporting Standards if a company (parent) controls an entity (a subsidiary), then consolidated financial statements need preparing. That is to say, all the assets and liabilities of the parent and subsidiary SPVs are added together in to one set of accounts.

So if a company retains control of an SPV then the consolidation defeats the purpose of the arrangement, ie. the asset and liability would still show on the consolidated balance sheet.

When control isn’t control

Control is usually considered to exist if 50% or more of the equity is held.

Arthur Andersen, the auditors to Enron, advised (rather dubiously) that if an “oversight committee” was in place at an SPV, then Enron could retain more than 50% of equity without actually having control. Not having control meant the assets and liabilities could be moved off the balance sheet.

In reality, all the Enron SPVs were run by the Enron management team, directly or indirectly, i.e. Enron had full control!

Create artificial gains on disposal

A common use of the SPV’s was for Enron to sell assets at above their book values (the values in the balance sheet) to the SPVs. Selling an asset at above book value can results in a gain, which potentially goes to the income statement, ie. increasing earnings.

Classify gains on disposal as operating profit

A gain on the sale of a fixed asset or investment isn’t usually part of the core operations of a business – unless that’s what the business specialises in. So a gain on the sale of an investment needs to be classified in the income statement as a one off gain.

Enron very rarely recognised these SPV disposal gains as one off, but hid them in operating profit, ie. giving the impression that these were repeatable earnings. Which to an extend they were, because they kept repeating the sham in subsequent periods!

Don’t impair assets

The assets and investments that were sold to SPVs were often ones that were about to be impaired, ie reduced in value. This was because Enron had overpaid for or overvalued the asset in the first place – which happened a lot.

An asset impairment is recognised in the income statement, ie. it reduces earnings. Enron very rarely impaired assets!

Guarantee SPVs with equity

Enron were able to support selling assets at over value to an SPV because Enron guaranteed the investments, with Enron stock, to the outside investors.  These guarantees don’t show on the balance sheet but are hidden in the disclosure notes of the financial statements. With 3,000 off balance sheet vehicles, the Enron disclosure notes were some what complex!

These SPV guarantees were all well and good while the Enron stock price was rising, but as soon as it started to fall, covenants were breached and the true liabilities came to fruition. All $23 billion of them!

End result

In 2001 Enron filed for bankruptcy, which was then the largest in history (until WorldCom’s bankruptcy a year later).

Fastow pleaded guilty to two charges of conspiracy and was sentenced to ten years with no parole.

While Enron was imploding, an email was sent round to Andersen staff about document retention policy, which led to the shredding of thousands of documents.

This resulted in Andersens being charged with obstruction of justice (the conviction was subsequently overturned).   This, amongst other failings, led to the downfall of Andersens and its 80,000 employees.

Next Week: #4 “Monetise” assets – turns future revenue into profit now

Simon Cook, Director, Lotus Amity

Simon specialises in providing forensic accounting services. Prior to founding Lotus Amity, he was a Forensic Accounting and Corporate Finance partner with BDO Australia and led their national forensic practice. Simon has assisted in many legal matters, including transaction disputes, damages claims, shareholder disputes and matrimonial matters. Simon is a Fellow of the Institute of Chartered Accountants of England and Wales and a Certified Fraud Examiner.

Dick Smith - Supplier Rebate Shenanigans?

“In its report into the company’s failure, not presented to court, liquidator McGrathNicol found that as sales fell, Dick Smith increasingly made purchasing decisions based on rebates the company could earn rather than what customers actually wanted to buy.”

This all sounds very familiar to the aggressive accounting Tesco adopted in relation to supplier receipts.

In the case of Tesco, supplier contributions, that were dependent on hitting future retail sales targets, were booked even when those sales targets were unlikely to be achieved. Thus overstating sales. This aggressive accounting can be hidden to a degree providing sales keep growing. As soon as sales begin to decline, as they inevitably did, there is nowhere to hide!

In the case of Dick Smith, it appears that supplier rebates were booked as a reduction in marketing expense, rather than a reduction in the value of stock. Thus inflating profit and stock. Happy days. The problem is the stock proved to be unsaleable.

 

What is a rebate and what do you do with it?

“A rebate is an amount paid by way of reduction, return, or refund on what has already been paid or contributed.” So unlike a discount it is money that comes back to customers after the purchase.

In terms of treatment, according to PWC “Rebates typically relate to cost of goods sold and are therefore captured under AASB 102 Inventories. These should then be recognised as a reduction in cost of sales when the inventory is sold rather than recorded as income upfront.”. Which seems the obvious prudent approach.

But oh dear, as PWC go on to explain, it is not that straight forward. “In reality, rebates are often complex arrangements reflecting the different elements of the goods and services exchanged between suppliers and retailers. These include not only the purchase of the inventory from the supplier, but also the marketing and promotion services retailers may coordinate and provide to suppliers. The accounting should follow the substance of these arrangements.”

All of a sudden life’s got a bit complicated! But to my simple mind this sounds (from the allegations) like an aggressive accounting timing technique, bringing forward profits now when in fact they haven’t (and may not) be achieved. Which ultimately comes from the blinded obsession with earnings and earnings growth and ignoring cash flow and working capital management.

Simon Cook, Director, Lotus Amity

Simon specialises in providing forensic accounting services. Prior to founding Lotus Amity, he was a Forensic Accounting and Corporate Finance partner with BDO Australia and led their national forensic practice.  He has worked as a forensic director for a major offshore forensic accounting practice which included assisting in multi-billion-dollar litigation in relation to the largest Bernie Madoff feeder fund.  He has also held senior management positions with Deloitte and Crowe Horwath.

 

When Fair Market Value isn't Fair (Value)

For valuation purposes Fair Market Value and Fair Value aren’t the same. Not knowing the difference could be a costly mistake.

Fair Market Value

Fair Market Value is a commonly defined in the valuation world.  It’s the negotiated price between a willing buyer and willing seller in an open and unrestricted market. Where the buyer and seller are acting at arms-length. The parties are knowledgeable and not anxious to do a deal.

So in efficient free global stock markets, where share prices reflect all relevant information, then we could assume that the stock price indicates the Fair Market Value of a small parcel of shares (not control) of a listed company. Of course, this depends on a number of further assumptions, such as there being plenty of buyers and sellers for the stock, ie. the stock is liquid (which many smaller caps are not).

Bid Price?

As an example, say we take a business to market in a structured way.  We contact all potential buyers all over the world, including competitors, private equity, wealthy individuals, consolidators, etc.  We create a orderly, timely and competitive bid process.  So would the various bids give us a Fair Market Value range?

Probably (hopefully) not.  If the competitive bid process was so good, it would artificially push up the price as the buyers become anxious to buy.  Which is of course exactly what we do want to happen.

Buyers might start to incorporate synergy benefits in their offer pricing, ie. share some of the future anticipated value with the seller.  The Fair Market Value definition doesn’t include any synergy benefits.

Price v Market Value

As Warren Buffet famously points out:

 “Price is what you pay. Value is what you get”

Mr Buffet should know. He’s made his vast fortune in identifying and exploiting the difference – to the chagrin of a number of seemingly hoodwinked business owners charmed by Mr Buffet’s amiable advances.

Just because the market says a stock price is so and so it doesn’t necessarily hold that is the value of the stock.  Price is an objective guide.  Valuation is subjective.

Fair Value

Fair Value is a whole different beast. Where as Fair Market Value is commonly defined by the valuation bodies, Fair Value is a term often incorporated in legislation and so we need to look to the courts for interpretation.

As an example, in the Delaware Courts in the US, where there is significant Fair Value related litigation, the courts have generally found the following in relation to defining Fair Value:

  • there should be no discount for lack of marketability1
  • Fair Value represents a proportionate interest in a going concern2
  • Fair Value represents the investment position of the shareholder3

Simply put, this would mean that the Fair Value could potentially be worth (significantly) more than Fair Market Value.

Which practically seems to makes sense.  If you’re a minority shareholder (say 5%) in a privately held small business and you’re being oppressed by the other majority shareholder (95%), then the Fair Market Value of your stake isn’t going to be very much. Who is practically going to buy the shares?

However, your pro-rata share of the value of a 100% controlled business as a going concern investment is going to be quite different. Or simply putting it another way, if all the shares were sold in an orderly market transaction and you got your 5% what would that be worth.  A whole heap more!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Swope v Siegel-Robert, Inc, United States District Court, 1999
  2. Tri-Continental Corp v Battye, Delaware Supreme Court, 1950
  3. Cavalier Oil Corp. v. Harnett, Delaware Supreme Court, 1989
Financial fraud - Understating provisions

A little messy to cover up but a simple rule to follow. Rather than being over prudent with your customers and their debts, simply assume they are all going to pay and don’t make any provisions.

If a customer who hasn’t paid goes out of business, don’t write the debt off just leave it on the books, because hea, you never know what might happen in the long run. As the classic economist Keynes said “in the long run we are all dead”, so it doesn’t much matter.

N.B. Accountants have to make judgments about how to reflect future uncertain events in the financial statements. So for example, a judgement on the likelihood or not of collecting the customer accounts receivable balances. In accounting there are a number of fundamental concepts, one of which is the Prudence Concept. Under the Prudence Concept Accountants have to be prudent or cautious in their judgments so assets aren’t overstated and liabilities aren’t understated. Provisions are a means of being prudent, in effect accruing for costs now so that assets aren’t overstated.

MCI & Walter Pavlo

Walter Pavlo, a billing & payment executive at MCI Communications (before MCI was acquired by the mighty WorldCom), became an expert at “cleaning up” the resellers debtors book. Resellers sold on MCI line capacity and were notoriously bad payers (ie. dodgy). Coincidentally, or not, WorldCom was one of MCI’s biggest reseller customers.

MCI finance chiefs set the ethical path for Pavlo, cleverly converting a debtor amount to a promissory note. Caribbean customer CT&T owed $55 million and even though the debt was highly unlikely to be collected (and it never was), it made more sense having it as a promissory note asset rather than appearing on the pesky aged receivables report.

Pavlo introduced an innovative collection practice. As cash came in it was allocated to aged receivable balances that were due (as you do) but not necessarily to the customer who paid it – otherwise known as Lapping receipts. The following month the cash got properly reassigned to the account of the customer that actually paid it and the old bad debt it was covering would go on the books as a new balance that wasn’t yet due. Happy days.

Pavlo got quite Lappy Happy and thought it would be helpful if he, and his business partner, personally took discounted payments of $6 million (through the Cayman Islands) from struggling customers and made their MCI debts “disappear”. Unfortunately, bad debts don’t “disappear” for very long. The FBI caught up with him and he was sentenced to three and half years in prison.

Three months after Pavlo went to prison, a class action was filed against WorldCom, alleging that of the telecom reseller accounts WorldCom had inherited from MCI, half were three-to-seven years past due. Of course when you’re in an industry boom, who needs due diligence!

Next week: #3 Turn assets into equity – off balance sheet vehicles

Simon Cook, Director, Lotus Amity

Simon specialises in providing forensic accounting services. Prior to founding Lotus Amity, he was a Forensic Accounting and Corporate Finance partner with BDO Australia and led their national forensic practice. Simon has assisted in many legal matters, including transaction disputes, damages claims, shareholder disputes and matrimonial matters. Simon is a Fellow of the Institute of Chartered Accountants of England and Wales and a Certified Fraud Examiner.

Source. “Stolen without a gun”, Walter Pavlo Jr.

Financial fraud - Capitalised expenditure

The old and easy classic.  As exemplified by the railway companies in the mid 1800’s.  Too much operating cost burning up your bottom line?  Move it over to your balance sheet and depreciate it over a nice long period of time. Hey presto, improved profit and a healthy balance sheet.

Scott Sullivan is the expense capitalisation guru.  Sullivan was the CFO at WorldCom.  WorldCom, through aggressive acquisition, became the second largest long distance telephone company in the US and at its peak had a market cap of $186 billion.

Under cleverly titled “prepaid capacity” journals, Sullivan successfully capitalised $3.8 billion of leased fibre line costs; which were otherwise interfering with operating profits. With the implosion of the telecom boom, there was little usage of these leased fibre lines.  Sullivan used the accounting Matching concept to justify deferring these costs until revenue picked up.

[The Matching concept states that a business must charge expenses to the income statement in the accounting period in which the revenue, to which those expenses relate, is earned. The problem is those expenses were monthly fibre leases, ie. the fibre could only generate revenue in the month the fibre was leased.]

 

 

 

 

Internal audit and the external auditors, Arthur Andersons, also didn’t agree with Sullivan’s interpretation of the Matching concept and handed him over to the authorities. Scott cut a deal to testify against his boss and pleaded guilty to securities fraud and was sentenced to five years.  A good result for Scott, given that his boss, cowboy booted Bernie Ebbers, got 25 years for fraud and conspiracy.

Interestingly, Anderson’s in their audits hadn’t picked up on the $3.8 billion expense capitalisation, as the auditors concentrated on Control Testing and Analytical Review.   Analytical Review is where the auditors compare figures to prior periods and look at industry benchmarks to check to see if the ratios are sensible.  WorldCom had great looking ratios and expense margins were consistent with the industry players.  When asked how the “prepaid capacity” costs were calculated, Sullivan said they were based on what they thought the margins should be, ie.  the industry benchmarks!

To be fair to Andersons, they did do some capitalisation sample testing and kindly gave advanced notice to the management team of the fixed asset accounts they would be reviewing.  One of those accounts to be tested did include some of the $3.8 billion “prepaid capacity” transactions.  The management team promptly made sure that transactions moved to another account before the audit team arrived.

In 2002 WorldCom became the largest US bankruptcy with the loss of nearly 30,000 jobs.

Next week: #4 under state your provisions

 

Simon Cook, Director, Lotus Amity

 

Simon specialises in providing forensic accounting services. Prior to founding Lotus Amity, he was a Forensic Accounting and Corporate Finance partner with BDO Australia and led their national forensic practice.  Simon has assisted in many legal matters, including transaction disputes, damages claims, shareholder disputes and matrimonial matters. Simon is a Fellow of the Institute of Chartered Accountants of England and Wales and a Certified Fraud Examiner.

 

 

Reference:  “Extraordinary Circumstance: The Journey of a Corporate Whistleblower”, Cynthia Cooper

QUALIFICATIONS

Simon Cook Virtual CFOSimon specialises in providing forensic accounting services. Prior to founding Lotus Amity, he was a Forensic Accounting partner with BDO Australia and led their national forensic practice.  He has worked as a forensic director for a major offshore forensic accounting practice which included assisting in multi-billion-dollar litigation in relation to the largest Bernie Madoff feeder fund.  He has also held senior management positions with Deloitte and Crowe Horwath.

Simon is a Fellow of the Institute of Chartered Accountants of England and Wales and a Certified Fraud Examiner. He holds a degree in Business Economics and Management Studies, a Masters Degree in Hospitality Management and a Graduate Diploma in Applied Finance. He has an Institute of Arbitration & Mediators practitioner’s certificate in mediation, is certified in investigations and is a graduate of the Australian Institute of Company Directors. Simon has presented to many legal practitioners on topics such as accounting, valuations, using an expert, accounting ethics, cybercrime and accounting shenanigans.

Simon has assisted in many legal matters, including transaction disputes, damages claims, shareholder disputes and matrimonial matters. Forensic services provided include risk and quantum assessment, valuations, investigations and interpretation of financial information. He has acted as an expert witness and as a shadow expert and assisted in mediations.
Member of the Institute of Chartered AccountantsAssociate of the Certified Fraud Examiners

FREQUENTLY ASKED QUESTIONS

What information is required?

The information required will depend on the matter, the required outcome, the time available and the complexity of the matter.

For business and equity valuations the information we typically require to begin with includes:

  • Last 5 years of financial statements
  • Current year-to-date monthly management accounts
  • Details of non normal and non business operating revenue and costs
  • Details of discontinued businesses and new business opportunities
  • Budget & Forecasts (together with performance against budget)
  • Business history and background
  • Details of key customers, products & services, markets and suppliers
  • Any contracts and special or unique relationships held by the business
  • Key management and staff
  • Business plan and competitive advantage details
  • Any IP owned by the entity

Usually once we have had access to the financial information we will have additional questions.

 

 

Fees: How much does it cost?

We generally operate on a fixed fee basis where ever possible.  Once we have sufficient information we provide a fee based on our understanding of those requirements.  The fee doesn’t include attendance at court or any further work involved, for example, should additional information have to be considered in the report. Preparation and attendance at court and any additional work is charged at $250 per hour, plus GST.

Are there any Guidelines or Regulations that have to be followed?

We follow the appropriate guidelines dependent on the engagement.  So for example, for a valuation engagements we follow:

APES 215.   The Accounting Professional & Ethical Standards Board standard on Forensic Accounting.  The standard covers issues such as public interest, professional independence, professional competence and due care, confidentiality, duties to the court,  expert reports and quality control.

APES 225. The Accounting Professional & Ethical Standards Board standard on Valuation Services. The standard covers issues such as the different types of valuation engagement, responsibilities of members, engagement and mandatory reporting requirements.

AICPA International Glossary of Terms.  Any report will be use the terms as defined by the American Institute of Certified Public Accountants, as required by the Australian Accounting Professional & Ethical Standards.

International Valuation Standards Council.  Where applicable the report may refer to the standards issued by the international valuation standard setters the IVSC.

AVCAL. In some situations in may be appropriate to refer to the Australian Private Equity & Venture Capital Association Valuation Guidelines.

IFRS. International Financial Reporting Standards are the standards developed on how to deal with items in financial statements, for example, they deal with issues such as recognition of revenue, fixed assets and provision.  It may be necessary to consider how the standards have been applied to financial statements, eg. whether the treatment of assets, liabilities, income and expenses is in accordance with the standards.

 

 

 

 

 

Letter of instruction: what information is required?

Ideally we lack to discuss the matter before receiving formal instructions so that we can understand clearly your needs.  Information we typically need in the instructions include:

  • Details of all the parties
  • Background and purposes of the engagement
  • Time frame
  • Required date of the report, eg. is the report to be dated at the date of production or some other date.
  • The date the matter relates to, this is important. So for example, if this is a valuation report, the date of the valuation.  We will need all the financial information up to that date.
  • Is the benefit of hindsight to be considered
  • Any limits of scope on the report
  • Any assumptions to be made and why
  • Any regulations and guidelines to be considered

 

 

Time frame: How long does it take?

It really does depend on the scope of the engagement, complexity and the amount of information involved.  For a straight forward valuation report we would prefer 3-4 weeks from the the time of receiving all the requested information.  The earlier the notice we get the better we are able to incorporate all relevant information

What does a report look like?

A report will typically be comprehensive but easy to understand.  The format will depend on the type of engagement, so for example. a valuation report would typically include:

  • Glossary of relevant valuation terms and appropriate rules and standards followed
  • Engagement & instruction details, purpose of engagement and scope, definition of value and why, key assumptions, information relied upon (contained in appendix), statement of independence and duties to the court
  • Description of the business, business ownership structure and what is being valued (eg. equity or the business)
  • Consideration and description of key customers, products & services, suppliers, competitive advantage and risk profile
  • Consideration and description of relevant industry analysis
  • Analysis of financial information for the last 5 years and analysis of current financial & forecast information, consideration of the accounting policies applied and sources of financial information, eg. audited?
  • Consideration and description of any non business and non recurring income and expenses
  • Consideration and description of appropriate valuation approaches and explanation for the method chosen
  • Consideration and description of any relevant market date, eg. relevant transactions or comparable company data
  • Where relevant, the application of a Discount for Lack of Control and the rationale and support for the discount applied
  • Where relevant, the application of a Discount for Lack of Marketabilty and the explanation and support for the discount applied
  • Where relevant, consideration and description of any surplus assets and liabilities
  • Valuation calculation and explanation
  • Any methods used as a cross check, eg. rules of thumb
  • Consideration of the value applicable to intangible assets, including goodwill
  • Qualifications & experience