Why CPA Testifying Experts Can’t Accept Contingent Fee Engagements

Posted on March 24 2015 by admin

StopAttorneys are often asked to take on a litigation assignment where there is a potential for a large monetary amount to be awarded to their clients by the court. They may take on the work solely based on a contingent fee arrangement with their client. What this usually means is that if the attorney wins the case for their client, they will get paid. If they don’t win, they don’t get paid. CPAs who are retained by clients to be testifying expert witnesses cannot similarly accept a litigation support engagement on a contingent fee arrangement.

The American Institute of CPAs (AICPA) indicates in its rules that a contingent fee is a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained or in which the amount of the fee is otherwise dependent upon the finding or result of such service. The AICPA also states for purposes of this rule, fees are not regarded as being contingent if fixed by courts or other public authorities or, in tax matters, if determined based on the results of judicial proceedings or the findings of governmental agencies. (*)

The AICPA is pretty explicit regarding the prohibition of its CPA members from taking contingent fees when the member performs: I) an audit or review of a financial statement; or II) a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or III) an examination of prospective financial information; or IV) prepares an original or amended tax return or claim for a tax refund for a contingent fee for any client. (**)

But, what about a CPA providing expert witness services in a litigation case? The AICPA’s 2009 publication, Special Report 09-1, FVS Section, Introduction to Civil Litigation Services, states the following in footnote 39 on page 19 in reference to the paragraph, Timekeeping, Fees and Billings:

“Contingent fees arrangements are almost never acceptable for an expert witness. Laws in many jurisdictions preclude expert contingent fees, as do the ethics rules of many bar associations, including rules of the American Bar Association. Even if an expert witness was in a situation that did not preclude a contingent fee by law or rule, a contingent fee creates the appearance that the expert witness lacks objectivity because fees are potentially dependent on the favorable testimony of the expert, or perhaps the successful outcome for the practitioner’s client. Regardless of the fee arrangements, it is advisable for the practitioner to collect any outstanding balances prior to expert testimony to avoid unintentionally creating a contingent fee arrangement, or the perception of one.”

By Don R. Bays, CPA/ABV/CFF, CVA

(*) AICPA Code of Professional Conduct, effective December 15, 2014; Section 1.510.001 Contingent Fees Rule, par. .03. The Arizona State Board of Accountancy’s Rule R4-1-455 Professional Conduct: Independence, Integrity, and Objectivity, par. B.1, contains similar language.

(**) Ibid; par. .01 (AICPA)

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Personal Injury Damages

Posted on March 19 2015 by admin

When Stan was injured in an automobile accident between his car and a tractor trailer operated by one of the largest shipping contractors in the U.S., his wife Maria wanted to “sue them for all they are worth.” When Stan and Maria consulted counsel, their attorney started by explaining the type of damages which were potentially available for them to pursue.

Economic Damages – assessed to provide compensation for monetary losses such as past and future earnings, past and future medical expenses, value of domestic services and loss of employment.

Non-economic Damages – subjective compensation for non-monetary losses such as pain and suffering, emotional distress, loss of consortium and loss of enjoyment of life.

Punitive Damages – awarded with the purpose of punishment; not awarded to compensate a loss but to deter intentional or reckless behavior.

Stan and Maria’s attorney retained a forensic accountant to calculate the amount of economic damages attributable to Stan’s accident. The forensic accountant was tasked with preparing a personal injury economic damages report which provided an analysis of any monetary amounts Stan would have realized “but for” the injuries sustained in the accident.

The forensic accountant’s report included damages related to:

Lost Earnings – expected earnings capacity of the injured party “but for” the accident.

Fringe Benefits – the loss of fringe benefits available to the injured party “but for” the accident.

Household Services – value of services which can no longer be performed by the injured party.

Medical Care – costs incurred and expected to be incurred in the future related to the medical conditions sustained in the accident.

Stan and Maria were able to settle prior to trial for $1,500,000 of economic damages and $1,000,000 for pain and suffering.

For more information of damages in a personal injury case, see the article “Determination of Damages in a Personal Injury Case” in the March 2015 BV/Lit Essentials e-Newsletter.

By Melissa Loughlin-Sines, ABV/CPA, CVA, CFE, CFF

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Did the Fraudster Act Alone? The Impact of Collusion on Fraud

Posted on March 17 2015 by admin

When performing forensic accounting engagements to detect or quantify employee theft or other types of fraud that has occurred in organizations, we often find that there is more than one person involved in the fraudulent scheme.

A recent study discussed in Fraud Magazine analyzed the impact of collusion on fraud. In the study, convicted fraud perpetrators from three federal prisons were interviewed. Approximately 59 percent of the interviewees stated that their fraudulent activity involved more than one person.

The Association of Certified Fraud Examiners’ 2014 Report to the Nation compared the types of fraudulent schemes committed by a single individual versus the types of schemes committed by groups. The biggest difference related to corruption schemes. Less than one-quarter of solo fraudsters were engaged in corruption schemes. When there were multiple people involved in the fraud, the frequency of corruption schemes jumped to 57 percent. Additionally, the misappropriation of non-cash assets was much more common when collusion was involved.

According to the ACFE, the types of schemes that are more common among fraudsters who act alone are expense reimbursement schemes, skimming, check tampering, payroll fraud and cash larceny.

Organizational leaders should be aware of the types of collusion that can lead to fraud in their company. Leaders should consider how groups of employees may be able to overcome internal controls and commit fraud. Paying close attention to corporate culture and different sub-groups or close-knit groups of employees in high risk areas of the organization can help address the chance of collusion occurring.

By Julia Allen Miessner, CPA, CFF, CGMA

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Home Sales Across Metro Phoenix on Track to Jump More than 30%

Posted on March 10 2015 by admin

“Home sales across metro Phoenix are on track to jump more than 30 percent during the next few months, potentially signaling the restart of the area’s stalled housing recovery.” Cathy Reagor, Arizona Republic

Although Valley home sales fell 14% in 2014, many economists and real estate experts are looking forward to a substantial increase in 2015. One of them is Cathy Reagor who published an article in the February 28, 2015 Arizona Republic.

Below are some interesting facts and commentary included in her article.

  • Most people who experienced foreclosures or short sales during the housing crash were required by lenders to wait seven years before they could qualify for a mortgage again. Consequently, those who lost houses in 2007 or 2008 are now eligible to buy again in 2015.
  • Interest rates are expected to tick up in in the near future, which is motivating millennials to purchase homes this year.
  • Less stringent lending standards such as the federally mandated cut to Federal Housing Administration mortgage insurance and the FHA’s required down payment of only 3.5% may be attracting new buyers.
  • The number of Valley houses under contract to sell started to surge in early February, according to Arizona State University’s W.P. Carey School of Business.
  • The biggest increases in pending sales were for residences priced from $150,000 to $250,000 and from $250,000 to $400,000.

Let’s cross our fingers and hope that these pending sales will be consummated causing a rebound in Arizona’s housing economy!!!!

By Gary Ringel, CGREA

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ESOP Appraisers Will Not be Named as Fiduciaries…At Least for the Time Being

Posted on March 3 2015 by admin

It was reported in January 2015 that the Department of Labor (DOL) will abandon the “appraiser-as-fiduciary” rule from its planned re-proposal of a broad set of rules affecting fiduciaries and prohibited transactions.

This story goes back to 2010 when the DOL issued a proposed regulation that would impose a fiduciary obligation on business appraisers in the valuation of Employee Stock Ownership Plans (ESOPs). The DOL withdrew its proposal in September 2011, announcing that a new version of the regulation would be forthcoming. Nothing has really happened in the last three years until this latest development, one that is viewed favorably by the business valuation community.

Business appraisers and organizations such as the American Society of Appraisers (ASA) and the American Institute of Certified Public Accountants (AICPA) have strongly opposed this type of regulation. Some of the reasons for opposition include:

  1. The need for appraisers to purchase fiduciary liability insurance which would drive up appraisal costs;
  2. higher costs could force out smaller appraiser firms and sole practitioners;
  3. appraisal firms may not want to take on the additional risk and avoid ESOP valuations altogether; and
  4. higher costs would be passed on to the ESOP plans which could discourage the creation of new ones in the future.

By Cindy Andresen, ASA

Sources:

The ESOP Association

BVWire Issue #149-1

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Will Your 2012 Gift Tax Return be Audited by the IRS?

Posted on February 25 2015 by admin

In 2012 taxpayers and their advisers were scratching their heads about the presidential election and its impact on future gift and estate tax exemptions because the $5 million inflation indexed per person federal estate and gift tax exclusion was scheduled to drop to $1 million on January 1, 2013.

Consequently, many wealthy matriarchs and patriarchs decided to make substantial gifts to family members by December 31, 2012 in order to report them on Form 709, gift tax returns, that needed to be submitted to the Internal Revenue Service by October 15, 2013 along with their personal tax returns. (*) The intent, of course, was to reduce the size of their taxable estates.

In 2012 and 2013 approximately 258,000 and 369,000 Form 709s were filed with the IRS. The aggregate amount of the gifts in those years was nearly $135,000,000,000 and $421,000,000,000, which was significantly higher than preceding years.

Many practitioners were expecting an influx of audits in 2015 and 2016 associated with the aforementioned 2012 and 2013 filings because once a Form 709 is filed and a gift fully disclosed, the IRS may not reopen the gift tax return if three years have passed. Data regarding 2014 audits has not yet been released by the Service. However, our conversations with estate planners, accountants, financial advisers, and trust officers indicate that very few 709s filed for the 2012 calendar year have been audited to date.

We will continue to keep you apprised of the number of audits in the State of Arizona and United States, the nature of the audits, and the manner in which the IRS attacks business appraisers’ opinions of value and lack of control and lack of marketability discounts applied to noncontrolling, nonmarketable minority interests in family businesses in 2012.

By Gary Ringel, CGREA

(*) The American Taxpayer Relief Act bill of 2012 (“2012 Tax Relief Act” or “Act”) was approved by the Senate and Congress on January 1, 2013 and signed into law by President Obama on January 2, 2013. As it turned out, the 2012 Tax Relief Act continued the estate tax exemption of $5 million, indexed for inflation from 2011. The Act also provided for a maximum estate tax rate of 40%. Therefore, in 2013 a married couple could make lifetime gifts having a value up to $10.5 million without incurring any federal gift tax.

Sources

The source for statistics related to Form 709 filings is the Internal Revenue Service.

The source for information regarding the American Taxpayer Relief Act is a January 16, 2013 article titled “Summary of Estate and Gift Tax Law Changes for 2013” authored by SchiffHardin LLP.

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Testifying in Court – It’s Not Just What You Say But How You Say It

Posted on February 11 2015 by admin

TestifyThe trial resumed right after lunch. It was my turn to testify. I was on the witness stand about half way through my testimony when I glanced over at the jury. I did not expect to see what I saw.

This was an economic damages case for which I was asked to provide testimony by the plaintiff. The trial was in Orange County, California. It occurred several years ago, right about the time I started testifying regarding these types of matters.

When I looked over at the jury members, I was a bit rattled to see two of them sleeping – soundly. Was my testimony that uninteresting? I then peeked at the judge. To my dismay, he too, was nodding – about ready to drift off into dreamland.

The client who paid for my time on this case did not get a favorable decision from the jury. I blamed myself for not being convincing enough. The attorney with whom I was working assured me, however, that it was not my testimony that hurt the case. It was, he said, the jury’s belief that liability did not exist on the part of the defendant. The good news was that I found out later that the case was successfully appealed by my client.

After testifying on this particular case, I decided that there was a lot more to testifying than just knowing the technical side of what I would be asked to testify about. I realized that I had to engage the decision makers – whether judge or jury, enough to keep them from dozing off or becoming quite bored about what I would be saying. I also decided that I had to become a very good teacher in the courtroom.

I started making eye contact with the judge if I was testifying at a bench trial or with the jury members if it was a trial by jury. I started to be more animated – in a professional manner, and using more inflections in my voice. I also discovered something else that would eventually be quite helpful to my ability to testify successfully. I noticed that CPA experts who opposed me in court would often lose the judge or jury, because of the experts’ insistence on speaking in very technical terms. This, I thought, was the experts’ way of showing the judge or jury just how intelligent they really were; and, because they were so intelligent, they were surely the more convincing witness.

I became a teacher. I studied the body language of the jury members and the judge whenever I started my testimony. If they had a glazed look in their eyes I knew I had to make things more simple and interesting. Then when I noticed their reaction changing – such as a slight nod of the head in approval, I knew I was on the right track. I eventually found that the ability to teach the jury, or the judge, about how a difficult damages calculation worked in language that they understood, gave me an edge over expert witnesses who seemed much more technically intelligent than I, but who spoke in terms that would make Einstein wince.

In summary, I learned two very important lessons on testifying in the courtroom: 1) Engage the jury and the judge. Try doing this by eye contact that is very sincere and using some body and hand gesturing. 2) Be a teacher. Speak and explain in a manner befitting of the level of education and experience of the jury, or judge in a non-jury trial. Try not to get overly-technical with your explanations.

And, one more thing, I….. zzzzzzz.

By Don Bays CPA/ABV, CVA, CFF

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Calculating Income for Child Support – Can You Deduct Your Dog Grooming Expense? (He greets clients in your office.)

Posted on February 3 2015 by admin

As forensic accountants, we are often asked to assist in divorce cases in order to determine the income of one, or both of the parties to help the Court decide the child support and spousal maintenance obligations. Often in these cases, the husband or wife is self-employed or owns a family business. One of the more controversial parts of our engagement is evaluating the expenses of the company which have been deducted from gross earnings on the tax returns and financial statements of the company. The Arizona Child Support Guidelines state that gross income for child support means gross receipts minus ordinary and necessary expenses required to produce income.

When we review the listed expenses, we must ask the question: “Should the reported expense amounts be considered ordinary and necessary business expenses for the generation of income, or should they be classified as personal or owner discretionary expenses, and therefore, not deducted from the gross receipts for purposes of child support?”

Here are just a few of the examples of interesting expenses we have seen and explanations we have heard over the years:

  • “I have to look great in my job”. Although some jobs such as acting and modeling require these types of expenditures, for the average business owner the cost of clothes, dry cleaning bills, haircuts or plastic surgery are not deductible for determining income for child support purposes.
  • “My job stresses me out and gives me severe back pain.” I can relate, but the cost of massages and spa days are not deductible.
  • “I was late for a business meeting.” Although we see speeding tickets and even traffic school listed as expenses, they are not deductible for calculation income for child support.
  • “I work out of my home.” Although this is true for many people, the expenses deducted must be reasonable. We have seen clients deduct everything from the cost of their groceries, pool maintenance, expensive home renovations and their entire mortgage.
  • “I am entertaining clients.” Ah yes, the most common explanation for questionable deductions such as boats, cabins, sports tickets, and fancy meals. We also often see a lot of family entertainment deducted – miniature golfing, skating and water parks. It is the forensic accountant’s job to sift through these expenses and make a reasonable determination of what is “ordinary and necessary” for the generation of income.

By Julia Miessner, CPA, CFF

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Property Management Fraud

Posted on January 27 2015 by admin

A former Tucson real estate agent was indicted on more than 20 counts related to real-estate fraud. The agent began operating a property management company in 2008 after suffering declines in his personal income due to the real estate crash which hit Arizona. By 2012, numerous clients had filed complaints with the Arizona Department of Real Estate contending they were no longer receiving rent payments from the agent and that he was not returning calls. An estimate of losses to clients is in excess of $60,000.

A Coolidge, Arizona man was convicted of fraud and theft charges related to personal use of client deposits and other funds in 2011. State prosecutors had accused the former councilman of taking somewhere between $55,000 and $283,000 to pay for personal expenses including telephone bills, shopping sprees and trips to Las Vegas.

In April 2013, a Maricopa County property management company closed its doors after a “cease and desist” order was issued by the Arizona Department of Real Estate (ADRE). An investigation by the ADRE led to findings of multiple violations including the misuse of trust funds and faulty paperwork. The owner of the property management company was indicted one year later on theft, forgery and fraud schemes. It is estimated that client losses are approaching $300,000, much of which were used for personal expenses including trips to Hawaii and New Orleans.

Property managers are required to have a real estate license in the State of Arizona. But that license does not mean they have been properly trained in property management. The 90 hours of in-class training required for a real estate license hardly cover property management issues such as receipt and handling of rent and security deposits, use of trust accounts for the deposit of those funds and reconciliation of those trust accounts.

If you are in need of a property management firm, protect yourself with a few simple steps:

  • Verify they hold an active real estate license in the state
  • Inquire as to level/years of experience in handling trust accounts
  • Require monthly accountings to be submitted timely
  • Search azre.gov for licensing and disciplinary records

If your property manager is not responding to your concerns, has treated you unfairly, or you have experienced a financial loss, file a complaint with the Arizona Department of Real Estate.

By Melissa Loughlin-Sines, ABV/CPA, CVA, CFE, CFF

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Qualified Personal Residence Trusts

Posted on January 20 2015 by admin

GIFT YOUR RESIDENCE TO YOUR BENEFICIARIES DURING YOUR LIFETIME, CONTINUE TO RESIDE IN IT AND SAVE TAXES

WHAT IS A QPRT?

A qualified personal residence trust (QPRT) is a trust typically designed to transfer a primary residence (*) to your beneficiaries during your lifetime which, if you elect, permits you to serve as the trustee. The term of the QPRT is usually between 10 and 20 years. QPRTs are governed by IRS Section 2702(a)(3)(A)(ii).

CAN I LIVE IN THE HOUSE DURING THE TERM OF THE QPRT?

You may live in the property until the end of the term, but you are required to pay all taxes and expenses associated with the residence, just as if you still owned it.

WHAT OCCURS AT THE END OF THE QPRT’S TERM?

At the end of the term, the ownership of the home will be conveyed to your beneficiaries or to a trust for their benefit. At that juncture, you must enter into a lease agreement with the beneficiaries or trust and actually pay that rent. Otherwise, the IRS could argue upon your death that the property should be included in your estate because the QPRT was never valid.

DOES THE CREATION OF A QPRT DECREASE THE VALUE OF MY ESTATE?

If you were to give your home today to beneficiaries, free and clear, the value of the gift would be equal to the fair market value of the home. However, by gifting the residence to a QPRT; you remove the asset from your estate, lower estate taxes at the time of your death, and take advantage of the individual lifetime gift tax exclusion of $5,340,000.

WHAT ARE THE FACTORS THAT INFLUENCE THE VALUE OF THE GIFT?

The exact value of a gift made through a QPRT depends on several factors, including but not limited to:

  • Your age upon the creation of the QPRT;
  • The market value of the home as determined by a qualified appraiser; and
  • The length of the term of the QPRT. The longer the term of the trust, the lower the taxable gift.

WHAT ARE THE RAMIFICATIONS IF I OUTLIVE THE TERM OF THE QPRT?

In order for a QPRT to succeed, you must outlive the trust term. If you die before the end of the term, the home will be brought back into your estate and subject to estate taxes.
The value of the QPRT gift also depends on the IRS interest rate that is in effect for the month when the QPRT is created because it is used to calculate the present value of the beneficiaries’ remainder interest. The higher the interest rate, the smaller the gift associated with the QPRT. The IRS interest rate has been very low for the past few years, but as it starts to move upwards again, QPRTs will generally become increasingly attractive.

SUMMARY

A QPRT is an excellent estate planning tool if structured with foresight and reasonable assumptions. It allows you to optimize the value of your home from both a gift tax and estate tax perspective while enabling you to retain the use and enjoyment of your residence for many years.

Gary Ringel, CGREA, Managing Director, Henry & Horne, LLP Business Valuation & Litigation Support Services Group

(*) The dwelling can also be a vacation home or boat as well as structures appurtenant to it.

Sources

One of the sources for this blog is an article published by Brown Brothers Harriman & Co. that was written by Michelle J. Hong, Vice President and Director of Wealth Planning.

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We believe that this service to our clients, and other interested parties, will bring valued information to those involved in and in need of valuation and forensic services. We bring with us years of knowledge and experience that can provide you with the information you need, or at least a little insight into the business valuation and forensic accounting worlds. As we provide weekly information to you, our reader, we value your input and feedback. We will also share that feedback with others, as we find appropriate. Welcome to Perspectives. We hope you find it informative and worthy of your time.


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