Understanding Forensic Accounting Reports Heidi F Muckler CPAABV

Understanding Forensic Accounting Reports Heidi F. Muckler, CPA/ABV, CFE, CVA HFM Valuation Louis J. Cercone, Jr. , CPA/ABV/CFF, ASA, CVA, CFE Brisbane Consulting Group, LLC

Types of Forensic Reports Valuation Income Asset Analysis Tracing Separate Property Analysis Lifestyle Analysis

Focus Today Business Often Valuation Report Includes Income analysis

Statement on Standards For Valuation Services – SSVS 1 Promulgated by the AICPA To improve the consistency and quality of valuation practice Required adherence by all CPA members

Statement on Standards For Valuation Services – SSVS 1 Section 1. 47 lists the requirements of the business valuation report Three types of written reports Detailed report Summary report Calculation report

Statement on Standards For Valuation Services – SSVS 1 Reporting Exemption For matters before a court, arbitrator or mediator, a CPA is exempt from the reporting provisions. Not exempt from the developmental provisions.

Contents of Report Letter Table of transmittal of contents Introduction Sources of information Qualitative Financial analysis of business entity analysis Adjustments to financial data

Contents of Report Valuation approaches and methods considered Valuation approaches and methods used Non-operating assets and liabilities Reconciliation of methods used Conclusion of value Qualifications of the analyst(s) Certifications of the analyst(s) Assumptions and limiting conditions

Introductory Section Identifies the client Purposes and intended use of report Identifies the business entity and the ownership interest Valuation date (s) Standard of value Scope of work Type of report-application of jurisdictional exception

Sources of Information Financial Tax information Industry & market data Economic data Empirical data Names Date of individuals interviewed of site visit

Qualitative Analysis Nature & history Management Competition Market share Marketing efforts Workforce-labor issues Company agreements Strengths & weaknesses

Financial Analysis Balance sheet Cash, accounts receivable, work in progress Working capital Fixed assets Non-operating assets and liabilities Debt Equity

Financial Analysis Income Statement Stability Are and source of revenues all revenues reported? Expenses Owner compensation Non-operating/personal Non-recurring items expenses

Valuation Approaches Income Capitalization of a single level of income Discounting multiple levels of income Market Publicly traded companies Private transactions Asset-based Balance sheet approach

Key Areas Balance sheet adjustments Accounts receivable, work in progress, nonoperating items Income adjustments Unreported revenues Overstated expenses Owner compensation Tax impacting

Key Areas Rates Capitalization Discount rate Market multiples Valuation discounts Lack of control Lack of marketability

Tax Cuts and Jobs Act Signed into Law December 22, 2017

Individuals All changes affecting individuals expire after 2025 Tax brackets cut to 10%, 12%, 24%, 32%, 35%, and 37% The 15% and 20% tax rates on long-term capital gains and qualified dividends retained; those in 10% or 12% brackets may pay zero tax and income levels for the 15% and 20% were changed.

Individuals Standard deduction increased to $24, 000 (MFJ), $18, 000 (HH) and $12, 000 for all others. No deduction for personal exemptions

Itemized Deductions Medical deduction retained; 7. 5% of AGI floor; after 2018 floor is 10% Cap for deduction mortgage interest is reduced from $1 million to $750 k; no deduction allowed for home equity debt Deduction for state and local income, property and sales tax (SALT) is capped at $10, 000; IRS says no to any prepayments in 2017 Percentage of AGI for charitable contributions is increased from 50% to 60%

Itemized Deductions No more casualty loss deductions unless for federally declared disasters Miscellaneous itemized subject to 2% floor (e. g. unreimbursed business expenses, tax prep fees) repealed Phase out of itemized deductions for high income tax payers repealed Tax rates for AMT retained but exemption amounts increased

Credits Child tax credit increases to $2, 000 per child; refundable portion increases to $1, 400 Additional non-refundable credit of $500 for qualifying dependent other than a child; AGI phaseout increased to $400, 000 (MFJ) and $200, 000 for all others Other credits such as credit for the elderly and permanently disabled retained

Other Provisions Taxability of alimony repealed for all divorce and separate agreements executed after December 31, 2018 Moving expense deduction repealed except for members of armed forces Moving expense reimbursement no longer excluded from gross income No change to the sale of a principal residence

Businesses Flat corporate tax rate of 20% No more corporate AMT Expense limitation under Section 179 increased to $1 million; phaseout threshold also increased Eligibility to use cash basis of accounting expanded to companies with revenues of $25 million or less Deduction for business interest is limited in certain situations but unused portion can be carried forward Limits on net operating losses to 80% of taxable income (without regard to the deduction); may carry forward but no more carry back

Businesses 50% of meals are still deductible; but no more entertainment Individuals allowed to deduct 20% of “qualified business income” earned from pass-through entities (S Corps, partnerships) Limitations based on W-2 wages of the business Disallowed for specified businesses (accounting, health, law, consulting, financial services, any business where the principal asset is the reputation and skill of one or more of its employees) or entities with income above a certain threshold Qualified business income does not include S corporation shareholder’s reasonable compensation or partner guaranteed payments (for service other than his/her capacity as a partner)

Questions? Heidi F. Muckler, CPA/ABV, CFE, CVA HFM Valuation 112 Spruce St. , Cedarhurst, NY 11516 516 -569 -9333 Louis J. Cercone, Jr. , CPA/ABV/CFF, ASA, CVA, CFE Brisbane Consulting Group, LLC 369 Franklin St. , Buffalo, NY 14202 716 -856 -3428