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Forensic Accounting Case Study Examples

We were engaged by a shareholder of a domestic corporation (Corporation) that had two equal shareholders. Our client, one of the shareholders, planned to retire and have his son continue in his capacity as the company’s salesman and be able to purchase an equity position. At the same time, the shareholders were approached by a private investment company (PIC) who was interested in purchasing a minority interest in the Corporation. The shareholders agreed to the sale of the minority interest in the Corporation. An additional relevant fact was that the shareholders and several related individuals owned the stock of a foreign based corporation.<

We developed a plan to have the Corporation contribute it’s assets to a new company (“NEWCO”) and have equity partners make capital contributions. In addition, NEWCO needed additional financing to buy the shares of the Corporation and also to buy the stock of the foreign corporation.

There were two complex issues our plan needed to address. First, a transfer of net assets or an exchange of shares between entities under common control is accounted for on a historical cost basis. The corporation would be transferring its net assets and its operation to NEWCO. Under accounting rules the two companies were considered to be held under common control.

Second, the bank financing the transaction wanted NEWCO to show a balance sheet with net worth that included the goodwill purchased. This was substantially greater than the contributed net assets and contributed capital.

Our plan called for the formation of a Family Limited Partnership (FLP) that would own NEWCO, in conjunction with the PIC, and the two original shareholders. This structure allowed the creation of a defective trust and the gifting of stock by both partners. Further, the structure met accounting rules and allowed for the use of Fair Market Value (FMR) accounting rather than historical cost.

Ultimately, the new entities were formed in which the PIC, the FLP and the original owners held equity in NEWCO and meet the rules of not being considered under common control.

The IRS audited all aspects of the transaction and passed it without exception. This resulted in significant savings for our client and an effective corporate structure for NEWCO.

Gettry Marcus CPA, P.C., a consulting, tax and forensic accounting firm, shares a Chief Financial Officer (CFO) fraud case study conducted by the firm.

A client requested an initial audit to satisfy bank requirements of a wholesale/distributor of office products. The experienced team at Gettry Marcus performed the required audit procedures, but as it does with all clients, Gettry Marcus looked beyond the required steps.

It was then that the team found some inconsistencies and unusual increases in certain balance sheet accounts. The first step for Gettry Marcus was to develop strong relationships with the owner and to obtain the trust of other key personnel. Then, with the firm's strong analytical procedures and review of certain invoices, Gettry Marcus uncovered an embezzlement of funds committed by the CFO.

The CFO admitted to stealing $100,000, but Gettry Marcus discovered the funds actually stolen to be five times that amount. After terminating the employee, the owner was able to recoup a significant amount of the funds lost. Finally, the firm assisted in interviewing and hiring the new CFO as well as implementing stronger internal controls to help prevent this or other improprieties from occurring in the future.

The full case study and others are available at the Gettry Marcus website.