HOUSTON – BKD CPAs & Advisors is pleased to announce the addition of Sean Sarsfield as a director in the Forensics & Valuation Services division in the firm’s Houston office.

Sarsfield has 18 years of experience in forensics, investigations and commercial dispute work, including valuations in a dispute context. At BKD, he will provide a broad range of litigation support and investigative services with a focus on services that require forensic accounting, economic damage quantification or valuation-related expertise. He also can offer fraud detection and investigation services when allegations of embezzlement, financial reporting fraud and other forms of white-collar crime are involved.

Before joining BKD, Sarsfield worked for two international firms and recently helped a Fortune 500 oil and gas company evaluate economic loss claims filed by businesses affected by the Deepwater Horizon oil spill in the Gulf of Mexico. In litigation matters, he has determined economic damages resulting from breach of contract disputes, business interruption and matters involving lost wages or benefits.

Sarsfield has presented to attorneys, CPAs and professional associations on various topics, including forensic accounting and fraud investigation, business valuation, corporate ethics and the quantification of economic damages. He also serves on the Business Valuations, Forensic and Litigation Services Committee for the Texas Society of CPAs.

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When we present on fraud, one of the most common questions we’re asked is: “What can my organization do to prevent fraud from happening?” The answer is to have proper controls and fraud prevention measures in place. However, implementation challenges arise when faced with management resistance.

The Association of Certified Fraud Examiners (ACFE) Fraud Examiners Manual recognizes that management often doesn’t view fraud as a concern. This may be because fraud typically happens unseen and losses go undetected, which can create reluctance to implement controls or allocate resources to combat fraud.

Management may also be concerned that addressing fraud can have a negative effect on employee morale. In these cases, it may be helpful to remind management that most employees want to work for an honest company. Understanding the importance of fraud prevention can save companies from actual dollar losses—estimated at 5 percent of revenue—and negative publicity, which can hurt the bottom line.

Reminding management to consider these factors may encourage them to implement effective controls and fraud prevention measures.

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With a recent college admissions scandal in the news, the lack of internal controls and fraud prevention training in higher education is well-known. Why weren’t any controls in place to help prevent this? What are colleges doing to address it?

Fraud in higher education extends beyond admissions, from administrators stealing or embezzling university money to the theft of student tuition money.

With fraud in the spotlight, colleges should begin planning how to help prevent fraud in the future and teach their faculty and students. Melissa Giannetta, president of the University of Central Florida’s Association of Certified Fraud Examiners (ACFE) student chapter, explained in Fraud Magazine^® that “Fraud is an important subject to teach our students because it is something that happens every day and is only continuing to grow. The more that we can prevent fraud from occurring, the more people that we can save from being negatively affected by fraudulent behavior.”

As a guide in planning, colleges can review a fraud prevention checklist that a group of Cornell University students developed and implemented for their school. For more information about the checklist, see the ACFE Insights blog.

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The digital age is fully upon us and affects our daily routine, providing us with speed, access and efficiency in almost every task we perform. Regardless of the device being used, our ability to communicate, exchange information, post on social media, enjoy streaming entertainment, manage home security systems and purchase online is instantaneous and highly efficient.

Technology isn’t just for ordering an Uber or receiving same-day purchases from Amazon. In fact, through amendments to Rule 902, under the Federal Rules of Evidence, technology is bringing both time and cost savings to federal courtrooms. Two new amendments—Rule 902(13) and Rule 902(14)—update Rule 902 by adding two new categories for self-authenticating evidence.

Pursuant to Rule 902(13):

“Certified Records Generated by an Electronic Process or System. A record generated by an electronic process or system that produces an accurate result, as shown by a certification of a qualified person that complies with the certification requirements of Rule 902(11) or (12). The proponent must also meet the notice requirements of Rule 902(11).”

Pursuant to Rule 902(14):

“Certified Data Copied from an Electronic Device, Storage Medium, or File. Data copied from an electronic device, storage medium, or file, if authenticated by a process of digital identification, as shown by a certification of a qualified person that complies with the certification requirements of Rule 902(11) or (12). The proponent also must meet the notice requirements of Rule 902(11).”

Prior to these amendments, digital evidence, under Rule 901, required a live witness at trial to authenticate the data. Self-authenticating evidence isn’t a new concept, as Rule 902 permits certain types of documents, such as newspapers, periodicals, certified business records, commercial paper and government documents, to be self-authenticated for admissibility at trial. While a witness might not be required at trial, self-authentication has its own requirements for admissibility. As detailed in the Rule 902 committee notes, certification is attained via a person who would be qualified at trial to testify as to the authenticity. Further, a qualified person must be an information technology practitioner qualified to testify as to the operations of data systems and digital evidence collection.

So what’s the technology that allows this courtroom efficiency? It all comes down to a “hash” under the Committee Notes on Rules—2017 Amendment:

“Today, data copied from electronic devices, storage media, and electronic files are ordinarily authenticated by ‘hash value.’ A hash value is a number that is often represented as a sequence of characters and is produced by an algorithm based upon the digital contents of a drive, medium, or file. If the hash values for the original and copy are different, then the copy is not identical to the original. If the hash values for the original and copy are the same, it is highly improbable that the original and copy are not identical. Thus, identical hash values for the original and copy reliably attest to the fact that they are exact duplicates. This amendment allows self-authentication by a certification of a qualified person that she checked the hash value of the proffered item and that it was identical to the original. The rule is flexible enough to allow certifications through processes other than comparison of hash value, including by other reliable means of identification provided by future technology.”

These new rules governing self-authentication of digital data should benefit the courts, law enforcement and litigants. Though forensic experts will still be needed for investigation, collection and certification, the new rules generally obviate the need for live witness testimony and associated travel costs. This will undoubtedly speed up court proceedings and hopefully reduce congested dockets by reducing time spent on authentication. This is especially important because the digital age has greatly increased the likelihood of evidence being digital. Furthermore, law enforcement computer forensic experts or seized computer evidence recovery specialists should benefit from the new rules, as they can now reallocate their time to more pressing matters.

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According to the 2018 Report to the Nations—a study of more than 2,690 occupational fraud cases published by the Association of Certified Fraud Examiners—proactive data monitoring/analysis reduced the duration and median loss due to occupational fraud by 58 percent and 52 percent, respectively.

The Indiana Department of Revenue recently experienced some of these savings by using proactive data monitoring/analysis. According to the Northwest Indiana Times, the Indiana Department of Revenue stopped $9.7 million in improper payments during the 2018 budget year due to identity theft prevention and refund fraud detection programs. The Indiana Department of Revenue has become a national leader in tax fraud prevention by combining innovative technology and dedicated fraud monitoring specialists, along with partnerships with other tax agencies.

Have you considered proactive data monitoring/analytics for your organization? If not, you could be missing out on significant savings. BKD Big Data & Analytics professionals are equipped to enhance marketing strategies, develop competitive advantages, open up new revenue opportunities, reduce risk and improve operational efficiency. Visit our Big Data & Analytics page for more details.

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A pediatric practice founder learned the hard way that not all buyout agreements are created equal. According to a recent BVLaw Alert, a New Jersey court decided the buyout provisions of the practice’s operating agreement “required a calculation of the company’s value using the last agreed-upon company value,” which was to be “adjusted to reflect the increase or decrease in the net worth of the company … since the last agreed-upon value.” The last agreed-upon value of the company was $2.4 million as of 2000. The plaintiff’s expert argued that the increase in net worth of the company included consideration of intangible value and “developed a metric for calculating the value of the company’s intangible assets in 2016.” The expert’s conclusion of value ranged between $5.6 million and $6.75 million.

The defense expert disagreed, arguing that intangible assets are “not recorded on the balance sheet of an entity unless it is the product of an acquisition or some type of business combination.” The defense expert’s conclusion of value ranged between $2.8 million and $3.2 million.

The court disagreed with the plaintiff expert’s inclusion of intangible assets and stated the expert’s definition gave him the opportunity “to manipulate the Company Value calculation for the benefit of the Plaintiff.” The court chose to adopt the $3.2 million value as it was “mindful” the plaintiff could feel “shortchanged” by the decision. Ultimately, the court recognized the “language in the agreement and lack of any updated valuations gave it little discretion when determining the buyout price.” A periodic review of the practice’s buyout agreement and a current valuation may have made the difference between a $3.2 million and $6.75 million court decision. If your business valuations aren’t up to date or you’ve never had a business valuation performed, our business valuations professionals would be happy to discuss a valuation of your company.

Sources:

BVLaw Alert: Experts clash over definition of ‘net worth’ in New Jersey buyout dispute

https://www.bvresources.com/articles/full-text-of-court-cases/namerow-v-pediatricare-associates-llc

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According to the U.S. Department of Justice, Charles Hallinan was dubbed the “Godfather” as he taught others how to defraud those seeking a payday loan by charging fixed fees and high interest rates in excess of what state laws permitted. That allowed this Godfather to net more than $68 million between 2007 and 2013, with his activities from 1997 to 2006 not included in this incredibly high-valued fraud.

Within the web of schemes, Hallinan used straw lenders, which set up fictitious lending arrangements between the customers and legitimate lenders. Hallinan established fake partnerships with a federally insured bank and Native American tribes to aid in his scheme.

This Godfather was sentenced to 168 months in prison. Hallinan, 77, would be 91 when released.

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Harris Dempsey “Butch” Ballow was originally set to serve time in a federal penitentiary 14 years ago, but he decided he’d flee to a Mexican resort town instead. His beach life ended in July 2010 when Mexican authorities captured him and later extradited him back to the United States. He then faced a new set of charges and a longer prison sentence.

While in Mexico, Ballow obtained majority stake in a seemingly legitimate company and transformed it into a holding company for several of his fictitious businesses. He then sought investment of approximately $37 million for the development of resorts. With no plans to build anything, Ballow had the investment money wired overseas into his personal accounts. As a man apparently devoid of any moral compass, or fear of prosecution, he targeted American and Canadian men and women who often took loans or dipped into retirement funds for Ballow’s “investment opportunity.”

Thanks to the combined efforts of the FBI, IRS, Canadian and Mexican authorities, U.S. Marshals and even the United States Postal Inspection Service, the 75-year-old Ballow likely will spend the rest of his life behind bars.

Click here to learn more about how BKD Forensics & Valuation Services can help you prevent or investigate fraud.

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The 2018 Report to the Nations by the Association of Certified Fraud Examiner’s states the following regarding whistleblowing and hotlines:

• Tips are by far the most common initial detection method (40 percent of cases)
• Employees provide more than half of tips
• Organizations with hotlines detect fraud by tips more often (46 percent versus 30 percent of cases)
• Fraud losses were 50 percent smaller at organizations with hotlines than those without
• Organizations without hotlines were more than twice as likely to detect fraud by accident or external audit

BKD offers IntegraReport hotline services to assist your company with whistleblowing and fraud detection. IntegraReport hotline services are available any time and provide two ways to leave reports (online and toll-free number), which are monitored by BKD fraud professionals.

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Managing Partner Angela Morelock is excited to have Stuart on board due to his extensive expertise.

“Stuart’s experience has given him a unique set of skills that positions him to develop our forensics division in Chicago,” she said. “From his time spent conducting a wide variety of investigations to managing a diverse group of teams, Stuart has the know-how to get the job done and the excitement to engage those he leads.”

Stuart began his career as a securities enforcement auditor with the Illinois Securities Department, specializing in detecting promissory note Ponzi schemes. He then became a special agent with the U.S. General Services Administration (GSA) Office of Inspector General (OIG) in Chicago. He served as a special agent in charge from August 2008 until April 2018, supervising the GSA OIG regional criminal, civil and administrative investigation program. This region encompasses six states and 12 judicial districts. Stuart joined BKD in May after retiring from law enforcement.

Stuart is a Certified Fraud Examiner and Certified Anti-Money Laundering Specialist. He is a summa cum laude graduate of DePaul University, Chicago, with a B.A. degree.

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Here are some of the report’s most interesting items:

• The ACFE identified more than $7 billion in total losses in real occupational fraud cases, which is up more than 10 percent from last year. This tells me that despite technological advances and overall fraud awareness, fraudsters are still finding a way.
• Data monitoring/analysis and surprise audits correlated with the largest reductions in fraud loss and duration. What’s surprising is that only 37 percent of the victim organizations implemented these controls. If we want to reduce that loss figure, implementing more fraud monitoring might help.
• Tips are still by far the most common initial detection method. That hasn’t changed as long as I’ve been reading these reports. Companies that use hotlines detect fraud by tips 16 percent more often. I wonder why some companies today still don’t offer hotlines.

While much of the report may seem shocking, there clearly are opportunities for companies to improve. Things appeared much bleaker a decade ago, and I believe the future’s bright for those of us who want to nip fraud in the bud.

For more information about BKD’s Forensics & Valuation Services division or how we can help with a fraud hotline, contact us or reach out to your trusted BKD advisor.

The post 2018 ACFE Report – What’s New? What’s Not? appeared first on BKD Forensics.

• 63 percent of victim organizations have hotlines. I spend most of my time investigating fraud at organizations that didn’t have a hotline.
• Organizations without hotlines are more than twice as likely to detect fraud by accident or external audit. No one wants to rely on an “accident” to detect fraud. In addition, external auditors are responsible for identifying material misstatements due to fraud. What is immaterial to an auditor may be quite material to you.
• 50 percent of corruption is detected by tip. Corruption is the hardest fraud to uncover and investigate, as it is “off book.” This is easily the best argument for why every organization needs a hotline.

A good trend is that more organizations are using hotlines than in 2016. The RTTN states 63 percent of organizations have hotlines, which is up from 60.1 percent in 2016 and 54 percent in 2014. Until this number reaches 100 percent, I’ll continue to emphasize the importance of every organization having a fraud hotline.

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• Construction Audits
  Wednesday, May 9 • 11:30 a.m.–12:30 p.m. Central time
  Presenters:  Shauna Woody-Coussens and Adam Rouse
• Tax Reform’s Effect on Business Valuations
  Wednesday, May 16 • 11:30 a.m.–12:30 p.m. Central time
  Presenter:  Rand Gambrell
• Whistleblowers & Retaliation in the #MeToo Era
  Wednesday, May 23 • 11:30 a.m.–12:30 p.m. Central time
  Presenters:  Julia Mast and Erin Rickert

Each webinar is eligible for one CPE credit. Click here to register.

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During the trial, Thicke apparently treated jurors to a live concert in which he played songs from U2, the Rolling Stones and the Beatles to show them that many music legends use similar chords. The jury apparently was unconvinced and awarded Gaye’s estate $7.4 million in damages and ongoing royalties (later reduced to $5.3 million).

The pending appeal likely will affect copyright infringement cases, and many musicians have already signed a petition expressing their concern that upholding the lower court’s decision will negatively affect creativity. In fact, copyright infringement cases already have increased in the last couple of years—perhaps as a direct result of the “Blurred Lines” decision.

Read more about this case at The Hollywood Reporter or Forbes.

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