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    Business Valuation and Forensic Accounting: For Resolving Disputes in Hawaii
    Business Valuation and Forensic Accounting: For Resolving Disputes in Hawaii
    Business Valuation and Forensic Accounting: For Resolving Disputes in Hawaii
    Ebook120 pages1 hour

    Business Valuation and Forensic Accounting: For Resolving Disputes in Hawaii

    By John Candon, Kimo Todd and Duane Seabolt

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    About this ebook

    Candon, Todd and Seabolt have written a brief, accessible
    introduction to business valuation and forensic accounting to
    help Hawaii residents involved in settling disputes over the values
    of businesses and business interests. Most often these sorts of
    disputes come about because co-owners of businesses are going
    their separate ways. It may be because of a pending divorce. It
    may be due to a disagreement among the co-owners. Whatever
    the motivation, this book will help the parties and their advisors
    chart their future course.

    This primer on business valuation and forensic accounting is
    designed for business owners but may be of interest to others in
    the islands of Hawaii and elsewhere.

    Included is a brief summary of the major business valuation
    professional credentials, the related professional standards and
    a brief description of the process involved in developing an
    opinion of the value of a business interest. It also summarizes,
    from a valuation analysts point of view, the case law that guides
    the valuation of businesses in Hawaii in the context of divorce.

    Forensic accounting standards, credentials and procedures, as
    well as examples of certain fraud schemes, are also included
    because, in financial disputes, one or more parties sometimes
    suspect that someone else is hiding the financial ball.
    LanguageEnglish
    PublisherAuthorHouse
    Release dateAug 29, 2012
    ISBN9781477261767
    Business Valuation and Forensic Accounting: For Resolving Disputes in Hawaii
    Author

    John Candon

    John Candon, ASA, CPA, ABV, CFE, CFF provides business valuation, fraud research, lost earnings and commercial damages calculation, insolvency analysis and other forensic accounting services. In addition to being a Certified Public Accountant (CPA), he has been recognized as Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF) by the American Institute of Certified Public Accountants. Mr. Candon has also been designated an Accredited Senior Appraiser (ASA) by the American Society of Appraisers. He is also a Certified Fraud Examiner (CFE) and a Life Member of the Association of Certified Fraud Examiners. Mr. Candon has served frequently as a chapter officer of the American Society of Appraisers and as the chair of state CPA society valuation and consulting committees. He also has been appointed by various Courts – including the U. S. Bankruptcy Court - to act as a receiver, special master, bankruptcy trustee and bankruptcy examiner for large enterprises involving commercial real estate, construction, hospitality, medical services and retail distribution. Mr. Candon has provided expert witness testimony at depositions and has been qualified as a testifying expert in trials and arbitrations for a variety of issues including fraud, economic damages, business valuation, complex accounting matters, taxes, and bankruptcy. Kimo Todd, CPA, ABV, CVA, JD is the Director of Business Valuation Services at CTS. He specializes in business valuation, economic damages analysis, lost earnings calculation, lost earnings, forensic accounting, and other litigation consulting services. In addition to being a Certified Public Accountant (CPA), Mr. Todd is accredited in business valuation (ABV) by the American Institute of Certified Public Accountants, is a Certified Valuation Analyst (CVA) and is Certified in Financial Forensics (CFF) by the American Institute of Certified Public Accountants. Mr. Todd is also a licensed attorney in the State of Hawaii and a member of the Hawaii State Bar. He has been qualified and has testified as an expert witness in Hawaii State court. Mr. Todd is a past officer of the Tax Section of the Hawaii State Bar Association and a member of the American Institute of Certified Public Accountants and the Hawaii Society of Certified Public Accountants. Mr. Todd also serves as a member of the Board of Directors of the Historic Hawaii Foundation and the Hawaii Estate Planning Council. A graduate of Kamehameha School and the University of Oregon, Mr. Todd acquired his law degree at the William S. Richardson School of Law. While in law school, he completed externships with U.S. District Court magistrate judge Francis Yamashita and with the State of Hawaii Department of Taxation. Mr. Todd also lectures frequently on the subject of business valuation. Duane Seabolt, JD, MBA, CPA/CFF/ABV, CFE is the Director of Forensic Services at Candon Todd & Seabolt LLC. Duane specializes in forensic accounting, business valuations, fraud investigations, economic damage analysis, lost profit and earnings calculations, litigation support and other consulting services. Prior to joining Candon Todd & Seabolt LLC, Duane held a senior manager position with a large local company and was a litigation attorney with a prominent Hawaii law firm. Duane currently lectures at Hawaii Pacific University and Kapiolani Community College in the areas of accounting, finance, and business law. Duane holds a Bachelor’s Degree in Accounting, a Master’s Degree in Business Administration, and a Juris Doctorate Degree. Duane holds numerous licenses and certifications including Certified Public Accountant (CPA), Certified in Financial Forensics (CFF), Accredited in Business Valuations (ABV), and Certified Fraud Examiner (CFE). Duane is a member in good standing with the American Institute of Certified Public Accountants.

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      Book preview

      Business Valuation and Forensic Accounting - John Candon

      © 2012 by John Candon, Kimo Todd, Duane Seabolt. All rights reserved.

      No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means without the written permission of the author.

      Published by AuthorHouse 08/23/2012

      ISBN: 978-1-4772-6178-1 (sc)

      ISBN: 978-1-4772-6177-4 (hc)

      ISBN: 978-1-4772-6176-7 (e)

      Library of Congress Control Number: 2012914859

      Any people depicted in stock imagery provided by Thinkstock are models, and such images are being used for illustrative purposes only.

      Certain stock imagery © Thinkstock.

      Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

      Contents

      DEDICATION

      INTRODUCTION

      Chapter ONE

      FUNDAMENTALS OF VALUING A BUSINESS

      Standards

      Credentials

      Defining the task

      Research

      Approaches and methods

      Discounts and Premiums

      A Valuation is not an audit

      Chapter TWO

      VALUATION CASES IN THE HAWAII COURTS

      Personal Goodwill Is Not A Marital Asset

      Chapter THREE

      FUNDAMENTALS OF FORENSIC ACCOUNTING

      Standards

      Credentials

      Accounting for the non-accountant

      Income Statement

      Statement of Changes in Owner’s Equity

      Balance Sheet

      Frequently seen red flags in financial disputes

      Defining the task

      Techniques

      Finding hidden assets

      APPENDIX

      Hawaii Case Law in re Valuation

      Antolik v Harvey,

      APPENDIX

      Types of Misappropriation Schemes

      APPENDIX

      Business Valuation References

      APPENDIX

      Forensic Accounting References

      APPENDIX

      Valuation Terminology

      APPENDIX

      Basic Accounting Terminology

      ABOUT THE AUTHORS

      DEDICATION

      This book is dedicated to the college professors, authors, and professional colleagues who have generously shared their knowledge with us, to those who have thoughtfully mentored us throughout our careers, and—most of all—to our wives and children.

      - John Candon

      Kimo Todd

      Duane Seabolt

      HONOLULU, HI 2012

      INTRODUCTION

      This book is designed to meet the needs of Hawaii residents involved in settling disputes over the values of businesses and business interests. It may be useful to both the disputants and their advisers, including their attorneys, accountants, and financial advisers.

      Most often these sorts of disputes come about because co-owners of businesses are going their separate ways. It may be because of a pending divorce. It may be due to a disagreement among the co-owners. Whatever the motivation, we hope this book will help the parties and their advisors chart their future course.

      Our goal was to author a brief, accessible discussion of business valuation and forensic accounting. Our respective bookshelves contain dozens of thorough, highly-detailed texts on business valuation and forensic accounting that have been written for practitioners. They are, of course, useful in our profession. They are also, unfortunately, much too thorough and jargon laden for the average layperson. This book sacrifices details in the interest of being easier to access. Consider it a primer.

      We begin with a brief summary of the major business valuation professional credentials available to valuation analysts and the related professional standards. We also provide a brief description of the process involved in developing an opinion of the value of a business interest.

      We also summarize, from a valuation analyst’s point of view, the case law that guides the valuation of businesses in Hawaii in the context of divorce. As we are not attorneys, we encourage parties to also consult their attorneys on these issues. Please also take care to consider any subsequent court decisions that may be relevant.

      A short, introductory discussion of forensic accounting has been included because we have found that one or more parties to financial disputes sometimes suspect that someone is hiding the financial ball. From time to time, we have found it to be true. We have provided a description of the major professional credentials and standards, some basic information on accounting and financial statements, a list of red flags, a few examples of the sorts of misappropriation experienced by business owners, and examples of the techniques that can be employed in investigations.

      Chapter ONE

      FUNDAMENTALS OF

      VALUING A BUSINESS

      This chapter very briefly describes business valuation, which is also called business appraisal. More in depth discussions of the topic are available in a variety of sources, including Valuing a Business by Shannon Pratt et al and Understanding Business Valuation by Gary Trugman. There are also business valuation texts directed at specific readers, such as The Lawyer’s Business Valuation Handbook, which is published by the American Bar Association for attorneys. Our goal here is to open the door, providing you with an introductory look.

      Standards

      Prior to the 1920’s, business valuation was more an art than a science. Buyers and sellers used their experience, wits, knowledge and best judgment to estimate the value of a business interest. It’s likely that no one trading stocks back then would have agreed with that statement. Modern day appraisers, however, have a wide array of tools available that were not available in the past. Among those tools are standards that provide a structure for conducting a business valuation study.

      The U.S. Prohibition Act, believe it or not, was the catalyst for the first formal set of standards for developing an opinion of value for a business. The economic losses resulting from the sudden demise of the liquor industry in 1919 were tax deductible. Intent, it appears, on fostering reliable valuations, the Internal Revenue Service began publishing guidance on valuing the lost businesses. The first such guidance was Appeals and Revenue Memorandum No. 34, which is usually referred to as ARM 34. This publication in 1920 was only the beginning of many IRS rulings, IRS orders and Court opinions about valuing businesses. Revenue Rulings 59-60 and 68-690, for instance, address the research required in a business valuation and are often cited in business valuation reports in words more or less like the following:

      1. Analyze the characteristics and history of the subject enterprise and the subject interest, including: past transactions; the size of the subject interest relative to the total ownership interest, other rights and obligations, and any agreements restricting transferability or otherwise affecting value and marketability.

      2. Analyze the financial condition and operating results, including: historical operating results; earnings capacity; distributions paid historically and distribution-paying capacity; balance sheets, historical and as of the Valuation Date; assets, liabilities, and book value; the liquidation value of the subject interest’s assets; and the outlook as of the Valuation Date.

      3. Consider the

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