Question

Business valuation is often performed in an adversarial environment.Consider how forensic accounting techniques can uncover additional economic add backs to normalize income.

For example, you are using an indirect method to recompute income because the valuation subject has lousy records and is uncooperative in a litigation matter. You find unreported income; there is an add-back to normalize income. Please be more descriptive than my example.

Question

1. Summarize at least one add-back to normalize the benefit stream and the forensic technique applied.

Answer 1

Forensic accounting is defined as "the application of investigative and analytical skills for the purpose of resolving financial issues in a manner that meets standards required by courts of law.

Traditionally, a business's value is determined through the adversarial process. In the adversarial process, the court assigns a value after both parties present evidence as to the business's value and cross-examine each others' business valuation expert

Some methods under these techniques are:-

• Direct and Indirect Methods. ...
• Cash T Method and Source and Application of Funds Method. ...
• Net Worth Method. ...
• Bank Deposit Method
• Example- Enron Corporation was a U.S.-based services company that was once revered as one of America’s most innovative companies. Upon retracing its accounts, forensic accountants discovered that the company would produce high-cost assets and falsely claim profits to boost its valuation. The Securities and Exchange Commision (SEC) began to investigate after its value began to plummet in the summer of 2001. By December that year, the house of cards built by Enron collapsed and it was forced to file for bankruptcy, resulting in Congress passing the Sarbanes-Oxley Act to increase the consequences for defrauding shareholders.