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Type of Matter:
A business valuation was prepared
immediately before a complex stock transaction was finalized. That
valuation report was later scrutinized in response to a claim that it
was improper and erroneous.
Background:
A complex stock-for-stock transaction
was contemplated between owners of a closely-held business involving
over 20 subsidiaries. In contemplation of that transaction, the company
retained a valuation expert to place a value on a portion of the
business. The transaction was consummated at the value determined by
that expert. Subsequently, the valuation conclusion was challenged and Arxis
was retained to evaluate the report.
Arxis Work:
A copy of the complete report and all
documentation that was originally supplied to the valuation expert was
provided to Arxis. With that information we attempted to replicate the
calculations, assumptions, and conclusions presented in the report. As
a result, numerous substantial errors were identified. It was a
collection of some of the most common valuation errors wrapped up in
one report:
- An
invested capital risk rate (WACC) was used to value a cash flow to
equity benefit stream. This, by definition, results in an
incorrect conclusion.
- The
expert properly concluded that public companies were inappropriate
to use as guideline companies. However, throughout the rest of the
report public companies were used to project cash flow, capital
expenditure levels, and working capital.
- Public
company data was used to determine the WACC rate for the subject
company. This was inappropriate given the conclusion that public
companies were not comparable to the subject company.
- The
expert did not consider, or adjust for, non-operating assets and
non-operating income and expenses.
- The
sale of similar privately held companies (Market Approach) was not
considered. This was problematic since there were hundreds of
transactions in the same SIC code as the subject company
available.
- Prior
transactions (several) of company stock were not considered.
Result:
The report was so flawed that all
parties agreed it had to be set aside and a new valuation performed. A
substantial amount of money had been spent on a valuation that was
flawed on every level.
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Since insurance fraud investigations
are initiated due to suspicions about a certain type of fraud or a
suspected individual, it is helpful to engage the expertise of a
trained fraud examination specialist. Arxis Financial employs trained
professionals who specialize in the detection and prevention of fraud.
In insurance fraud matters, attorneys
engage Arxis
Financial to analyze, explain and present financially
complex issues, typically relating to on-the-job injury and
property-casualty fraud, as well as other insurance fraud schemes. The
specialists in Arxis
Financial's "Forensic
Accounting" practice apply detailed investigation and analysis
that is necessary to uncover essential facts and provide meaningful
insights. Our fraud investigators assist in determining whether fraud
occurred, and if so, to estimate the extent of monetary loss or damages
and to determine who committed the fraud.
Arxis Financial
utilizes various investigative and analytical procedures to support
criminal or civil actions. Our services include analysis of personal
and business transactions, document review and tracing, and expert
witness testimony. Expert analysis and conclusions are presented in
depositions and trial at local, state and federal court levels as well
as mediation and arbitration. We assist attorneys in interpreting the
data, and help counsel to understand and analyze events or issues. This
level of support can be a key asset in determining a legal strategy as
well as reaching a reasonable and efficient conclusion.
The Forensic Accounting practice
is headed by partner Chris
L. Hamilton, CPA, CFE, CVA. Mr. Hamilton is a Certified Public
Accountant, Certified Fraud Examiner, and Certified Valuation Analyst.
He is a licensed life and disability insurance agent and a General
Securities Representative. Mr. Hamilton has published articles in
several publications, and has made presentations at national
conferences, training institutes and seminars on topics including
forensic accounting, fraud and business appraisal.
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