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FTI Company Overview June 2007
FLBA Autumn Lecture Series
Forensic Accounting and Family Law
Julia Wallace-Walker FTI Forensic Accounting Limited
Agenda
1. A recent case study (FZ v SZ 2010)
2. The Role of Accountants in drafting the Form E
3. Ex parte Applications
4. Developments in the use of Hildebrand Documents
5. Role of Experts
6. Valuation methodology
2
THE JUDGMENT
– 3 lessons:
1) initial move of a divorce can colour the rest of the case
2) every action gives rise to an equal and opposite reaction
3) allegations of dishonesty should be very carefully considered
– The expert accountant’s role in preparing the Form E
– The expert accountant’s role in ex parte applications
4
THE JUDGMENT
– Experts must put their resources to good use
– If documents are produced then they must be considered by
the Expert.
5
– Complicated affairs
– Pressure of time (no excuse for productionof defective Form E)
– Accountant’s responsibility for non-disclosure
– Undertaking of in-depth due diligence
– Costs
– Independence: Performing further work or accepting appointment as Expert
Issues
7
The use of confidential information in divorce proceedings
– Essential rules from Hildebrand [1992]:
- Documents left lying around the family home or in the
dustbins can be legitimately copied and used
- Unacceptable for locks to be breached or for mail to be
opened
- Originals should not be retained
- Early disclosure should be given
- No real guidance on data from personal computers
- Problem; if documents show dishonesty then the process is justified
but if nothing revealed then the H/W can say that his privacy has
been violated.
10
The use of confidential information in divorce proceedings
Tchenguiz v Imerman [2010]
– Spouses can no longer take and copy confidential documents
they find lying around the marital home
– The Court of Appeal ruled there was no legal basis for the
Hildebrand rules
– Costs order imposed on the W- dangerous strategy
– Impact of the ruling
– Increasing practice of rich parties dishonestly hiding their
assets
– Can we do our job without Hildebrand?
11
THE EXPERT
– Enhances understanding of accounting issues
– Provides commercial and financial reality
– Assists in determining complex issues
– Offers opinion and gives evidence
– Must be independent, impartial and credible
– Part 35 of the Civil Procedure Rules (“CPR”) provides detailed
rules on the role of expert witnesses
– Hiring an expert outside Court Approval (FZ v SZ)
13
Independence?
– Are expert accountants “Inevitably partisan?”
– Is an expert entirely Independent
– No previous commercial relationships with client
14
SINGLE OR JOINT EXPERT?
– Single experts are not advocates of their party
– Experts may assist from an early stage
– Frame further requests of information during disclosure
– Assist in the inspection of disclosures
– Examine other lay, and expert, witnesses
SINGLE EXPERT
– Usually appointed by the Court, requiring both parties to agree joint instructions
– The Court has the power to direct that one expert give the evidence only
– Parties should, if possible, agree upon a single joint expert whom they can jointly instruct.
SINGLE JOINT EXPERT
15
WHAT IF THE SINGLE JOINT EXPERT GETS IT WRONG
– If the valuation is complex and highly reliant on opinion it may be better to seek judgement from more than one expert.
– Reality is both sides may hire an expert to verify the amounts for their own interests, and if necessary challenge the findings. Thus pushing costs higher.
Cost issues
16
VALUATION
A fair market value is the price that would be negotiated in an open and unrestricted market between a willing, knowledgeable, but not anxious buyer and a willing, knowledgeable, but not anxious seller, acting at arm’s length.
ISSUES TO ADDRESS BEFORE PROCEEDING WITH VALUATION
– Would a broad, “at a glance” assessment be most appropriate to achieve a cost-effective result?
– Is the valuation to cover the total value of assets (such as a business) or only the spouse’s equity stake in the total assets.
– The difference between paper wealth and true wealth.
NET ASSET BASIS
– Company not reliant on trading i.e. if it is a property holding company.
– Firstly, establish the asset value by a valuer in that particular field.
– Secondly, the appropriate premium or discount should be applied.
– The balance sheet does not show the value of a company in any way – it is merely a snapshot of the company at any given date.
FUTURE MAINTAINABLE EARNINGS BASIS
STEP 1: Assess future maintainable earnings after adjusting for extraordinary and non-recurring items and for tax
STEP 2: Determine an appropriate capitalisation rate/Price Earnings Ratio (PE Ratio)
STEP 3: Multiply future maintainable earnings by PE Ratio = Goodwill
STEP 4: Value = Goodwill + Surplus assets
DIVIDEND YIELD BASIS
– Dividend Yield Basis is used in Valuations of minority shareholdings in large private companies paying dividends.
– Firm Value =
– There may be no dividend history if the shareholders are paid a salary, in which case, a more detailed investigation may be required.
Maintainable Dividends
Risk – Dividend Growth
VALUATIONS
– Enterprise Value
– Industry rule of thumb
– Intangible assets
– Date of the valuation
– Discount for minority interest
– Discount for lack of marketability
FTI Company Overview June 2007
Forensic Accounting and Family Law
[email protected] 979 7507
Julia Wallace-Walker FTI Forensic Accounting Limited322 High Holborn London WC1V 7PB