February 2007 Newsletter

Expert Reliance on Third-Party Specialists

Case: Sam J. Alberts v. HCA Inc., et al.

In Alberts v. HCA Inc., et al., (Sam J. Alberts, Trustee for the DCHC Liquidation Trust, v. HCA Inc., et al., U.S. Bankruptcy Court for the District of Columbia, Case No. 02-02250) the defense filed a motion to disallow expert witness testimony on the grounds the expert was not qualified to conduct the appraisals necessary for the evaluations and moreover, the expert performed his work by relying on only selected third-party appraisals, dismissing other appraisals on debatable grounds. The judge deferred ruling on the admissibility of the expert testimony until trial, noting he would closely scrutinize the expert’s calculations and the expert’s rejection of certain appraisals in favor of others without adequate explanation.

As noted in the Ramco case (Ramco Oil & Gas Ltd. V. Anglo-Dutch (Tenge) L.L.C. Texas 14th Court of Appeals No. 14-04-00433-CV) included in our December 2006 newsletter, there exist restrictions upon the expert’s incorporation of third-party valuation opinions. Likewise, the AICPA in its proposed business valuation standards plans to increase the level of scrutiny on third-party appraisals used by CPA business appraisers. The exact wording is still under debate but the final standard will probably require the disclosure if not explanation and justification of the amount of reliance on third-party valuation information.

Oil Field Fraud

Source: J.A. Compton & Co., P.C.

We observe recent, increased attention by law enforcement to kickback and asset misappropriation schemes involving oilfield equipment and services. We also note increased incidence of these schemes being detected. As with many fraud schemes, simply asking employees about the potential existence of such a scheme often yields valuable information.

In our experience, undisclosed ownership by management of key vendors and/or customers has been a critical part of the schemes. Oftentimes, the target uses the company’s computer to create phony invoices or alter company deals for his own benefit. From that point, the target’s company computer should be considered for preservation and investigation.

From a forensic accounting perspective, the best sources of evidence are any third-party documents, such as invoices and bank records, not just those of the target and his businesses. Based on these kinds of documents, we have prepared diagrams and timelines of transactions that have proven helpful to law enforcement and fact-finders in obtaining an understanding of complex fraud schemes in a quick and efficient manner.

SAS 103 - Audit Documentation

Source: Today’s CPA – Accounting & Auditing – SAS 103 Tightens Audit Documentation Requirements

Statement on Auditing Standards (SAS) No. 103, Audit Documentation, is effective for audits of financial statements for periods ending on or after December 15, 2006. Highlights of this new Standard include:

  • SAS 103 supersedes SAS 96, Audit Documentation, which provided less definitive guidance on documentation. SAS 103 states that the auditor must prepare documentation instead of should prepare audit documentation, making audit documentation an “unconditional requirement” according to SAS 103. SAS 96 required that audit documentation be sufficient to enable a member of the engagement team with supervision and review responsibilities to understand the nature, timing and results of auditing procedures performed and the evidence obtained. Instead of a member of the engagement, SAS 103 requires that the documentation enable an experienced auditor, with no previous connection to the audit, to understand the audit documentation.

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