Significant Forensic Accounting and Litigation Support Cases
MAXIMIZING ASSETS IN A BANKRUPTCY CASE
Homebuilder Levitt & Sons LLC was one of the casualties of the nationwide real estate downturn. In 2007, Soneet Kapila, CPA, partner, Kapila & Company, Fort Lauderdale, was appointed the chief administrator by U.S. Bankruptcy Court for six of the debtor cases that had Wachovia Bank collateral. He managed eight residential communities, maximized their value, and recovered more than $100 million in gross proceeds from their orderly liquidation. "This framework preserved a ‘going concern value' in a declining market," said Kapila.
When the Wachovia debtors, a group of six entities that developed residential communities in the southeastern United States, filed for bankruptcy protection in November, 2007, their projects included two family neighborhood communities and six active adult, age-restricted communities. While six communities were partially occupied, two of them – Seasons at Seven Hills and Waterstone at Seven Hills – consisted of vacant land. On the bankruptcy petition date, the Wachovia projects collectively totaled 1,354 developed and partially developed lots, 1,466 undeveloped lots, 59 model homes, 271 partially completed homes, 23 boat slips, one partially completed marina, one complete and three partially complete amenity centers, and vast common areas.
As the sole secured creditor of the Wachovia debtors, Wachovia recognized that it would not recover the full value of its pre-petition loans. To mitigate its loss, the bank requested that the court appoint a chief administrator to continue the development of these assets to achieve an orderly liquidation. Wachovia extended a $3.5 million revolving line of credit to the Wachovia debtors to help complete and sell these projects.
As chief administrator, Kapila assembled a team of professionals including financial advisors, a construction industry consultant, legal counsel, a risk management consultant, and two general contractors. With this team, Kapila stabilized and preserved the communities, worked with residents and homeowners associations to improve the quality of living, and completed construction of approximately 150 homes and three amenity centers. They also launched a marketing and sales strategy, negotiated multimillion dollar project sale transactions and effectively liquidated the Wachovia projects.
"The bank achieved a tremendous payback on its debt investment versus a fire sale," said Kapila. "It demonstrates the benefits of an active preservation of assets and value since two other major banks within the Levitt bankruptcy case adopted widely different strategies with different results."
INVESTIGATING ON BEHALF OF THE MONROE SCHOOL BOARD
On March 27, 2009 the Monroe County School Board engaged Berkowitz Dick Pollack and Brant Certified Public Accountants and Consultants, LLP (BDPB), Miami, to perform forensic accounting
investigative services regarding questionable financial transactions. The target of the Key West investigation was Monique Acevedo, the former head of the district's Adult Education Department, and her husband Randall Acevedo, the former district superintendent.
"As a result of our investigation, Randy Acevedo was suspended from his position by then governor Charlie Christ and ultimately convicted of three counts of public corruption, a third-degree felony," said Richard S. Fechter, associate director of Forensic and Business Valuation Services, BDBP. "Monique Acevedo was convicted of grand theft and sentenced to eight years in jail followed by 22 years probation with a condition that she refund the funds she stole."
The forensic investigation focused on questionable purchasing card ("P-Card") charges as well as allegations of missing cash and other questionable financial transactions. In addition, BDPB was asked to investigate cash receipts in the Adult Education Department, employee travel, and allegations of a hostile work environment.
BDPB identified material violations of the district's P-Card policies and procedures as well as internal control deficiencies that made it possible Monique Acevedo to conduct unauthorized transactions. BDPB's analysis for the period from Fiscal Year ("FY") 2000 through March 18, 2009 revealed that cash receipts totaling of $297,571 were not deposited into the appropriate bank account or accounted for by the district's Finance Department.
Fechter found that written policies and procedures were not in place to properly account for the collection, accounting or management of tuition fees and fees for student services. "Virtually no cash receipts were being delivered from the Adult Education Department to the Finance Department for approximately seven years," he added. In addition, no audits of the Adult
Education Department cash receipts were performed by the auditor general – a serious deficiency in the district's oversight system.
TRACKING A HUSBAND'S OVERSEAS ASSETS
W. David Ellrich, Jr., CPA, partner, Moore, Ellrich & Neal, PA in Palm Beach Gardens, was recently engaged in a high-stakes divorce case in the 20th Judicial Circuit in Southwest Florida.
He provided forensic accounting services for the legal team representing the wife, Linda Scott-Irwin, whose husband, James B. Irwin, a self-made millionaire, was attempting to conceal his widespread holdings across the United States, Europe and Asia.
After multiple depositions and discovery, Charlotte County Circuit Court Judge John Dommerich entered a temporary relief order on behalf of Scott-Irwin, 54, against her 73-year-old husband on September 15, 2009. He ordered an immediate $750,000 lump sum alimony payment, as well as fees and costs for her attorneys.
In his ruling, the judge said, "The court finds the husband's testimony to be noncredible as it concerns the most significant issues in this case."
In his first financial affidavit, Irwin admitted to ownership of more than $29 million in assets, said Ellrich. "However, the court found that Irwin owns many more assets than he had disclosed and that he used offshore entities to hold title to those assets in a manner designed to disguise his ownership." Those assets included several homes in the U.S. and abroad, two yachts and numerous business entities.
Six days after Irwin was notified of the hearing's outcome via telephone, he committed suicide at his home in Connecticut.
UNCOVERING FRAUDULENT FINANCIAL ENTRIES
Nicole M. Mannarino, partner, Marcum LLP, Fort Lauderdale, was auditing the 2005 financial statement for DHB Industries (currently known as Point Blank Solutions, Inc.) when she discovered
fraudulent journal entries posted by the chief financial officer.
"It's not often that a CPA auditing a public company, has the duty, and the opportunity to participate in a Section 10A evaluation under the Securities and Exchange Act of 1934," said Mannarino, who uncovered the inventory-related fraud at one of DHB's public subsidiaries.
Last year, she testified as a government witness in a federal criminal trial in New York again DHB's senior management, including CEO David Brooks, CFO Dawn Schlegel, and COO Sandra Hatfield. Schlegel pleaded guilty and served as a key witness for the government. Brooks and Hatfield were tried and convicted on numerous counts of securities fraud and conspiracy, including lying to auditors, with both facing up to 25 years on the most serious counts.
Mannarino said the CEO, CFO, and COO colluded to overstate inventory valuations in order to manipulate gross profit margins and net income levels in the public company's periodic reports, between 2003 and 2005. "The company consistently reported overstated gross profit margin percentages of approximately 30 percent to the public," she said. However, during the later, required, financial restatements of the company's reported results in its public filings, the true gross margin percentage was found to be in the 12 to 17 percent range, and inventory balances were overstated by tens of millions of dollars.
Recently, the SEC initiated a new action against the former members of the company's Board of Directors, including its Audit Committee, for turning a blind eye to financial red flags, added Mannarino. The SEC has not filed an action against an entire board of directors in more than 30 years.
RESOLVING A COLLABORATIVE FAMILY LAW MATTER
Appelrouth Farah & Company was recently retained in a collaborative family law matter involving a high-income, high-net-worth executive of a major sports league. "Collaborative family law is a relatively new, cutting-edge form of divorce that allows the parties to control the case without threat of litigation," said Ed Sachs, director of litigation and valuation services, Appelrouth Farah & Company, Coral Gables. "The process includes a neutral forensic accountant and a neutral mental health professional."
In this case, Sachs reviewed the settlement offer put forth by the husband, determining if the information being provided as to the value, makeup and distribution of the assets was being properly disclosed and to give the parties and their counsel a complete understanding of the proposal. This matter included the review and explanation of complex retirement plans, profit sharing plans and other complex investments including multiple real estate investments.
Sachs was also charged with determining that the support being provided was reasonable, that the assets being distributed and the support being paid was being properly tax affected and that the support would meet the needs of the wife.
"This case, while not necessarily complicated, was an excellent example of the collaborative process and how divorce and family matters can be settled with the least amount of acrimony and dissention," Sachs said.
AUDITING THE CITY OF ANCHORAGE'S FINANCIAL RECORDS
MRW Consulting Group LLP recently conducted a forensic audit for the City of Anchorage. "Our extensive audit of 2008 financial records uncovered a lack of prudent financial management, but no fraud," said José I. Marrero, partner in the Fort Lauderdale firm.
The audit was conducted primarily to provide an independent review and analysis of journal entries relating to contributions to the Public Employees' Retirement System (PERS) that were made by the State of Alaska on behalf of the city. It also covered the alignment between revenues and appropriations, the fund balance and reserves, budgeting actions and other fiscal management issues.
"This was characterized as a forensic audit, but the scope of work included significantly more than analyzing the books and records maintained by the municipality," said Marrero "MRW's approach to the engagement was significantly different from both accounting and auditing procedures. This type of review required conducting interviews, analyzing laws, conducting custom queries of the general ledger to create specialized reports, and reviewing audio and video recordings of the Anchorage Assembly meetings.
Throughout the audit, interviews were conducted with key employees and elected officials to determine their understanding of state regulations as well as the city's policies and procedures, and to determine their adherence to those regulations and policies.
The MRW review determined the PERS fund balance as of December 31, 2008 was substantially below the requirement of 8.25 percent of revenue plus reserves. The errors appear to have resulted from incorrect methodology regarding projected revenues and expenditures, given Alaska's economy during the last quarter of 2008.
MRW recommended that a reporting system be devised to monitor and report fund balance within a reasonable degree of accuracy and to provide that information to the Assembly on a routine basis.
At the conclusion of the engagement, MRW's lead auditor, Ronald Wise, answered numerous questions from the assembly regarding methodology, findings, and recommendations. "Several members of
the assembly, as well as the city's CFO and director of internal audit, commented that MRW's findings and recommendations were insightful and very thorough," said Marrero. "They expressed their appreciation to MRW for resolving issues that the municipality had been unable to resolve internally. Back to Midyear 2011