PBTK Case Study #1: Employee Fraud Investigation
PBTK Case Study #2: Court Appointed as Special Master
PBTK Case Study #3: Determine Economic Losses as Neutral Expert
PBTK Case Study #4: Alter Ego Investigation
PBTK Case Study #5: Determining Lost Profits
PBTK Case Study #6: Divorce



PBTK Case Study #1: Employee Fraud Investigation

PBTK was retained by a locally-owned casino to investigate and quantify the losses to support an employee theft insurance claim that was perpetrated by a key employee. Following that investigation, we assisted the State of Nevada Gaming Control Enforcement Division in its submittal of the matter for prosecution, and then supported prosecution of the suspect by the Clark County District Attorney's Office.

Procedures:

Procedures included performing background research on the suspect, considering the financial and accounting processing environment, identifying and isolating suspicious transactions and those subject to influence by the suspect, testing selected transactions, and quantifying the theft loss.

Planning Phase:

Background research; evaluate and understand financial and accounting processing systems of the casino/hotel that may have been preyed upon; identify transactions subject to potential manipulation; conduct interviews of management and the suspect.

Investigative Accounting Procedures:

Analyze the support for identified cash payouts; physical inventory of all computer equipment; independent assessment of purchase quantities and costs; analyze falsified invoice files from a recovered compact disk.

Quantify the Theft Loss:

The loss amount of approximately $500,000 was determined by aggregating fabricated invoices that had been identified based on our independent physical inventory and estimating the inflated purchase costs using financial analyses and extrapolation.

Outcome:

This claim was accepted by the insurance carrier, which promptly paid out the policy limit under the employee theft coverage of the insurance policy. The perpetrator was indicted and entered a guilty plea for his offenses.

PBTK Case Study #2: Court Appointed as Special Master

Appointed by the Eighth Judicial District Court, Clark County, Nevada to serve as the fact finder in all accounting issues related to a tenant – landlord dispute. This was a multi-year dispute pertaining to misallocation of common operating costs ("Additional Rent," also known as CAM).

Relevant issues included:

  1. Cost allocation worksheets
  2. Costs categorized as Additional Rent
  3. Vendor credits and rebates
  4. Methods for allocating such costs to the tenant.

Work Performed:

PBTK's assignment as Special Master involved performing a Forensic Investigation using the accounting records for costs included as Additional Rent, tracing those costs to supporting documents and allocating the Additional Rent to the tenant pursuant to lease agreements. Procedures included:

Planning:

  • Review written summaries highlighting the dispute issues
  • Analyze the general ledgers to determine those costs included in Additional Rent
  • Review lease agreements of the tenant
  • Meetings with counsel.

Forensic Accounting Procedures:

  • Determine those specific costs included in Additional Rent
  • Trace costs to supporting documentation (invoices, journal entries, or payroll)
  • Summarize the Unsupported and At Issue costs
  • Evaluate cost offsets and lease-specified credits
  • Analyze tenant allocation methods and square footage/HVAC-usage factors

Develop findings:

  • Adjustments cost allocation methodologies
  • Recast the Additional Rent reconciliation statements, after adjusting cost pools and allocation methodologies

Outcome:

After performing our Forensic Investigation, a report of our findings was issued to the Court. The parties reached a settlement prior to trial


PBTK Case Study #3: Determine Economic Losses as Neutral Expert

Engaged as neutral fact finder to make a final determination of tenant economic losses pursuant to an Engagement Protocol drafted by counsel pursuant to a settlement arrangement. This business interruption claim for lost profits resulted from water intrusion and the subsequent repair process at a men's clothier tenant ("Clothier") located in Las Vegas.

Relevant issues included:

  1. Time period that retail operations were negatively impacted
  2. Method for estimating any lost sales
  3. Gross profit margins
  4. Impact of an affiliate manufacturer/supplier relationship on lost profits
  5. Treatment of recurring or extra costs incurred

Work Performed:

Performed procedures to determine the time-span of the business interruption, quantify losses and determine the extra costs incurred as a result. Procedures included:

  • Planning:
    • Review loss estimates prepared by the litigating parties
    • Perform site visit
    • Review photographs of the water damage
    • Conduct interviews with the general manager and corporate-level accounting personnel
    • Evaluate monthly retail traffic counts and monthly relative sales indexes for other tenants of the shopping venue
  • Forensic Investigation and Analysis:
    • Background research on the Clothier, including its origin and mode of operation
    • Analyze and evaluate financial statements and tax returns of Clothier
    • Develop predictive indicators for quantifying lost sales using composite sales indices from other retailers
    • Determine loss period for the Clothier
    • Consider possible avoided costs
    • Quantify any extra costs incurred as a result
  • Quantify the Loss:
    • An economic loss was determined, including business interruption loss and extra cost components.

Outcome:

Issued a Preliminary Report from which the parties were able to reach a settlement.


PBTK Case Study #4: Alter Ego Investigation

PBTK was retained on behalf of an international equipment manufacturer/lessor, to determine the existence of a unity-of-interest among certain individuals and closely-held corporations, commonly referred to as an Alter Ego claim. Relevant parties included four corporations with interlocking ownership/management and five individuals, which all operated in the same industry.

Procedures:

PBTK performed investigative and document analysis procedures for the purpose of determining the existence of transactions, relationships and other indicia of Alter Ego. Successful Alter Ego claims allow the court to remove the protection of the corporate veil and hold the controlling forces separately liable.

Planning Phase:

Background research on the corporations and individuals; reviewed legal findings and held periodic discussions with counsel; organized records for assessing the following areas relevant to Alter Ego claims: Financial dependence, Confusion about corporate identity, Lack of separateness, Domination and control.

Investigative Accounting Procedures:

Financial account analyses to identify lack of arms-length transactions, inconsistencies in treatment and indicia of Alter Ego:

  • Balance sheet accounts for related party transactions, including payables, intercompany and distributions
  • Expense accounts, including payroll, noting cost sharing among corporations and commingled cost pools
  • Sales and cost of goods sold accounts, noting below market pricing that effectively transferred profits between the corporations
  • Payroll records, noting common employees working at multiple commonly controlled corporations

Consideration of corporate conduct and ownerships, based upon governance documents and independent research

Outcome:

Determined that indicia of Alter Ego existed, allowing financial transactions to the detriment of the equipment manufacturer/lessor.


PBTK Case Study #5: Determining Lost Profits

Engaged as a rebuttal expert with respect to a $1.8 million lost profits claim at a nightclub venue in Las Vegas, to critique the opposing expert and independently calculate an alternative lost profits amount for consideration by the Trier-of-Fact. In essence, this was a breach of contract action, with the Plaintiff claiming losses due to actions of the Defendants that allegedly restricted access by patrons and created a sub-standard operating environment.

The lost profits claim had been developed by an economist on behalf of the Plaintiff, using annual taxable income from business income tax returns and historical statistics from the UNLV Center for Business and Economic Research.

Key dispute issues included: calculation methodology, period of lost profits, estimating lost sales revenue, incremental cost percentage and corresponding lost profit margin

Work Performed:

  • General Procedures:
    • Conducted independent research of the nightclub industry; performed site inspection; scheduled monthly operating performance for analysis purposes; analyzed annual tax returns; prepared an independent expectation of lost sales, the incremental cost percentage, and resultant lost profits; identified the lost profits scope period.
  • Critique of Plantiff Expert:
    • Inappropriately relied upon annual comparisons of taxable income for previous years, not monthly comparison; did not adjust for comparability issues between years; disregarded likely financial impact of pre-existing and newly opened competitors; did not consider other possible causes for losses (e.g., remodeling of facility, rebranding of the nightclub), but opined that entire loss was caused by Defendant.
  • Quantify the Loss:
    • A $200,000 economic loss was determined, including statutory interest, based upon the incremental cost percentage calculated of 67%.

Outcome:
This matter went to trial; however, the Defendant's economic expert was excluded from testifying, due to the Court finding that his methodology was unreliable.


PBTK Case Study #6: Divorce

PBTK was engaged in a Court-ordered divorce matter to conduct a forensic analysis of all the businesses, separately owned and operated by the husband or wife (the "Parties"), for the purpose of determining the available income and earnings. Marital discord had heightened over multiple years, providing the spouses with ample time and opportunity to engineer their reporting of business operations, but also significantly raising the level of distrust.

The businesses consisted of medical and retail operations, including entities established before, or received by gift during, the pendency of the marriage and entities formed during the marriage, presumptively establishing separate and community property interests.

Procedures:

PBTK's forensic accountants performed procedures that included assessing reported business operations to determine the level of reliability, using QuickBooks reports, annual income tax returns and bank account records. They also evaluated expenses to determine whether personal benefits were received by the Parties even though they may have been deducted as ordinary and necessary business expenses.

Planning Phase:

Planning for this engagement included evaluating and understanding the financial and accounting of all the businesses, identifying areas of possible risk, conducting interviews with the Parties, accountants for the businesses and office/administrative personnel. Further, PBTK's forensic accountants performed analytical review of business operating activity (revenue and expense) and year-end balance sheets for 3-5 previous years, both horizontally from year-to-year and proportional/common-size evaluation for each year.

Investigative Accounting Procedures:

Initial procedures concentrated on assembling complete accounting records for the scope period, by scheduling of deposits and withdrawals from bank account statements and supporting records. This resulted in portrayal of business revenues and expenses on the cash basis of accounting. Then, our forensic accounts performed analysis of the new customer acquisition process and related costs thereof, including internet based presence. Monthly revenue trends were identified and evaluated based upon the customer acquisition process, in addition to year-to-year revenue proportional change analysis by month.

Quantify the Income:

After analyzing the financial data, we determined the cash flow for the scope period to be substantially higher than the income reported on QuickBook reports or income tax returns. Necessary adjustments included: 1) add back of expenses that we determined personally benefitted the owner/manager spouse, 2) add back of non-cash expenses and 3) add back of costs incurred for overall overhead and administration of a group of entities, not just the paying entity.

PBTK adjustments were made to reflect stand-alone operations of each entity independently, which entailed shifting of expenses between entities to properly match revenues and expenses. Also, PBTK adjustments were made to reflect tens of thousands paid toward significantly past due credit card balances incurred primarily for business purposes, but with commingled personal charges that required separate efforts to isolate.

The Court-ordered Accounting Report added clarity to the businesses aspect of this protracted divorce battle, which allowed the Parties to effectively settle the dispute at mediation.