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

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1. A recent case study- FZ v SZ

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

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THE JUDGMENT

– Experts must put their resources to good use

– If documents are produced then they must be considered by

the Expert.

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2. The role of Accountants in drafting the Form E

– 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

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3. Ex parte Applications

4. Developments in the use of Hildebrand documents

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.

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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?

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5. The role of the expert - Independence?- Single or joint?- Costs issues

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)

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Independence?

– Are expert accountants “Inevitably partisan?”

– Is an expert entirely Independent

– No previous commercial relationships with client

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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

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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

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6. Valuation methodology

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.

BASES OF VALUATION

– Net Assets

– Future Maintainable Earnings

– Dividend Yield

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

julia.walker@fticonsulting.com0207 979 7507

Julia Wallace-Walker FTI Forensic Accounting Limited322 High Holborn London WC1V 7PB