november/december 2008 - nacva taiwan · november/december 2008. forensic accounting demand reaches...

November/December 2008

Forensic Accounting Demand Reaches New HighAccounting Today’s 2007 survey of the top 100 accounting firms—and their plans for increasing their business this year—dramatically illustrates this niche opportunity: 77% of the 78 firms responding cite forensic accounting growth on their radar. Yet the accounting profession has yet to embrace—or even offer—a cogent, comprehensive forensic accounting methodology by which accountants can guide and refine their forensic accounting craft.

Until now.

The Consultants’ Training Institute and financialforensics®

have developed an intensive, five-day workshop that is the only program of its kind in the United States. Entitled, Forensic Accounting Academy™ — What Your Clients “Think” You Know about Forensic Accounting©, this timely program takes participants from concept to detail and delivers specific forensic accounting tools and techniques that are immediately applicable to virtually all aspects of the accounting profession: auditing, tax, valuation, litigation, and fraud.

Here Are the Skill Sets You’ll Acquire• Training in the “Top 30” specific tools and techniques to use in forensic accounting and related assignments such as Full-and-False Inclusion, Genogram, Entity(ies) Charts, Timeline Analysis, Link Analysis, Item Listing, (Modified) Net Worth Method, Source and Use of Cash Method, Proof-of-Cash Method, Digital Analysis (e.g., Benford’s), CAGR, ANOVA, and others.• A working knowledge of proprietary forensic accounting methodology called FA/IM©. Its “process map” approach (depicted below) will be used to illustrate the application of forensic accounting tools and techniques to all aspects of professional services. The workshop applies a selectively available software-based methodology that provides specific investigative tools and techniques.

Design and Instruction TeamSpearheaded by Darrell D. Dorrell, CPA/ABV, MBA, CVA, ASA, CMA, DABFA, a partner in a highly specialized forensic accounting practice called financialforensics® and firmly entrenched in the profession with over 30 years of experience, the 13 CPAs and attorneys who have designed and taught this workshop are exceptionally well-qualified in virtually all aspects of financial disciplines. Their knowledge transfer provides an unmatched opportunity to glean leading-edge techniques from their deep expertise.

Take Away Timely Techniques You Can Use Right NowEnhance your core practice (audit, tax, et al.) as well as your part-time niche disciplines. Identify new practice areas as logical extensions of your expertise and train your staff to leverage your knowledge. Leave with actual report excerpts and trial exhibits for future applications.

You’ll find descriptions of the topics covered in each day of the program online at: www.nacva.com in the Training area, and 2009 dates will be posted shortly. Or call Member Services with questions about the program and what Accounting Today calls “this fast-growing niche”: (800) 677-2009.

Consultants’ Training Institutec/o National Association of Certified Valuation Analysts • 1111 Brickyard Road, Suite 200, Salt Lake City, Utah 84106-5401

Tel: (801) 486-0600 • Fax: (801) 486-7500 • Internet: www.nacva.com

Forensic Accounting/Investigation Methodology (FA/IM )©

FOUNDATIONAL INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL

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• Obtain validating data• Obtain refuting data

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• Combine first-hand knowledge (e.g. Interviews and Depositions) with second-hand knowledge (e.g., Background Research data)• Identify disparities for additional investigation• TASKS • Establish search protocol • Collect data for validation/corroboration

November / December 2008 The Value Examiner 3

A PROFESS IONAL DEVELOPMENT JOURNAL for t he CONSULT ING D I SC I PL INES

On The Cover

5 F R O M T H E E D I T O R

Trend: More Disputes over Non-Compete Agreements

Litigation over post-employment covenants is growing, and forensic accountants are being called on to calculate economic damages.

7 V A L U A T I O N

Investing in a Better Jobby Michael Sack Elmaleh, CPA, CVA

Purchasing equity in a small business more closely resembles an investment in education than an investment in a publicly traded security. The primary anticipated marginal benefit is increased cash compensation, not profit or free cash flow; and to receive the benefit the investor must provide personal labor.

12 L I T I G A T I O N C O N S U L T I N G

Economic Loss in Breach of Post-Employment Covenantsby Richard L. Hannah, PhD

Increased use of non-compete agreements has led to a growth in court cases to decide whether a particular agreement is enforceable, and what sort of economic damages an employer may recover when a former employee breaches the agreement. The law varies from state to state, but damages measured in lost profits is a unifying theme.

16 P R A C T I C E M A N A G E M E N T

How to Use the New Internet for Business Developmentby Elgé Premeau and David M. Freedman

Joining and participating in a professional network like LinkedIn, and commenting on business and financial blogs (or writing your own blog) are two examples of the new “social media” marketing strategies being employed by professional advisers.

33 B O O K R E V I E W

The Business Valuation Internet Research Guideby Jan Davis (JT Research LLC, Portland, OR, 2008)Reviewed by Eva M. Lang, CPA/ABV, ASA

Continued on Page 4…

Rhetorical Skills Help Win New BusinessWhat Valuation Professionals Can Learn from ObamaBy Andreas Creutzmann, WP, CVA, StB, Dipl.-Kfm

Barack Obama’s personality, confidence, and rhetorical skills—including the clear, focused, and consistent

enunciation of goals—helped him win the mother of all engagements. For a valuation professional making a presentation to a prospective client, getting the engagement often depends on those same skills.

20

The Value Examiner November / December 20084

A PROFESS IONAL DEVELOPMENT JOURNAL fo r t he CONSULT ING D I SC I PL INES

Editorial .............................. Black

Valuation ............................. Blue

Forensic Accounting ........... Green

Litigation Consulting ......... Orange

Practice Management ......... Red

Academic Research ............. Purple

S U B M I S S I O N D A T E SIssue Submission Dates Publish DatesMay/June 2009 March 1, 2009 June 1, 2009July/August 2009 May 1, 2009 August 1, 2009

A L L S U B M I S S I O N SThe Value Examiner is devoted to current, articulate, concise, and practical articles in business valuation, litigation consulting, fraud deterrence, matrimonial litigation support, mergers and acquisitions, exit planning, and building enterprise value. Articles submitted for publication should range from 500 to 3,000 words. Articles can span multiple issues. Case studies and best practices are always welcome submissions.

S U B M I S S I O N S T A N D A R D SAll articles should be thoroughly edited and proofread. Submit manuscript electronically (in standard word process-ing format, on CD, or by e-mail) to David M. Freedman: [email protected]. Include a brief biography to place at the end of the article, a color photo of the author (resolution 300 dpi), and the amount of time to research and write the article. The Value Examiner accepts some reprinted articles, if accompanied by appropriate reprint permission.

R E P R I N T SMaterial in The Value Examiner may not be reproduced without express written permission. Article reprints are available; call NACVA at (800) 677-2009 and/or visit the website: www.nacva.com

E D I T O R I A L S T A F FCEO & Publisher: Parnell BlackExecutive Editor: Doug Kirchner

Senior Editor: David M. Freedman

E D I T O R I A L B O A R DChairman: David N. Wood, CPA/ABV, CVA

D. Larry Crumbley, PhD, CPA, CrFA, CFFADarrell D. Dorrell, CPA, MBA, CVA,

ASA, CMA, DABFA, CMCWillis E. Eayrs, CVA, CM&AA (Germany)Nancy J. Fannon, CPA/ABV, ASA, MCBAMark G. Filler, CPA/ABV, CBA, AM, CVAEdward J. Giardina, MSA, CPA/ABV, CVAMichael Goldman, MBA, CPA, CVA, CFE

Neil Paschall, CPA/ABV, CVA, CFFAKeith Sellers, DBA, CPA/ABV, CVA

Sandra M. Shell, CPA/ABV, CVAEdward Wandtke, CPA, CVA

Susan Yi, CPA, CVA

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Ask the AttorneysShould you let the hiring attorney edit your valuation report?


Stockdale’s Court Cornerby John Stockdale, Jr., Esq.

Summaries and analyses of the most important cases that involve valuation issues, in both federal and state courts

F O R E N S I C A C C O U N T I N G

The Fraud Filesby James Martin, CMA, CIA, CFFA,R. Austin Marks, CPA, CFFA, andTodd Michael Jolicieur, CFFA

P R A C T I C E M A N A G E M E N T

Keys to Growing Your Practiceby Joey Asher, Esq.

26

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F R O M T H E E D I T O R

Trend: More Disputes over Non-Compete Agreements

Economics professor Richard Hannah points out, in his article that starts on page 12, that growing use of post-employment covenants—also known as non-compete agreements—has led to increas-

ing litigation involving alleged breach of those agreements. Over the past 10 years, the number of published federal court decisions involving non-competes increased by 81 percent, according to the Shepherd Law Group, a Boston-based labor and employment law firm.1

That trend has resulted in a greater need for experts who can calculate economic loss in cases where the non-compete does not clearly specify reasonable liquidated damages (a pre-set penalty that the former employee must pay if found to be in violation of the agreement).

A couple of high-profile lawsuits involving non-competes were filed in the past six months, both involving Apple Inc. In July, Motorola filed a suit in Illinois against Mike Fenger, its former senior vice president of mobile devices for Europe, Middle East, and Africa. When he was a Motorola employee, Fenger signed an employment contract with a non-compete clause, which barred him from taking a job with a competi-tor within two years of resigning. As consideration for sign-ing the contract, Fenger received cash and stock options now worth more than $1 million, according to the lawsuit.

Fenger left Motorola in March 2008, after six years with the company. In June he took a new job as Apple’s vice presi-dent of global iPhone sales. Motorola also claims that Fenger raided two other Motorola employees to work with him at Apple, which is also prohibited by the contract.

In the lawsuit, Motorola seeks to prevent Fenger from working for Apple or any other competitor, and to recover the $1 million from Fenger.

Motorola points out that Fenger was privy to Motorola’s trade secrets, including “pricing, margins, customer initia-

tives, allocation of resources, product development, multiyear product, business and talent planning and strategies….” and that “he cannot perform his duties for Apple without inevita-bly disclosing Motorola’s trade secrets.”2

In the other case, IBM sued its former employee Mark Papermaster, who had been vice president of IBM’s blade server development unit until he resigned in October. He had worked for IBM 26 years, and signed a non-compete agree-ment in 2006 that barred him from working for competitors for one year after termination of his employment with IBM. The lawsuit, filed in New York, claims that Papermaster, who has knowledge of “significant and highly confidential IBM trade secrets,” intends to accept a job in November with Ap-ple, where he would be a senior executive advising CEO Steve Jobs personally. IBM seeks an injunction to prevent Paper-master from taking the Apple job, plus monetary awards “as the court deems just and proper.”3

In neither case did the plaintiff claim that its ex-employee took any documents, files, or data with him to a new employ-er. High-tech employers use non-competes to protect their intellectual property, as well as deprive competitors of talent.

We will be following these and other significant non-compete cases, as this is a growing area for forensic ac-countants. VE

1 “Non-compete Clause Tying Hands of Employees,” by Barbara Rose, Chicago Tribune, February 25, 2008.2 “Motorola Sues Ex-Executive for Going to Apple,” Information Week blog, July 18, 2008, available at www.informationweek.com/blog/main/ar-

chives/2008/07/motorola_sues_e.html.3 “IBM Sues Top Executive to Stop Migration to Apple,” Womble Carlyle Sandridge & Rice, Non-compete and Restrictive Covenants Blog, October 31, 2008, available at www.womblenon-compete.blogspot.com/.

David M. FreedmanSenior [email protected]

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a college education, special professional certifications, or the acquisition of small businesses is not limited to additional cash. Other incremental benefits include improved status, au-tonomy, and more stimulating and challenging employment.

Investment in EducationAccording to the 2000 census, almost 46 percent of the

population between the ages of 18 and 24 has attended some college and obtained an associate degree or higher.1 While the percentage of the overall population with a bachelor’s degree or higher is closer to 30 percent, college attendance in some form continues to be widespread, despite steeply increasing tuition costs. The U.S. Department of Education estimated the aver-age yearly cost in tuition, room, and board at 54 institutions to be over $17,000 for the 2005-06 academic year. The average cost for two-year institutions was over $7,000 per year.2 There-fore, an investment in a bachelor’s degree now costs on average nearly $70,000, while an associate degree costs about $14,000. These figures represent out-of-pocket costs, but do not reflect the full opportunity costs of obtaining a post-secondary edu-cation, because they do not include the wages foregone while attending school full-time. When foregone wages are included in the calculation, the average cost of attaining a bachelor’s degree is now well over $100,000.

The recent steep increase in educational costs has led some to question the economic wisdom of investing in education beyond high school. Nonetheless, 2005 Census Bureau data,

It is often remarked that in many equity transfers involving small “Main Street” businesses, the new owner is simply buying a job. For many in the valua-tion community, the idea that anyone would be foolish

enough to simply buy themselves a job is met with derision. Because the standard model of valuation holds that equity value is driven exclusively by the anticipation of free cash f low, rather than compensation, investors who do not act according to the standard theory of value are seen as irra-tional. However, if we view a small business equity transfer as the acquisition of a better job, as opposed to just a job, the supposed irrationality disappears.

In this article, I will demonstrate that investing in a bet-ter job is a widespread phenomenon that is not confined to equity transfers involving small, closely held businesses. The attainment of college degrees and professional and techni-cal certifications operates on the same economic principles as an investor acquiring a small, closely held business. The economic principles are (a) marginal benefit and (b) delayed gratification. The economic actors invest time and money in the present, in anticipation of realizing higher compensation in the future.

The primary anticipated marginal benefit for these activi-ties is increased cash compensation. This increased compen-sation is not profit or free cash flow, because in order to re-ceive it, the investor must continue to provide personal labor. Furthermore, the incremental benefit that people seek from

Investing in aBetter Job

by Michael Sack Elmaleh, MS, CPA, CVA

V A L U A T I O N

1 U.S. Census Bureau, 2000 Census. 2 U.S. Department of Education, National Center for Educational Statistics (2007). Digest of Educational Statistics, 2006 (NCES 2007-017).



summarized in Table 1, indicates that such investments are economically rational. The census also provides a breakdown of expected lifetime earnings by level of educational attain-ment, shown in Table 2.3

Table 1: Average Annual Full-time Earnings by Educational Attainment, 2005

Education Earnings ($)

No high school diploma 19,200

High school diploma 28,600

Bachelor’s degree 51,600

Advanced degree 78,100

Table 2: Expected Lifetime Earnings by Educational Attainment

Education Earnings ($)

No high school diploma 1,000,000

High school diploma 1,200,000

Some college 1,500,000

Associate’s degree 1,600,000

Bachelor’s degree 2,100,000

Master’s degree 2,500,000

Doctoral degree 3,400,000

Professional degree 4,400,000

Clearly, there is a significant economic payback for in-dividuals willing to invest in college education. Although higher compensation represents a major marginal benefit of an investment in higher education, there are other benefits as well. The attainment of a college degree opens up a greater range of employment choices and flexibility, increased status, and often more stimulating and enjoyable work.

There are other less tangible, marginal benefits to attain-ing a college degree. First, there is a sense of achievement that individuals feel upon completion. College education of-ten results in close friendships, associations, and lasting con-nections. Alumni usually develop and maintain significant emotional loyalty to their educational institutions, which benefit both institutions and graduates. Finally, graduates may actually retain what they learned in college, and de-velop a desire for more lifelong learning.

Continuing Education for the EmployedAccording to 2006 Department of Education statistics,

of the nearly 17.5 million students enrolled in college, about

6.7 million or 38 percent were part-time.4 Fifty-six percent of all colleges offered some form of distance learning geared to employed students. Based on 2003 surveys, 46 percent of all employed people participated in some form of career- or job-related course work.

Based on 2004-2005 academic year data, fully 4 percent of the adult population were enrolled in part-time college degree programs, 1 percent were involved in part-time vo-cational course work, and 1 percent were enrolled in part-time apprenticeship programs. According to this survey data, 5 percent of adults employed full-time were enrolled in part-time college degree programs, while 8 percent of professional or managerial employees were enrolled in such programs.5

The popularity of these programs suggests that current-ly employed individuals are willing to invest time and mon-ey to improve their career prospects. The commitment to part-time and vocational degree programs by those already fully employed is remarkable, because the sacrifices made by those students may be quite significant. They are willing to give up free time to advance their job prospects. Although part or all of the tuition is often paid by employers under educational assistance programs, reimbursement generally depends on maintaining minimum academic performance.

Professional Certifications Most of the thousands of trade and professional associa-

tions in the United States offer certification and training pro-grams. In our profession, the CVA and ABV designations are examples. Usually these programs are designed for employees, professionals, or tradespeople who have already established the minimum level of experience or educational attainment to en-ter their chosen field. The basic idea behind such certifications is to demonstrate additional expertise beyond the minimum standard for entry in the relevant trade or profession.

The cost in time and money to obtain these certificates varies, but generally it is less than part-time, post-secondary degree programs. Nonetheless, the cost usually is measurable in the low four figures. Most of these programs do not qualify as tax-free employer educational benefits, so these costs are probably less subsidized than weekend and evening degree programs. Obtaining these certificates may require additional training and passing an exam or exams. Often practitioners and tradespeople are required to have a certain minimum of experience as well. The economic rationale for attaining ad-ditional credentials and certifications is identical to the ratio-nale for obtaining a college degree: The holders of degrees and certificates expect marginal benefits in the form of higher wages or fees.

3 U.S. Census Bureau, Annual Social and Economic Supplement to the Cur-rent Population Survey, 2005.

4 U.S. Department of Education, National Center for Educational Statistics, Digest of Educational Statistics (2006).5 Ibid.



Investing in a Small BusinessMany, if not most, small businesses require the active,

full-time presence of an owner-manager. These businesses are not large enough to generate sufficient revenue to pay for the internal and external audit functions that are needed to overcome the agency conflicts between owners and em-ployees that can threaten the continued survival of a busi-ness. Even if agency problems could be overcome with non-owner employees, the cost entailed would leave little or no cash available to the owners.

In these small businesses the owner-manager must in-vest not merely capital but full-time labor to ensure that the business survives. Owner-managers who invest in these businesses have made a decision that the material and psy-chological rewards of ownership and full-time management of a small business are greater than the comparable benefits of full-time, non-owner employment.

When an investor purchases an equity interest in a small, closely held business that requires their full-time par-ticipation, the underlying economics are not comparable to acquiring an equity interest in a publicly traded corporation. In the latter case, there is no expectation that the equity ac-quirer will provide any services to the acquired company. All returns from the investment in a publicly traded compa-ny are free cash flow. In most small, closely held businesses the return on investment primarily represents compensation for services.

The rationale for buying an equity interest in a small closely held business is that the owner’s compensation, net of the cost of the investment, will be higher than if the investor remains a non-owner employee. Therefore, the un-derlying economics of a small company equity purchase more closely resembles an investment in education than an investment in a publicly traded security. In both educa-tional and small business equity investment, the investor exchanges time and money now for greater future compen-sation. The expected return on the investment of tuition and classroom hours is a higher future wage than would be available without the educational investment. The ex-pected return for an equity investment in a small, closely held business is a higher future wage to the investor than would be available if that investment had been foregone. It is just that simple.

In educational, vocational, and small business equity investments, there are no expectations of receiving any cash return from the investment if the investor withdraws from the job market or from active participation in the business (although it is sometimes possible to grow a small business that currently generates little or no free cash flow into a bigger business that does). The common feature of these in-vestments is that the economic benefits cannot be sustained without continued investment in work. In contrast, invest-

ments in publicly traded securities provide returns indepen-dent of investor exertions.

Investing in Business vs. EducationWhile the fundamental goal of these improved-com-

pensation investments is the same, there are notable dif-ferences. One difference involves the degree to which the investor attempts to precisely compute the estimated future benefit associated with the investment. The decision to in-vest in attaining in a two-year or four-year college degree is not likely to be accompanied by a specific future compensa-tion analysis. This may be the case because the anticipated wage increase is assumed to be very high, relative to the cost of tuition and wages foregone, negating the need for the computation.

It may be the case that more specific attention to fu-ture wage levels is considered in the choice of an academic major. For example, the choice of a business major versus a history major may be based on a general idea that the job market compensates the former more highly than the latter.

Similarly, the decision to invest in the attainment of a new professional or vocational certification is not likely to be based on a very detailed marginal compensation analy-sis. One reason is that the cost of obtaining the advanced certification is not nearly as great as the cost of obtaining a college degree or investing in a closely held small busi-ness. Another reason for not seeking a more refined mar-ginal benefit analysis may stem from the fact that precise information on the increased expected wages or fees from a certification is not easily obtained.

When, on the other hand, an individual contemplates investing in a small, closely held business as a means of increasing compensation, usually the expected marginal benefits are carefully analyzed, because the investor is put-ting all of his or her eggs in one basket. The risk that the investment will not pay off is much greater than the risk in-volved in investing in post-secondary education or attaining advanced professional certifications. In these latter cases, there is an understanding that there are many possible jobs available that will provide greater compensation, not just one job. There is some risk of unemployment to be sure, but this risk is certainly more diffuse than the risk associated with investing in a closely held business. For this reason alone, much more attention is paid to the precise expected increased compensation of investing in a small business.

Although it is fairly clear that the risk of not obtaining the desired higher compensation is much more pronounced with a small business investment, there is one sense in which the risk may be somewhat less. Specifically, an owner of a small firm faces no risk of being terminated if the business



6 For further discussion, see my article “The Effect of Sales Terms on Good-will, Risk and Return in Transfers of Closely Held Accounting Practices,” Journal of Business Valuation and Economic Loss Analysis, Volume 3 (2008).

7 “Distinguishing Owner Compensation from Profi t: In Search of a Respon-sibility Premium,” The Value Examiner, July/August 2008, page 18.

survives. There is, however, always this risk in the case of employment without an ownership interest. It should also be noted that when small business equity interests are ex-changed, a variety of risk-mitigating sales terms are often used. These include continued seller involvement during a transition period, non-compete agreements, and sales price being contingent on retained customers and clients.6

Furthermore, to a great extent an owner-employee’s compensation will be more closely tied to job performance than employment without ownership, particularly if that employment is in a large, highly bureaucratic setting. The rewards for excellent performance may be much greater as an owner-employee, compared with a non-owner employee. This closer connection between compensation and job per-formance represents both a risk and a possible reward for choosing self-employment.

The more pronounced risk associated with small busi-ness equity investment raises an interesting question. Do investors in small, closely held businesses demand more compensation than comparable investors in college degrees and professional and vocational certification programs? This would be the analogue of the risk-versus-return re-lationship that is widely believed to prevail in traditional investments in publicly traded securities. In theory, you would think that small business equity investors would de-mand higher compensation, because of the extra risk as-sociated with such investments.

In a recent article, I argued that the additional respon-sibilities associated with owning and actively managing a small, closely held business necessitates the payment of a re-sponsibility premium.7 It is possible that the additional risk of self-employment might be a component of this responsibil-ity premium. The need for such a premium may, however, be offset by the additional benefits of the autonomy associated with self-employment. Unfortunately, I am not aware of any accessible data that relates the size of compensation to the risk of unemployment.

SummaryInvesting time and money to attain “something” that al-

lows a person to earn more in future wages is economically rational, if the present value of the additional future wages exceeds the present value of the investment cost in time and money to attain that “something.” In our market economy, these attained “somethings” include college degrees, voca-tional and professional certifications, and equity ownership in small, closely held businesses.

The underlying economics of a small company equity purchase more closely resembles an investment in education than an investment in a publicly traded security.

Most small, closely held businesses require the full-time active management of the owner. Little or no free cash flow would be available to the investor if they chose to hire a non-owner manager. The return to such owner-managers is com-pensation. These additional returns are available only if the investor remains an active, full-time manager of the business. These investors believe that the combination of cash and in-tangible benefits associated with self-employment, net of the investment cost, will exceed the combination of benefits avail-able as a non-owner employee. Such investors are not simply buying a job; they are buying a better job. VE

Michael Sack Elmaleh, MS, CPA, CVA, has served as a principal and partner in CPA firms in Madison, WI, for nearly 20 years. He has been retained as an expert witness in valuation cases in Wisconsin and Maryland. He has served as a past chair of the Wis-consin Institute of Certified Public Accountants Fed-eral Taxation Committee. As an adjunct instructor in colleges in Maryland and Wisconsin, Elmaleh has taught mathematics, statistics, economics, corporate

finance, and accounting. He has written several articles for The Value Examiner. (e-Mail: [email protected])

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1 Covenants Not to Compete: a State-by-State Survey, Fifth Edition, Brian M. Malsberger, editor, BNA Books, Washington, DC, 2005, page xi.2 Excellent renditions of this history can be found in “Employee Agree-ments Not to Compete,” by Harlan M. Bake, Harvard Law Review, Vol. 73,

No. 4 (1960), pp. 625-691; and “A Survey of Legal Restrictions of Conv-enants Not to Compete,” by Hadar Hannes, Litigation Economics Review, Vol. 5, No. 1 (2001), pp. 1-10.

Economic Loss in Breach of Post-Employment

Covenants by Richard Hanna, PhD


In the preface to the authoritative, three-volume work Covenants Not to Compete: a State-by-State Survey, editor Brian M. Malsberger articulated the underlying eco-nomic rationale for post-employment covenants:

In a service-driven economy, the ability of a business to protect its investment in human resources, customer rela-tionships, and confidential business information is critical to ensuring continuing economic viability. In this milieu, businesses increasingly rely upon post-employment cov-enants not to compete to protect these investments. The growth in the use of such covenants also represents a sound response to increased levels of employee mobility.…1

A post-employment covenant (PEC) may restrict a former employee’s (or former partner’s) ability to start up a compet-ing business or consultancy, or accept a position with a com-peting firm in a certain capacity, within a specific time period and/or geographical region. Restrictions may also apply to contact with customers of the former employer, or “raiding” employees from the former employer.

Courts have consistently found that PECs may not

be enforced if their restrictive terms are so broad that they unreasonably prevent the former employee from (a) earning a livelihood or (b) providing services that are vital to the pub-lic. For the former, the connected themes of labor mobility and freedom to earn a living have survived for five centuries in the evolution from English and U.S. common law.2 With respect to the latter, the interests of the public are considered to be controlling in most cases. Mobility of physicians, for example, is often viewed by courts as a matter of public inter-est. Attorney mobility, likewise, may be perceived as in the public interest because of the courts’ interest in allowing rep-resentation of one’s own choosing. On the other hand, courts are generally more likely to enforce PEC-based restrictions on corporate officers, because of their deep and intimate organi-zational knowledge.

If a former employee or partner commits theft or unau-thorized transfer of trade secrets, customer lists, or unique corporate processes of competitive advantage, a breach is more obvious and enforcement is more likely. With re-spect to trade secrets, civil liabilities may apply under the Uniform Trade Secrets Act, adopted by 46 states. Derived remedies may include injunctions or damages. Therefore,



3 For example, see Scruggs Mgmt v. Hanson, No. 2-05-413-CV, Court of Appeals of Texas, 2nd Dist., Ft. Worth, 2006 Tex. App. Lexis 10272, November 30, 2006; and Alw Mktg Corp v. Hill, No. A92A0663, Court of Appeals of Georgia, 205 Ga. App. 194; 422 S.E. 2nd 9; 1992 Ga. App. LEXIS 1135; 1993-2 Trade Cas. (CCH) P70, 434, July 9, 1992.

a non-compete agreement is not required for such relief, al-though non-disclosure of trade secrets is often referenced in employment agreements.

PECs and Forensic AccountantsIncreased use of these contracts has led to a growth in

court cases to decide whether a particular PEC is enforceable, and what sort of remedy—possibly including injunctive relief and/or economic damages—may be appropriate. When an employer accuses a former employee of breaching the cove-nant and the dispute goes to court, or when a covenant breach leads to a court-enforced settlement, forensic accountants may be called on to estimate economic losses.

Large damages in these cases appear to be rare. The reason may be due to the reluctance of the judicial system to add to the burden of indirect penalties as to the former employee’s ability to earn a livelihood.

A critical failing on the part of many businesses is that they simply point out contract language, often not specific as to loss computation, as the basis for the court to deter-mine economic loss. While courts readily make decisions regarding enforcement conditions (e.g., compliance with reasonable territorial or time restrictions as to employment of a competing business), frequently courts dismiss claims of economic loss because no specific computation based in fact has been entered into the judicial proceeding.3

Lost Profit Unifies StatesWhat damages may an employer recover, and from whom,

for breach of a covenant not to compete? Regarding this query, a state-by-state review of Malsberger’s reference guide indi-cates that lost profit is a central theme. There are variations, however, which include the following specifications:• The measure is employer loss, rather than employee gain

(California).• No fixed cost can be allocated in loss computation

(Connecticut).• Prospective profit losses may be considered (North

Carolina and Nebraska).• The employee may be liable for raiding employees

(District of Columbia and Pennsylvania) or the cost to train replacement employees (New Jersey).

• Prejudgment interest may be allowed (Kentucky).

Hence, lost profit is a unifying framework of loss analysis among the 50 states and the District of Columbia.

Loss Computations Within these boundaries lies ambiguous terrain in which

courts apply rules of reason given the specific circumstances of each case. Estimates of losses, whether formal or informal, are useful from three economic perspectives:1. The firm’s decision to sue a former employee to enforce

a PEC, flowing from comparing economic loss to the economic cost of legal action (a cost/benefit assessment)

2. The loss estimation as a basis for out-of-court settlements, or buyouts

3. Lost profits for the purpose of damage awards

Another focal point is that damages awarded are intended to restore the former employer to its position had the breach not occurred. However, the determination of lost profits relies on different standards of specificity across jurisdictions. The standards may range from what is a reasonable estimate to a requirement of certainty.

A survey of the data in Malsberger reveals two states, Florida and Louisiana, with statutes that govern decisions regarding covenant breaches. The issue of post-employment covenants has not been decided in Hawaii, Mississippi, Mon-tana, North Dakota, or Oklahoma. The remaining states and the District of Columbia have decided cases upon the courts’ rules of reason. Consider Idaho, which recognizes goodwill and profits as distinct types of damages, while a Maine case only focused on revenues as the measure of loss. And there is Minnesota, which has admitted the concept of vicarious lia-bility, meaning the new employer may be liable for damages.

From the perspective of economic theory, the measured loss is the reduction of profits caused by a breach. Practical measurement requires applying this theory to the facts, for ex-ample through the prism of opportunity costs. Computation of losses can be roughly divided into three tiers of analysis:1. Applying familiar skills to analyze the general business

climate, specific industry, and specific markets relevant to the loss

2. Using sophisticated, emerging analytical techniques, such as incorporating survivor probabilities

3. Computing losses with novel approaches that incorporate emerging trends, such as those derived from technological innovation and shifts in human values

Example of a PEC BreachI will use a hypothetical example to illustrate. Assume an

employee (a knowledge worker, whom we’ll name KW) has signed a non-compete agreement with her current employer.



This agreement states that if KW terminates employment, she cannot work within the same occupation in the employ-er’s product market area (defined as the state of Tennessee) for three years. The employer’s motivation is the risk of profit loss due to KW’s familiarity with its customer base and its con-fidential internal production processes. KW quits the current employer and within three months is employed in her same occupation with a new employer within the state. (To expedite, let’s further assume injunctive relief was denied. Note that, un-like other types of cases, an interesting aspect of post-employ-ment covenants is the high probability of pursuit of damages even when injunctions are denied.)

The employer brings a breach of PEC claim, and a foren-sic accountant is hired as an expert to calculate loss of profit. Of course, the simplest approach is to measure profit before and after the termination event, perhaps adjusted with simple accounting variables, such as related resource costs or sales level. Depending on case specifics and duration, the foren-sic accountant may further adjust for such factors as inflation and industry variations. Also, when the situation and avail-able data merit such consideration, survivor rates are a very important adjustment.

In fact, in a high-profile case, applying survivor prob-abilities may be crucial. These dimensions include not only probability of the firm’s survivorship (e.g., corporation, law or medical practice, or consulting firm), but customer reten-tion, product life cycles, and employee turnover. The last item could be quite significant should KW’s direct or indirect raid-ing activity lead to a drain of key employees.

As an example of survivorship, consider a non-compete agreement that restricts a former employee of an insurance company from working for a competing insurance company for three years. The ex-employee breaches this condition, and the ex-employer seeks damages based on lost premiums from policyholders who subsequently terminate their coverage. The crux of estimated loss could highly depend on estimating how many of those policyholders would have normally (i.e., ac-cording to statistical probability) dropped coverage anyway; or put another way, have been retained as policyholders from one year to the next.

Even within these categories, there are subcategories. For example, with respect to the current employer, events such as mergers and acquisitions, age of the firm, and size of the firm could be relevant to the analysis. Furthermore, some breaches may merit a valuation of lost contracts or lost ongoing busi-ness relations with customers. If more details are warranted in this line of analysis, clear metrics are essential. These met-rics might include expressions of number of sales per custom-er or average value per sale for all customers, either of which would likely require conversion to lost profits attributable to customers lost from the breach.

The forensics expert may even compare customer reten-

tion probability under “normal” business conditions to the de-viations allegedly derived from the breach. The cost of good data and good analysis at this level of detail would seem justi-fied only with reasonable chance of damage recovery. How-ever, another reason may be the firm’s intention of establish-ing a deterrent threat to those contemplating a PEC breach.

This illustrates the essence of the practical problem of whether businesses can show a reasonable and factual com-putational basis for actual or probable losses for a growing proportion of the workforce restrained by agreements not to compete.

ConclusionA fair conclusion regarding the forensics of non-compete

agreements is that there is no consolidated theory or law of the land. States rule, although lost profits is a unifying theme. The intrigue of this situation is that it potentially produces a variety of analytic approaches, depending on the state or states in a particular case. VE

Richard L. Hannah, PhD, is professor of economics at Middle Tennessee State University in Murfreesboro. He teaches labor analytics, employ-ment relations, and employee benefits at the graduate and undergradu-ate levels. He also teaches in MTSU’s MBA program and Honors College. Current research focuses on individual employment contracts and human capital issues. Hannah’s professional activities include service as an expert witness. e-Mail: [email protected].

This article was adapted from an article originally pub-lished in the Journal of Business Valuation and Economic Loss

Analysis (Vol. 3, Issue 1, available at www.bepress.com/jbvela/vol3/iss1/art9), with permission from the publisher, Berkeley Electronic Press.

Want to Earn a Bigger Piece of the Pie?The Middle Market LandscapeThe robust middle market (businesses with revenues between $5MM and$500MM) is being driven by a number of factors that are unique to today’seconomy, including baby boomer exits, rapid consolidation of many industries,and rapid changes in business driven by the technology and information age

The OpportunityNow is the time to capitalize on your past business valuation training andexperience—as well as your present proximity to deal flow activity—and offeryour middle market clients much-needed M&A services.

The middle market generates lucrative fees for investment bankers, with deal fees ranging from a low of $200K to several million dollars. The averageM&A fee is somewhere around $400,000.

But there are barriers to entry, including the high cost of marketing and technical support, a lack of training and experience, generating and sustaining dealflow while executing current engagements, lack of a track record and credibility, and the need for technical resources supplied by larger investment banks.

The McLean Group (TMG) has a unique program, however, for potential investment bankers and deal makers that provides training, marketingand deal support, national and international branding, regulatory compliance support, and licensing.

The TMG Turnkey ProgramThe TMG program is designed—in short—to put NACVA members in the M&A business. (The majority of TMG bankers are, in fact, NACVAmembers.) Here, more specifically, is what TMG provides NACVA members:

• Training, both formal and informal, in how to market M&A services• Senior banker technical support—in person if requested—on deal engagements• Full backroom and analytic support for bankers• National website describing TMG and each of its bankers• National branding• Shared cost marketing programs including direct mail and/or e-mail campaigns, seminar speakers, marketing collateral such as brochures,

business cards, and logos, telemarketing programs, and e-mail newsletters

The McLean GroupThis intensive, soup-to-nuts program is cosponsored by the Consultants’ Training Institute (CTI) and The McLean Group. With headquarters inWashington, DC and offices in Sacramento, Winnipeg, Boston, Columbus, Richmond, Raleigh, and Atlanta, The McLean Group is a middle marketinvestment bank and a member of the National Association of Securities Dealers (NASD). Headed up by Chairman and Managing Director DennisJ. Roberts, CPA/ABV, CVA, TMG provides merger and acquisition, private institutional equity and debt formation, valuation services (through aseparate affiliate), and transaction related consulting services to the middle market. TMG maintains a tight international affiliation with a number ofother banks, and collectively executed the third largest number of M&A transactions in the world last year.

Step by StepIs the challenging mergers and acquisitions discipline right for you? Test the waters: TMG, the Association of Certified Merger and Acquisition Professionals (ACMAP), and the CTI offer the following courses:

• The CTI’s four-hour Introduction to Mergers & Acquisitions that addresses the fundamental issues of M&A as well as an introduction to conducting an M&A practice

• ACMAP’s five-day Mergers & Acquisitions Workshop that simultaneously addresses both the sales side and the buy side: this intensivetraining program leads to the Certified Merger and Acquisition Professional (CMAP) designation and is designed to put participants

on the fast track to the M&A world

• TMG’s four-hour training and introduction to The McLean Group Procedures, Resources, and Processes

Whether you’re thinking of offering M&A advisory services as an adjunct to your existingpractice, as a stand-alone entity, or if you’re ready to take the plunge into investment banking,The McLean Group, ACMAP, and the CTI have the training and support you’ll need to make your mark in the high-powered field of middle market mergers and acquisitions.

For more information on The McLean Group Investment Banker Support Program,including the training session referred to above, call (703) 827-0200. For the CTI and ACMAP courses, visit the Training area of the NACVA website: www.nacva.com.Or call Member Services toll-free: (800) 677-2009.

1660 International Drive, Suite 450McLean, Virginia 22102Tel: (703) 827-0200 • Fax: (703) 827-0175Internet: www.mcleanllc.com



1 Time, December 13, 2006.2 “Social Media in the Inc. 500: The First Longitudinal Study,” by Eric Mattson and Nora Ganim Barnes, PhD, University of Massachusetts Dartmouth Center for Marketing Research, 2008; available at www.umassd.edu/cmr/studiesresearch/blogstudy5.cfm.

3 Already the Internet is “the new prime time,” as people in the U.S. depend more on the Internet for news and entertainment than on any other medium, according to comScore (www.comscore.com).

How to Use the New Internet for Business Development

by Elgé Premeau and David M. Freedman


Ten years ago, many managers of small profession-al practices were wondering if they needed their own company website. Many still get by without one today, but most consider a website essential

for practice development. Doubts about whether to have a website seem quaint now.

Ten years from now, the issue of whether to engage in the “Web 2.0 conversation” will seem quaint.

How the Web Was WonWeb 2.0 refers to the new version of the World Wide

Web, which is more collaborative and “user-generated” than the previous version. In the early days of the Web, content flowed mainly one way: from websites to users. Web 2.0, also called the social Web, enables users—people with no web programming skills, HTML knowledge, or website develop-ment experience—to create content and form communities of content creators. In fact, Time magazine named such users (“You”) its Person of the Year in 2006.1 Instead of flowing one way, online content now flows every which way and back again—it’s a conversation.

Web 2.0 marketing tools include social networking sites (like Facebook and LinkedIn), which let you build your personal, professional, or company profile online, and connect with other site members to build relationships, share referrals, educate each other, and form virtual communities. Social me-dia sites make it easy for anyone to publish original content,

including news (Newsvine), information (Wikipedia), photos (Flickr), videos (YouTube), and user-generated content of all kinds on blogs (Blogger, WordPress), micro-blogs (Twitter), specialized wikis (Wikispaces, PBwiki, Google Sites), and fo-rums (Google Groups). All of the above media (the ones in parentheses) are free of charge and easy to use. And there are many more of them.

In a study conducted this year by the University of Mas-sachusetts,2 44 percent of the Inc. 500 companies said social media marketing strategy is “very important.” That’s up from 25 percent in 2007. Almost 40 percent of the Inc. 500 compa-nies have company blogs (compared to 11.6 percent of For-tune 500 companies).

Engaging in the Web 2.0 conversation will never be the only marketing strategy you need, and many practitioners will get along without doing much of it. But active marketers need to know what the conversation is all about, because it has be-come a powerful marketing strategy for many businesses. And social media marketing becomes more powerful as more busi-ness people use the Internet as a primary source of news, in-formation, and networking opportunities.3 By the way, social media can be enormous fun if you’re the least bit geeky.

Some territories on the social web have already been staked out, developed, and densely populated. The business-to-business, financial services territory is still largely a frontier, however, and you have a chance to be a pioneer in this “space.” There is gold in them hills.



Where to Dig InIf you are new to the Web 2.0 conversation, it might seem

strange and overwhelming. People (especially teenagers) who spend a lot of time online seem to speak a new language. As-suming you can find a few extra hours per week, how and where do you begin to develop business using these new online tools? You can begin by wading into one of three entry points: blogging (more importantly, commenting on other people’s blogs), networking, or publishing content.

BloggingA blog is essentially an online journal consisting of short

“posts” listed in reverse chronological order. Old blog posts are archived and searchable by date and by topic, key word, or “tag.” When blogging started to explode in popularity a few years ago, they were primarily personal in nature; but they’ve increasingly been embraced by the business com-munity as a way to publish information and opinions, gain exposure in the marketplace, gratify ego, improve search engine optimization, generate click-throughs for corporate websites, and create a dialogue with existing and prospective customers, strategic partners, and the media.

Blogs look and work like traditional websites except for three important distinctions. First, blogs are very easy to build, “populate” with content (including text, images, vid-eo, and links), and update frequently. Most blogs also enable RSS, which allows readers to “subscribe” to a blog that they want to read regularly. The RSS (really simple syndication) feed sends each subscriber a notice by e-mail or to his or her RSS reader (such as FeedDemon, or the reader built into your browser) whenever that blog is updated with a new post.

As a blogger, you can “feed” your posts to your subscrib-ers. You don’t have to know how RSS works; the blog soft-ware takes care of it all for you.

There are a few good blogging “hosts,” such as Blogger and WordPress, that let you do all that free of charge, but some customization options are limited. You can pay a mod-est fee and have many more options (including more design templates and use of your own domain name) with a service like TypePad.

The second distinction between blogs and websites is the reader’s ability to respond to blog posts by leaving com-ments. The blogger can respond to those comments in turn, other people add more comments, and so on, creating a dia-log. In fact, communities can sprout up around robust com-menting activity.

The third distinction is that search engines tend to rank blogs differently from traditional website pages in their search results, usually resulting in a higher ranking for recent blog posts. Some bloggers use their blogs to attract click-through traffic to their main websites. And some use blogs instead of

traditional websites, as blogs can feature brochure-type infor-mation about you and your firm.

Blogging can be fun and a powerful practice development tool, but it requires a serious commitment to posting valu-able information, and posting it often—like weekly at the very least (some post more than once a day). Just like a newsletter, your readers will tune you out if you publish seldom or if your posts just aren’t very relevant or useful.

Commenting on BlogsWhether or not you aspire to be a blogger, the best way to

dip your toe into the “blogosphere” is to read other people’s blogs, and occasionally write comments on blogs.

By commenting on blogs, we’ve built relationships with clients, strategic partners, and subcontractors who have re-ferred business to us and vice versa.

To start, use special blog search engines like Technorati (www.technorati.com) or IceRocket (www.icerocket.com) to find blogs about your practice areas, industries in which you do business, legal and regulatory issues, etc. For market-ing purposes, focus on issues that your clients are likely to be interested in. Subscribe to a few blogs via RSS, follow the conversations, and learn what your clients are talking pas-sionately about (“passion” has become the marketing buzz-word of 2008). Then look for opportunities to contribute comments, answer questions, correct factual inaccuracies, and offer tips.

To comment on a blog, simply look for the “comment” hypertext link, usually at the end of a post, and click on it. Sometimes there will be a number before the “comment” link, indicating how many comments have already been posted. When you click on the link, you’ll read other people’s com-ments, if any, and have an opportunity to add yours by filling out a form.

Commenting on other people’s blogs is much easier than publishing your own blog, and the exposure can be just as great, since search engines index comments as well as the underlying blog posts. Many blogs, but not all, let you include your e-mail address and sometimes your web-site URL with your comment. That makes it possible for people who read your comments to contact you directly, or visit (click through to) your website. It also has the po-tential to improve the search engine rankings of your own website, because incoming links is one of the metrics used by search algorithms.

Occasionally a blogger quotes from a comment or series of replies on another blog, and these comments become part of a wider conversation, in effect “syndicating” the original con-tent. There have even been instances where mainstream media pick up these conversations and quote authoritative blog com-ments, treating them increasingly as reliable sources.



One caveat about commenting: Once you post a comment, there’s no turning back—you can’t withdraw it, and there’s no guarantee that you can persuade the blogger to delete it. You can post a cor-rection (or apology), but your original comment will be visible, archived, and searchable for who knows how many decades or centuries. So don’t get too vi-tuperative with your comments.

Then there’s micro-blogging, using sites like Twitter, which has exploded in popularity in the past year (it has well over 2 million registered users), even for business use—oh, and for pres-idential campaigns. Twitter’s appeal is that it is a blogging tool, a streamlined social network, and an instant-messag-ing substitute—and it is optimized for mobile phones.

Even if you don’t blog or comment, you should sooner or later read blogs and listen to the conversation. Your competitors are doing it.

Networking You have heard of social network-

ing sites like MySpace and Facebook (each of which claims 100 million members), and professional networking sites like LinkedIn. These sites evolve faster than bacteria, with new features and applications, and they have become little Internets all to themselves, provid-ing rich social experiences.

Those three aren’t the only social networking sites you can join. There are literally thousands out there, with new ones coming online every week. You can search for specialized, niche networks (and even create your own) on websites like Ning and Google Groups. While most of the smaller social networking sites focus on a nar-row interest, theme, or hobby, there are many networking sites catering to spe-cific industries, professions, econom-ics, and various aspects of business and commerce.

An online social network provides a virtual community where people can

connect with others having similar in-terests or goals. Each member creates a profile that can include all manner of biographical data, a resume and/or work history, contact info, photos, videos, and links to their website and blog. You can limit how much of that information (if any) can be viewed by the general public, and how much can be viewed only by the people whom you invite to be your “connections.” In effect, your profile becomes your online presence if you don’t otherwise have a website.

Businesses and organizations can register as members of these network-ing sites. Ernst & Young, for example, has an E&Y Careers page on Face-book, where it lists internship opportu-nities, publishes press releases and bro-chures related to employment, answers frequently asked questions, conducts polls (and posts the results), and shows photos and videos. The E&Y site has collected more than 17,680 “fans”—people who visited the firm’s Facebook profile and wanted to connect.

LinkedIn recently launched a “Companies” section, where firms can post profiles. More than 400 compa-nies with less than 10 employees estab-lish profiles there as of October; as did almost 4,000 U.S. accounting firms of all sizes; and 291 capital markets firms in the Chicago area alone.

Social networking sites encour-age you to invite your contacts to “connect” with you or become your “friends.” These connections, espe-cially on LinkedIn, facilitate net-working for business and employ-ment opportunities. You can upload your Outlook or other contact direc-tory to LinkedIn to facilitate inviting your contacts to connect. If you in-clude your college, high school, and former employers in your profile, LinkedIn helps you reconnect with old classmates and colleagues. Your LinkedIn profile page (to which you can limit access by the public) tells you who has viewed your profile in

the past month. The site has job listings and a question-and-answer section; you can ask a question on any subject, and people whose profiles indicate exper-tise in that subject may answer. Ask-ing a question helps you with research and at the same time connects you with people you might like to know. Answer-ing questions in your area of expertise is a great way to establish your authori-tativeness in the LinkedIn community. The person who asks the question has the option of selecting the most useful answer, and the answerer gets special recognition.

When you create a profile on LinkedIn, you can link from your own website to your LinkedIn profile with a “widget” (variations shown below) that LinkedIn provides in the form of HTML code.

LinkedIn provides HTML code that you can use to create a link from your own website to your LinkedIn profi le. These are just a few of the link-button images provided. Even if visitors to your website decline to click on the link, the message you convey is: “I am connected.”

Hyper-syndicate Your ContentAnother entry point into the world

of Web 2.0 marketing is publishing informative content on your website, such as articles, white papers, audio and video recordings of your seminars, and links to online resources like the Tax Code, regulatory agencies, relevant court cases, and specialized calculators. This has been referred to as “journal-ism-level” (as opposed to promotional) content. You can make your website a reliable resource for your clients.

If you don’t have your own web-site, you can build one very easily using consumer-friendly services such as Wet-Paint or WordPress.



In the Web 1.0 environment, when you published informative website content, the objective was to attract visitors to your site. In the Web 2.0 world, the objective is not only to at-tract visitors but also to get people to distribute your content “virally” by forwarding it, sharing it (see sharethis.com), recommending it (see digg.com), bookmarking and tagging it (see deli-cious.com), referring to it, and linking to it in their blog posts and blog com-ments, and generally embedding it in the Web 2.0 conversation. This sort of wide distribution of content is called hyper-syndication.

Of course, you can boost the dis-tribution process by referring to your content, and provide hypertext links to it, in your own blog comments and other interactions with social media and networking. (You can also submit your content to digg.com to get the ball rolling.) But be careful not to refer to your own content in an obviously self-serving, promotional way—do it only if it is relevant to the conversa-tion or answers questions that people are asking. If the community smells self-serving promotion, they will not just ignore you; they might scold you, possibly resulting in a “blogstorm” of reproach.

Not only does hyper-syndication result in potentially more click-through visitors and broader exposure, it also can elevate your ranking in search en-gines enormously. Search algorithms reward content that the community finds useful. And that’s the key: It must be useful, so make an effort to produce informative content that is insightful, relevant to your target audience, easy to comprehend, and up-to-date. Then update it whenever appropriate.

Monitor Buzz about YouDo you know what other people

are saying online about you or your firm? Especially if you are opinion-ated or challenge the status quo, it is

possible that people will talk about you—maybe in laudatory terms, may-be not. If you have a very high profile, there may be a Wikipedia entry about you. You need to monitor what is be-ing written about you, and you can do so using media monitoring tools like Google Alerts and Factiva.

If you find inaccurate informa-tion or defamatory claims, be careful how you respond. Work quickly and diplomatically to correct factual er-rors, but approach the process as a collaboration, in which you are a par-ticipant rather than an enforcer. If you threaten to sue, or try to take control of the conversation—or appear disin-genuous—you will be excoriated by indignant hordes, and your efforts will backfire.

Return on InvestmentLike most forms of public relations,

it is very difficult to measure ROI for social media marketing. You can count the number of e-mails you receive from people who read your blog comments, connections you have on a social net-working site, hits to your website that originate from social media links, etc.; but it’s hard to calculate how those “im-pressions” help you get new engage-ments or affect your bottom line. So from a cost-benefit point of view, we can’t tell you that you must engage in the Web 2.0 conversation today or you will be left behind—it’s not a snooze-lose situation yet. But it represents a relationship-building opportunity for those who enjoy Internet technology or feel adventurous.

There are dozens of ways to engage in the Web 2.0 conversation in your narrow field, and be careful, because it can be addictive. Don’t lose sight of the fundamental fact that marketing professional services is about building relationships. Every word or image that you post online should be crafted ap-propriately and diplomatically with that objective in mind. VE

Elgé Premeau is an Internet marketing consultant, and the principal of eMar-keting Strategist (www.emarketingstrategist.com) in Portland, OR. She advises service businesses on Internet marketing strategies, websites design

and development, e-newsletters, search engine optimization, pay-per-click campaigns, blogs, article placement, and copywriting.

David M. Freedman is the senior editor of The Value Examiner. He has worked as a financial, legal, and technology journalist for 30 years, and is the author of “Web 2.0 Basics for PR,” available at www.web2ba-

sics4pr.com.

The authors thank Gregory L. La-Follette, CPA, CITP, for his assistance on this article. LaFollette is senior man-ager of tax and technology consulting at Eide Bailly, LLP, and executive editor of The CPA Technology Advisor. His blog is TheTechGap.com (www.thetechgap.com); and his podcast series, “Intersec-tion Live” (featuring news, trends, and products from the intersection of tech-nology and public accounting), is avail-able via iTunes.



The American presidential elections are regular media spectacles that are unique worldwide. The candidates pass through a multitude of prelimi-naries and try to convince the delegates of their

competence. Researchers know, however, that competence is rarely the decisive factor for a politician’s success.1 Win-ning an election requires a compelling personality, rhetorical capabilities, and confidence.

Researchers in the Psychology Department at Princeton University found that elections are largely determined by can-didates’ facial characteristics:2

[I]nferences of competence based solely on facial appear-ance predicted the outcomes of U.S. congressional elec-tions better than chance (e.g., 68.8 percent of the Senate races in 2004), and also were linearly related to the margin of victory. The findings suggest that rapid, unreflective trait inferences can contribute to voting choices, which are widely assumed to be based primarily on rational and deliberative considerations.

Likewise, for a valuation professional making a presentation to a prospective client, getting the engagement often depends on having a compelling personality, rhetorical skills, and confi-dence—as much as it depends on demonstrating competence.

Claudia E. Enkelmann, from the Institut Enkelmann in Königstein, Germany, has made a close analysis of Barack Obama’s secrets of success based on his style of communicat-ing rather than any sort of empirical measure of competence.3

Enkelmann points to a dozen factors that are the key to his success:1. He enunciates clear goals, is decisive, and communicates

a focused vision, Engelmann says. He doesn’t seem to have doubts.

2. He apparently enjoys himself and has a good sense of humor. His smile and enthusiasm give audiences an appetite for the future—with him.

3. His body language (grand gestures, assured eye contact, and a dynamic walk) radiates power, pep, and vitality. At the same time, he transfers an incredible tranquility to his audience.

4. His rhetorical skills rival those of John F. Kennedy and Martin Luther King. He is highly articulate but comprehensible, and conveys inspiring messages. He has the courage to pause, rather than shout, for emphasis. He often uses “trios”: “We can end the war. We can save the planet. We can change the world.”

5. His deep voice tends to inspire confidence.

Rhetorical Skills Help Win New Business

What Valuation Professionals Can Learn from Obama

By Andreas Creutzmann, WP, StB, CVA, Dipl.-Kfm.


1 Max Kaase, Hans-Dieter Klingemann, Wahlen und Wähler. Analysen aus Anlass der Bundestagswahl 1990, First Edition, VS Verlag für Sozialwis-senschaften, Wiesbaden, 1994, page 472–505.2 Alexander Todorov, Anesu N. Mandisodza, Amir Goren, & Crystal C. Hall

“Inferences of Competence from Faces Predict Election Outcomes,” Sci-ence, June 10, 2005, Volume 308, No. 5728, pp. 1623–1626.3 Claudia E. Enkelmann, Obamas Erfolgsgeheimnisse, Der Erfolgreiche Weg, Issue No. 3, 2008, p. 20.



6. He appears empathic and sympathetic, showing openly that he is interested in others.

7. He stirs people’s emotions with his vision of (and belief in) a better future. He conquers people’s hearts through emotional appeals.

8. He is idealistic and arouses hope in people. His own biography is an American dream, with the promise of boundless advancement.

9. He tries to present himself as a uniter, not a divider.10. He motivates people. He mobilized many previous non-

voters and donors to his campaign.11. He wields influence. For example, he has TV hostess

Oprah Winfrey and Nobel Prize winner (and former vice president) Al Gore on his side.

12. He has a strong, supportive partner. Michelle Obama is very clever, and Barack trusts her instincts. He said, “I got many ideas only with her help.” The Obamas know that they are successful together or not at all.

Lessons for Valuation ProfessionalsWhether or not you voted for Barack Obama, you can

learn from his winning style of communication, and improve your chances of making successful presentations. Here are three keys to professional success, Obama-style:

1. Clarity of GoalsObama knows what he wants. A valuation professional

who knows what has to be done, in what sequence, and at which point in time in order to successfully implement a valu-ation project, radiates this through his statements and body language. You even convey this clarity by your voice on the telephone. These signals assure the client that they can trust you to manage the project.

Another important principle is that you should write down all goals for accomplishing a project. Studies have shown that people who write their goals on paper are more successful than those who do not, but this principle is often neglected.4 If specific goals and milestones are written down, with fixed deadlines for achieving them, not only are they easier to remember and refer to, but they are clear and visible to clients and members of your team.

Business valuation professionals should create a schedule of major goals and sub-goals or milestones, so that there are relatively short periods between them. As long as you do not overestimate what you can accomplish in a given period, and know that you can deliver what you promise to the client, you will be confident when you make the promise.

4 Henriette Anne Klauser, PhD, Write It Down, Make It Happen, First Edi-tion, Simon & Schuster, New York, 2001, page 203.5 Apicella is a PhD candidate in biological anthropology at Harvard Univer-sity, Department of Anthropology ([email protected]). Her study also indicated that in mate selection, as opposed to professional and public

speaking situations, women tend to prefer men with deeper voices, while men tend to select women with higher voice. See http://news.bbc.co.uk/2/hi/science/nature/7013136.stm.6 You can fi nd at www.nsaspeaker.org professional trainers who specialize in this area.

2. Rhetorical SkillsEnkelmann’s study indicates that a man’s deep voice

inspires confidence. What about a woman’s voice? Anthro-pological researcher Coren Lee Apicella has found that for American women, a high-pitched voice connotes youth and inexperience, while a lower pitch inspires authority and as-surance.5 You can develop such a voice with vocal training, which most good actors do (and which I have done for almost 20 years). This applies to meetings as well as presentations.

Simple, clearly structured sentences that can be under-stood by non-financial employees of the client are persuasive. Valuation professionals who think they can harangue clients with jargon, abbreviations, acronyms, and complex financial theories should not be surprised if many clients say after the presentation, “We are still confused, but on a higher level.”

The task of the rhetoric is to provide the means necessary to create a common sense of understanding between speaker and listener or a thing in common in a one-to-one conversa-tion—and to reveal differences. The core question is: How? How do I act toward others and how can I influence people without manipulating them?

Albert Mehrabian, currently professor emeritus of psy-chology at the University of California in Los Angeles, dis-covered that only 7 percent of communication comes from spoken words. Thirty-eight percent is from the tone of the voice, and 55 percent is from body language. That’s why it is important to strengthen your overall presentation skills, not just the words you utter.

A professional trainer can help you improve your rhetori-cal skills on three levels:6

• Voice training. The starting point is to improve your breathing technique with the aim of developing a likeable, trustworthy, and persuasive voice.

• Listening and responding. Improve the effectiveness of asking questions, listening to people’s answers, and responding to their questions. This training helps the professional lead critical conversations and negotiations successfully.

• Public speaking. Experienced public speakers become effective only by practicing. Good trainers give participants enough opportunities to improve their speaking skills by practical exercises.

A good way to find a trainer near you is by using a search engine with the key words “speech trainer” or “presentation trainer” in your city (or the nearest big city). Or in the U.S., contact Speechworks (www.speechworks.net), a consulting firm



owned by Joey Asher, The Value Examiner’s “Keys to Growing Your Practice” columnist (see page 32). Toastmasters Interna-tional (www.toastmasters.org) is a well known organization that helps people develop public rhetorical and speaking skills.

3. Empathy is Key to SuccessEmpathy is the ability to imagine oneself in another’s

place and understand the other’s feelings, desires, ideas, and comprehension level. Obama has the gift of empathy.

How does a professional learn to be empathic? The easiest way is to listen to your client and to ask questions. Valuation pro-fessionals who run from project to project, who have a multitude of milestones and deadlines in their heads, are sometimes more occupied with themselves than with responding to their clients. Empathic valuation professionals are more successful at devel-oping good relationships with clients, based on trust.

Winning with PersonalityNone of the items in the above list of Obama’s secrets of

success are related to his expertise. They are characteristics relating to his personality. Does this mean that a valuation professional’s expert qualifications do not matter anymore in gaining engagements? No! But we know that expertise alone is not the key to success. Clarity of goals, rhetorical skills, and

empathy are “soft” characteristics that clients consider when they decide who to hire as their adviser. VE

Andreas Creutzmann, WP, StB, CVA, Dipl.-Kfm., is CEO of IVA Valuation & Advisory Wirtschaftsprue-fungsgesellschaft, in Frankfurt, Germany (www.iva-valuation.de). He is also managing partner of Creutzmann & Co. GmbH Wirtschaftspruefungsge-sellschaft Steuerberatungsgesellschaft, Landau. As an expert in shareholders´ compensation claims, he serves as a court-appointed expert. Creutzmann is the founder and chairman of the German Chapter

of the International Association of Consultants, Valuers and Analysts (www.iacva.de). As a professor at the Calw-University, he teaches in the field of business valuations and value-based management. Creutzmann is a member of the professional advisory board of the business valu-ation magazine BewertungsPraktiker. He is also a member of the German Speakers Association.

Editor’s note: Regarding the designations after the au-thor’s name, WP is the German equivalent of CPA; StB is a German designation for tax advisor; and Dipl.-Kfm. means the author earned a degree in business administration (at Mannheim University).

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AttorneysAsk The

Question: Should a valuation expert ever allow the hir-ing attorney to edit a draft of a valuation report?

Alan I. Greene, Attorney:The short answer is yes. The long answer is that it is okay

for an expert to let someone edit a report to correct errors of spelling, grammar, punctuation, and style, and to generally make the report more understandable and presentable. But it is not okay to let the attorney make any substantive changes, including revising data, calculations, or conclusions.

The attorney might make a useful suggestion for a for-mat change that clarifies the opinion without changing the substance. For example, you may want to change the order of the items in a numbered list to present a more logical se-quence.

What are the consequences if an expert lets an attorney make substantive changes in his or her valuation report? If the opposing side can prove that the attorney made a change that altered the expert’s opinion, then the judge might strike

the report as evidence and not allow the expert to testify. That not only hurts the hiring attorney’s client’s case, but also could mar the expert’s reputation for integrity and ob-jectivity.

In some cases, the opposing attorneys will agree before expert discovery begins that neither side will ask the other to produce drafts of their experts’ reports, which avoids nit-picking and saves time. On the other hand, if an attorney suspects that the opposing lawyer influenced an expert’s opinion, a prior agreement will restrict the attorney’s ability to show such influence. VE

Alan I. Greene is an attorney with Hinshaw & Culbertson, a law firm based in Chicago. Contact: [email protected].

Should You Let an Attorney Edit Your Report?



Court CornerJohn Stockdale, Jr., Esq., Schafer and Weiner, PLLC

Stockdale's

EstateIn In re Buonamici, 2008 WL 3522429 (Del. Ch. Aug.

11, 2008), the Delaware Chancery Court determined that a guardian did not breach her fiduciary duty to her ward where both the guardian and the ward held interests in the closely held family businesses, which the guardian sold to fund the ward’s living expenses. The court held that the guardian did not breach her fiduciary duty when she relied upon the cor-porate accountant (who was also her personal accountant and the accountant of her sibling-shareholders) to determine the value of the businesses and who six years later was found to have undervalued the businesses. Notwithstanding its finding of no breach of fiduciary duty, the court held the guardian liable under an unjust enrichment theory for the pro rata share of the businesses’ undervaluation.

In Gross v CIR, 2008 WL 4388277 (U.S. Tax Ct. Sept. 29, 2008), the U.S. Tax Court decided issues relating to indirect gifts and valuation of limited partnership interests, where the limited partnership primarily held marketable securities. The court determined that despite the fact that the gifts and the lim-ited partnership agreement were executed on the same day, a general partnership was formed six months earlier between the same parties and having essentially the same terms as those listed in the limited partnership agreement. Further, the court found that a combined 35 percent discount for lack of market-ability and minority interest was appropriate, where the parties stipulated that 35 percent was the appropriate discount to be applied to a 22.25 percent interest in the limited partnership.

DivorceIn Fickle v. Fickle, 2008 WL 3843846 (Tenn. App. Aug.

19, 2008), the Tennessee Court of Appeals affirmed the lower court’s valuation of a single-asset real estate business that was the husband’s sole and separate property. The business oper-ated a farm, which was farmed by a tenant farmer and lacked the capacity to be developed. The court valued the business based on the value of the real estate, and it rejected a stock valuation of the business inclusive of discounts for built-in

capital gains and lack of marketability. The court determined that the advancement of funds to the business from the mari-tal community to the business was sufficient to characterize the appreciation in the real property as marital appreciation, since there was no evidence that the appreciation resulted solely from market forces.

In In re Marriage of Thornhill, 2008 WL 3877223 (Colo. App. Aug. 21, 2008), the Colorado Court of Appeals con-cluded that a trial court has the discretion to apply a discount for lack of marketability. It rejected the wife’s position that a discount was inappropriate as a matter of law and rejected the analogy of the divorce situation to that of dissenting share-holders. It noted that the divorce statute did not contain the language “fair value” and the failure to apply a discount in certain circumstances could penalize the businessed spouse.

In Ebner v. Ebner, 2008 WL 4562516 (Ohio App. 5 Dist. October 6, 2008), the Ohio Court of Appeals, Fifth District, affirmed the trial court’s valuation of a closely held heating and cooling business at $75,000, where only one party pre-sented expert testimony regarding the value of the business and the other party declined to provide the expert with rel-evant business documents as well as failed to file tax returns for six years. The expert considered the following informa-tion in valuing the business: sales data from First Research, which indicated sales prices of 30 percent corporate revenue; the goodwill associated with the business; a sale of an interest in this business; and the market value of similar businesses. Notwithstanding the difficulty in this valuation, the court af-firmed the only valuation in evidence.

In Hendershot v. Hendershot, 2008 WL 4445648 (Tex. App. – Fort Worth October 2, 2008), the Texas Court of Appeals af-firmed the lower court’s valuation of employee stock options. Each party presented the court with expert valuation testimo-ny: the wife valued the options using the intrinsic valuation method, while the husband’s expert valued the options using the Black-Scholes method. The appellate court determined that



it was within the trial court’s discretion to accept the wife’s ex-pert valuation and to award all the options to the wife.

Lost ProfitsIn High Performance Learning, Inc. v. Aspen Technology, 2008

WL 3861993 (Mass. Ct. App. Aug 21, 2008), the Massachu-setts Court of Appeals affirmed a lower court’s calculation of lost profits under a contract, whereby High Performance would assist Aspen to obtain a state grant, which would be used to fund educational course taught by High Performance. After two courses, Aspen ceased holding High Performance’s course. The court noted that High Performance was entitled to be placed in same position it would have been had the con-tract been performed, and lost profits were appropriate so long as they were established with a fair degree of certainty. The court rejected Aspen’s claim that High Performance’s profit margin was excessive, holding that a damage award is not re-quired to be reduced where the business enjoys a healthy prof-it margin and where the profit margin was a known value.

In Goss Int’l Americas, Inc. v. MAN Roland, Inc., 2008 WL 3823705 (D. N.H. Aug. 15, 2008), the U.S. District Court for the District of New Hampshire determined that a patent holder-printing press manufacturer could not recover from an infring-er-competing manufacturer damages based on economic value that the infringer’s customer received from using the infringing printing press. The court found that while indirect profits may be had in suits against end users, they were not proper here because either an award of lost profit or reasonable royalty against the infringer would fully compensate the patent holder for the sale (rather than the use of) the infringing printing presses.

In Llamas Group v. Huron Valley Schools, 2008 WL 3349076 (Mich. App. Aug. 2, 2008), the Michigan Court of Appeals re-versed a trial court and held that where a public body requires its contractors to be bonded and where that public body breach-es a contract that results in a loss of the contractor’s bonding ability, the public body is liable for the contractor’s consequen-tial damages resulting from the loss of that bonding ability, because the consequential damages were within the parties’ objective understanding when the contract was formed.

In Taylor, Bean & Whitaker Mortgage Corp. v. GMAC Mort-

gage Corp., 2008 WL 3819752 (M.D. Fla. Aug. 12, 2008), the U.S. District Court for the Middle District of Florida decided two significant issues in this case relative to expert testimony on this opinion. First, it determined that data provided by a third party (here, the Mortgage Industry Advisory Corp. or MAIC indices) and disclosed by the expert in his report were admissible under F.R.E. 703 as the type of data relied upon by like experts and were not the work of an undisclosed ex-pert. Additionally, the court determined that the opinion of a damages expert, a CPA and CFE, satisfied the Daubert test and

any infirmities in his facts and data or reliability of his prin-ciples and methods went to weight rather than admissibility.

In Hinz v. Neuroscience, Inc., 2008 WL 3876312 (8th Cir. Aug. 22, 2008), the U.S. Court of Appeals for the Eighth Cir-cuit affirmed a district court’s decision granting judgment notwithstanding the verdict to defendant because the plain-tiff failed to adequately establish lost profits in a two-player market. In reaching this decision, the court reasoned that (1) the plaintiff experienced astronomical growth during a period of competition; (2) the plaintiff failed to introduce compara-tive customer lists; (3) the plaintiff ’s growth rate included all products, not just the alleged breached products; and (4) no evidence was introduced regarding the relevant industry or its growth rate during the same period.

In Gettinger v. Magnetic Services, Inc., 2008 WL 4559758 (D. N.J. October 8, 2008), the U.S. District Court for the Dis-trict of New Jersey denied cross-motions for summary judg-ment on the issue of whether goodwill of an MRI clinic, held as a partnership, is a distributable asset where the partnership was dissolved according to the terms of the partnership agree-ment, the partnership agreement was silent as to whether goodwill was a partnership asset, and the partnership’s assets were sold to its general partner, who operated the same busi-ness from the same location after the sale.

In Winchell v. Schiff, 2008 WL 4541943 (Nev. Oct. 9, 2008), the Nevada Supreme Court held that an injured party may recov-er from a tortfeaser for all injuries suffered as a result of a conver-sation, which may include loss of business value where the busi-ness is destroyed. Under the facts of this case, Plaintiff rented cold storage space from Defendant, who converted a quantity of goods after changing the locks on the space. As a result of the loss of goods, Plaintiff ’s business was unable to survive. The majority held that the jury’s damage award was supported by the business’s profit and loss statements and its tax returns. No pro-fessional business appraisal was presented. A dissenting justice concluded that while the valuation evidence was presented by the business owner, the damage award was unsupported because the business owner’s testimony was conclusive.

Editor’s note: The information provided in this article is for informational purposes only and should not be construed as legal advice. If you need legal or professional advice, please consult the appropriate professional. VE

John J. Stockdale, Jr., Esq., is a law clerk at Schafer and Weiner, PLLC, a boutique bankruptcy law firm in Bloomfield Hills, Michigan. He is also an editor-at-large with Business Valuation Resources, LLC. John has been reporting business valuation and damage computation case law for appraisers and attorneys since 1996. He is the author of BVR’s Guide to Lost Profits Case Law, BVR’s Guide to Cana-dian Valuation Cases, and Valuation Case Digest.



The Fraud FilesCompiled by James Martin, CMA, CIA, CFFA;

R. Austin Marks, CPA, CFFA; and Todd Michael Jolicoeur, CFFA

Fraud is a pervasive problem that can affect any organization. Fraud deter-rence is based on the premise that improvements to the underlying internal control structure of an organization can reduce the opportunity for fraud. These are the stories of fraud and the organizations affected.

CuCu for CucuzThe SEC accused the former CEO and CFO of auto

parts manufacturer Hayes Lemmerz of securities fraud. Former CEO Ranko Cucuz and former CFO William Shovers engaged in a scheme to make material misrep-resentations on financial reports to meet earnings targets and conceal mounting losses. The pair made the material misrepresentations during the fiscal years 1999 and 2000, and the first quarter of 2001. They also concealed infor-mation about the improper accounting procedures used. In addition, the pair made misrepresentations regarding Hayes’s financial condition involving a $300 million bond offering by Hayes in 2001. The verdict culminated a two-week trial at the U.S. District Court for the Eastern Dis-trict of Michigan. A federal court will decide the penalties of Cucuz (found guilty of negligence) and Shovers (con-victed on all four charges faced).

Karey Wutowski, “Jury Finds Ex-Hayes Lemmerz Execs Li-

able for Fraud,” reuters.com, 21 August 2008; available at www.

reuters.com/article/marketsNews/idUSN2125797620080821,

accessed 23 August 2008.

Point Guard Sidelined by FBIThe Wayne County, Michigan, Register of Deeds’

mortgage-fraud task force and the FBI are conducting an ongoing investigation to determine whether or not Detroit Pistons guard Lindsey Hunter was a victim or perpetrator of mortgage fraud. So far, the investigation has left the two

sides split. The Wayne County investigators believe that the athlete is merely a victim, duped by another “mastermind” in the scheme. However, the FBI believes that Hunter is indeed the mastermind behind two possible fraudulent deals that went wrong. A victim of the scheme, Bruce Mc-Clellan, also believes Hunter is guilty. McClellan claims that he was approached about a possible business deal by Hunter’s business partner, Iron Johnson, involving the pur-chase of a home in Bloomfield Hills for Hunter’s longtime friend. They told McClellan that his name would be on the house for about a year before being turned over to Hunter’s friend, at which time McClellan would receive $300,000. McClellan claimed he was suspicious, but proceeded with the transaction. When the buyer backed out of the deal, he became nervous as the monthly payments were four times his monthly salary. McClellan then began to accumulate thousands of dollars in unpaid bills. Hunter’s vehicle was spotted in the driveway numerous times by McClellan. Af-ter the FBI was apprised of the situation, an ongoing in-vestigation began and they found another deal involving Johnson and Hunter, similar to the deal with McClellan. Hunter subsequently filed a lien on the property for $14,000 of unpaid closing costs.

Tom Henderson and Daniel Duggan, “Pistons Guard: Duplic-

itous or Dupe in Mortgage Fraud?” crainsdetroit.com, 24 August

2008; available at http://crainsdetroit.com/article/20080824/

REG/16549244/-1, accessed 26 August 2008.



Bad Day at the MallEven though the dust has finally settled in what has

been called the worst case of identity theft in American his-tory, many of the problems that caused it are still lingering. Government officials recently announced that 11 people were arrested for allegedly stealing tens of millions of credit card numbers and racking up huge charges on the stolen accounts. The corporations stolen from include Barnes & Noble, BJ’s, Boston Market, Dave & Buster’s, DSW, For-ever 21, OfficeMax, Sports Authority, and TJX. Authori-ties allege that the suspects traveled from city to city using laptops to hack into each business’s wireless network and steal passwords, account details, and credit card data. The fact that information for over 41 million credit cards was obtained fraudulently before the experts decided to step up security is disenchanting. A recent study from Information

Week found that 21 percent of companies do not conduct any security risk assessments in the first place.

J.R. Raphael, “Massive Identity Theft Exposes Troubling

Trend,” pcworld.com, 6 August 2008; available at www.pcworld.

com/businesscenter/article/149485/massive_identity_theft_ex-

poses_troubling_trend.html, accessed 28 August 2008.

Approaching Deadline Brings Change toID TheftWith the November 1, 2008, deadline approaching, the

Information Security Media Group has estimated that 50 percent of U.S. banking institutions are not ready to meet the standards of the Federal Reserve’s Red Flag Rules—Section 114 of the Fair and Accurate Credit Transactions (FACT) Act of 2003. Consequently, financial institutions will be scrambling to meet the compliance requirements by the due date. The good news: help is on the way. Security Identity Systems, a leader in identity theft protection, is of-fering an “end-to-end answer for all 26 measures” of the Red Flag Rules to ensure that companies are ready. “Fi-nancial institutions are now facing a unique and pressing situation,” said Bryan Ansley, the CEO of the company. “Already reeling from the mortgage crisis and strong stock market dips, banks need help to emplace regulatory anti-fraud measures.”

The Red Flag Rules require financial institutions to take a more hands-on approach in conducting identity theft assessment. Statistics from the FBI show that U.S. com-panies spend $67 billion annually to combat cyber crime, while consumers lose $50 billion to identity theft.

“Financial Institutions Up in Arms over New Red Flag Reg-

ulations,” marketwatch.com, 25 August 2008; available at www.

marketwatch.com/news/story/financial-institutions-up-arms-

over/story.aspx?guid=%7B07B238A7-4A46-4E5C-80DE-84268

24AAF0F%7D&dist=hppr, accessed 28 August 2008.

Rivas Indicted on 19 CountsA federal court in Chattanooga has issued a 19-count

indictment against a former currency trader after he alleg-edly bilked approximately $31 million from hundreds of investors in the United States. The charges in the indict-ment include wire fraud, money laundering, criminally de-rived monetary transactions, and bankruptcy fraud. Begin-ning in March 2001, Luis H. Rivas allegedly conducted a Ponzi scheme to scam investors out of millions of dollars in which he would pay old investors with the funds from new investors. He also falsely claimed to investors that he was earning high returns through currency trading, and promised potential clients that they would receive earnings as high as 96 percent. The indictment additionally alleges Rivas lied about a prior felony. Rivas allegedly made sev-eral wire transfers to banks, which included $170,000 from InterbankFX to Bank of America, $30,000 from Bank of America to Regions Bank, and several others. Rivas used the stolen funds to purchase lavish items such as houses, cars, furs, and jewelry; and used some of the cash for “shop-ping trips” for himself and others.

“Chattanooga Grand Jury Indicts ‘Con Man’ Rivas,” chat-

tanoogan.com, 27 August 2008; available at www.chattanoogan.

com/articles/article_133974.asp, accessed 28 August 2008.

New Guidelines to Combat Corporate FraudDue to increased pressure from Congress, the U.S. De-

partment of Justice has issued new guidelines to assist pros-ecutors in pursuing corporate fraud cases. The guidelines seek to prevent the government from demanding that com-panies turn over confidential legal materials in exchange for favorable deals in plea agreements. In addition, they will bar prosecutors from penalizing companies that pay attor-ney fees for employees under investigation. This marks the end of a three-year period in which the U.S. Chamber of Commerce and American Bar Association argued the Jus-tice Department’s investigation tactics violated employees’ rights and gave unfair leverage to prosecutors. The guide-lines were released the same day that a federal appeals court upheld the dismissal of tax fraud charges against 13 KPMG employees. During the trial, they claimed that the govern-ment violated their constitutional right to legal counsel. The director of congressional and public affairs at the U.S. Chamber of Commerce, Pete Lawson, commented that they believe more legislation is needed to fix the problems at the Justice Department and other agencies.

Robert Schmidt, “Justice Dept. Reining In Prosecutors,”

washingtonpost.com, 29 August 2008; available at www.

washingtonpost.com/wp-dyn/content/article/2008/08/28/

AR2008082803249.html, accessed 29 August 2008.



Heaven and HarleysEarl R. Wolfe, a 59-year-old man pretending to be a

priest, has been charged in the Southern District of Flor-ida with conspiring to defraud the United States and six counts of filing a false tax return. His girlfriend, Linda C. Edell, and a CPA are facing similar charges. The court alleges that from 1999 to 2004 Wolfe routinely represent-ed $600 of income on tax returns that he filed with the Internal Revenue Service. In reality, Wolfe was an unli-censed architect who was earning more than $750,000. He attempted to hide his income by cashing more than $600,000 at a local check cashing store; and Wolfe hadn’t actually paid income taxes since 1989. Wolfe further at-tempted to conceal his assets from the IRS: in October 2003, he claimed to be a priest and created the Office of the Presiding Overseer of the Domicile Creators Service Ministry, which he showed to be a tax-exempt religious entity. Wolfe then transferred his residence and two Har-ley Davidson motorcycles to the fictitious ministry.

“Self-proclaimed Priest Convicted of Tax Fraud,” the U.S.

Department of Justice, Southern District of Florida, 22 Au-

gust 2008; available at www.usdoj.gov/tax/usaopress/2008/

txdv08_080822-01.pdf, accessed 28 August 2008.

Companies, Beware!Over the past few years, there has been a substantial

increase in ex-federal agents and former prosecutors being hired by private law firms and corporate general counsel, for their ability to solve crimes. This trend appears to be driven by advances in technology, rising fear of financial fraud and theft of intellectual property, workplace discrimi-nation claims, and corporate espionage. “Most lawyers do not have the technological experience or the accounting expertise to do almost any of the stuff that these guys do,” said Alan Brudner, head of an international financial ser-vices firm. Brudner acknowledged his expanding reliance on private investigators, claiming that he has gone from us-ing their services only rarely to once a month. In addition, he attributed the increasing use of private investigators to increased government regulation and investigation. As for their methods, most of the private investigators employ undercover tactics using various kinds of e-mail, bank ac-count, and computer monitoring. They also conduct inter-views of employees and ex-employees.

Tresa Baldas, “Companies Keep Watch, Covertly,” law.

com, 2 September 2008; available at www.law.com/jsp/ihc/

PubArticleIHC.jsp?id=1202424167974&pos=ataglance, ac-

cessed 2 September 2008.

Banking Clients’ Assets Swiped CleanAn interesting scheme was uncovered in northeast Ire-

land when a group of perpetrators were caught posing as bank service personnel and replaced credit card readers in retailers’ stores with their own readers. Consequently, they were able to obtain information that could possibly be used to steal from victims’ bank accounts. It may be possi-ble that the thieves were able to steal data from over 10,000 debit and credit cards. One official for the Irish Payment Services Organization said that fraud may already have occurred on the cards, and those affected would be noti-fied immediately. However, ATMs that use the “chip and pin” system may be safe from the fraud. Some European cards are embedded with a microchip that is checked at all ATMs, and if the cards do not possess a chip, they are rejected automatically. Luckily, criminals have not figured out how to replicate those chips. The Bank of Ireland has also taken the measure of limiting oversea withdrawals because the data from the compromised cards could be duplicated onto a “dummy card” and then used overseas. Ireland’s National Police are conducting an investigation, and few details have been publicly disclosed.

Jeremy Kirk, “Scammers Replace Credit Card Readers in

Irish Stores,” pcworld.com, 18 August 2008; available at www.

pcworld.com/businesscenter/article/149935/scammers_re-

place_credit_card_readers_in_irish_stores.html, accessed 28 Au-

gust 2008.

Going Down with the ShipA Michigan man has been arrested for engaging in a

multi-million dollar scam that attempted to defraud a bank through fraudulent loan applications. Michael Vorce is now facing charges of bank fraud and conspiracy to com-mit bank fraud along with his co-defendant, James Gett. Prosecutors allege that the pair attempted to secure a loan in the amount of $391,450 on June 30 in the name of a Milwaukee attorney, in an attempt to purchase a 48-foot Sea Ray yacht. The FBI said in a press release that the pair is also the subject of an investigation that could lead to a possible larger fraud scheme. This scheme could involve numerous states with at least $2.6 million being stolen at four financial institutions. From 2005 through 2007, Vorce was able to secure millions of dollars in loans for yachts that either didn’t exist or he didn’t own. The money from the loans was actually being used to support a lavish life-style, which included luxury cars and a Miami condomin-ium. Michael Berzowski was the name being used on the


What You Need to Know If You Make Financial Determinations

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corporate and business shenanigans.

Over eight years ago, NACVA’s Financial Forensics Institute (FFI) was established in partnership with some of the nation’s top minds and authorities in forensic accounting, law, economics, valuation theory, and expert witnessing to offer practitioners unparalleled and

highly comprehensive training in all facets of forensic fi nancial consulting.

With the credential to prove it—Certifi ed Forensic Financial Analyst (CFFA).

To see what it takes to earn this well-established designation, visit www.nacva.com or call (800) 677-2009.

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National Association of Certifi ed Valuation Analysts1111 Brickyard Road, Suite 200 • Salt Lake City, Utah 84106-5401

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There once was a salesman in a hardware store named Johnny.

The store began carrying what Johnny considered the best cordless power drill on the planet. It was the Super-Drill 5000. This drill was a high-voltage, supercharged, hand-held model that came with two dozen drill bits and various gauges, jigs, and attachments. The SuperDrill 5000 was so light anyone could use it. It was powerful, portable, and held a charge twice as long as the other drills. And it was beautiful.

Johnny had been selling drills for years, and yet he still got a thrill when he looked at the SuperDrill 5000.

One day, Janet walked into the store and walked straight to the drills.

“Interested in a drill?” asked Johnny. “Yes,” she said, “I need to drill a few holes for a dog-

house I’m building for my dog Balou.” “Have you thought about the SuperDrill 5000?” As

Johnny said the words, he felt a thrill of excitement. He thought, “How could anyone not fall in love with the Super-Drill 5000?” When Johnny described all the features of the drill, Janet could hear Johnny’s passion; she could see it in his eyes.

Then she pointed to another drill, the K250—a lesser drill in every respect. “But this drill costs a third as much,” she said.

Johnny scoffed at the K250, reminding her of all the fea-tures of the SuperDrill 5000. “This drill comes complete with 24 drill bits and various gauges, jigs, and attachments. And it’s so light.”

Keys to Growing Your Practice

By Joey Asher, Esq.

“But I only need to drill four simple holes to make my dog house,” she responded. In the end, Janet bought the less-er drill.

What is the moral of this fable? People buy holes, not drills.

Put another way, people buy solutions, not products or services.

With that in mind, you should always pitch solutions first and foremost.

So let’s say you’ve been invited to pitch for a chance to assist in a major business valuation engagement. You under-stand that there will be lots of complex financial issues to unravel.

In that circumstance, what is the company in the market for? They’re not in the market for a business valuation ana-lyst, i.e., a drill. That means you should not talk primarily about your firm’s history, reputation, and prestigious clients; or about your credentials, memberships in professional asso-ciations, designations, etc.

The company is in the market for a hole, that is, a plan to unravel the complex accounting issues presented by the en-gagement. As an analyst pitching for the opportunity, it’s your job to show the prospect that you understand the problem and can provide a solution to those accounting issues first; and second, that you and your team are highly qualified to imple-ment that solution.

That means your presentation should focus on how you’re going to approach the problem of unraveling the spe-

Pitch Holes, Not Drills




In early 2008, a survey commissioned by the British Li-brary titled “Information Behaviour of the Researcher of the Future” was published. It dispelled the com-mon assumption that the Google Generation—young

people born or brought up in the Internet age—are adept at searching the Internet. It found that while young people demonstrate an ease and familiarity with computers, they do not possess the critical and analytical skills needed to develop effective search strategies.

This is decidedly bad news for business appraisers plan-ning to rely upon their teenage children to help them find fi-nancial data on the Internet. Fortunately, Jan Davis has pub-lished a guide to business valuation research on the Internet that is so complete, you’ll never have to ask your teenager to Google for you again.

Davis takes a practical approach with The Business Valua-

tion Internet Research Guide. She provides the reader only care-fully selected sources that have a proven track record for reli-ability. Her 20 years as a professional researcher have given her the experience and insight to cull the forest of Internet

options down to those most relevant (and affordable) trees for the business appraiser.

Davis is president of JT Research in Portland, OR, which published the book. Her clients include financial analysts, business appraisers, CPAs, business brokers, and economists. She is the former library director at Willamette Management Associates, and has a master’s degree in library and informa-tion science. (As a matter of disclosure, I have worked with Jan Davis on a variety of projects since 1994, including mak-ing presentations on Internet search, writing books and ar-ticles on research, and teaching research workshops.)

This Internet research guide starts with a handy section on developing a research strategy. The questions in this chapter help the reader think through the information needed before jumping into the pool of web research. Subsequent chapters are organized by business valuation function, such as guide-line company searches or finding industry data.

Although Davis emphasizes affordable information sources, she points out that not everything on the Internet is free. Some of her recommended sites require a subscription or

B O O K R E V I E W

The Business Valuation Internet Research Guide

By Jan Davis, MLISJT Research, Portland, OR, 2008

Paperback, 114 pages, $29.96*

Reviewed by Eva M. Lang, CPA/ABV, ASA

* Available for downloading in PDF format, with active hypertext links, for $20 at www.jtresearch.com/the_book_business_valuation.html.



cific financial issues of this specific case. To the extent that you can detail a specific strategy, do it. If you’ve got expe-rience implementing similar strategies for other clients, tell those stories.

Part of the solution the company is buying is also a busi-ness valuation analyst whom they like personally. After all, they’re going to have to spend a lot of time with you. With that in mind, you should present the solution with a style that connects with the prospect on a personal level. That means speaking with the same kind of intensity that you use when speaking with close friends, not the cold, analytic, technical “accountant voice” that makes you sound like ev-eryone else.

When pitching for a new piece of business, remember what the prospect is buying.

Pitch the hole, not the drill. VE

Joey Asher is an attorney and president of Speech-works (www.speechworks.net), a selling and communication skills coaching firm in Atlanta. He has worked with hundreds of accountants and consultants, and with dozens of firms, helping them grow their business and connect with clients. He is the author of Selling and Communication Skills for Lawyers (ALM Publishing, 2004) and Even a Geek Can Speak (Longstreet Press, 2001).

Fraud FilesContinued from page 30…

a per-document access fee. She includes pricing information, and notes whether a free or lower-cost option is available.

The research guide is peppered with “Jan’s Notes,” which are insightful tidbits on particular sources. For example, Jan’s Note on MarketResearch.com says, “This is a great place to find free blurbs on an industry because many firms provide abstracts which describe the report.”

In addition to the descriptions of specific websites, Da-vis covers related topics such as how to evaluate the reli-ability of a website, how to know when it is time to stop searching, and how to find websites that are nominally “no longer available.” VE

Eva M. Lang, CPA/ABV, ASA, is executive director of Financial Consulting Group (www.gofcg.org), based in Los Angeles. She resides in Germantown, TN. Lang publishes the BV Girl Business Valuation Blog (http://bvgirl.squarespace.com).

James Martin, MS, CIA, CMA, CFFA, senior manager with Cendrowski Corporate Advisors, LLC (www.frauddeterrence.com), provides comprehensive risk assessments, focus-ing on the evaluation of operating effectiveness of business processes and the internal control structure.

R. Austin Marks, CPA, CFFA, consultant with

Cendrowski Corporate Advisors, LLC, specializes

in risk assessment, internal control evaluation,

business process review, and litigation support for

partnership and divorce proceedings.

Todd Michael Jolicoeur, CFFA, staff tax profes-

sional and consultant with Cendrowski Corporate

Advisors, LLC, works with management to identify

operational and financial issues to improve business

performance, and provides litigation support for

partnership and divorce proceedings.

loan applications, and the defendants provided fictitious e-mail addresses and tax returns.

Chris Knape, “Michael Vorce Arrested in Chicago with An-

other West Michigan Man over an Alleged Loan Fraud,” mlive.

com (The Grand Rapids Press), 29 August 2008; available at

www.mlive.com/grpress/news/index.ssf/2008/08/michael_

vorce_arrested_in_chic.html, accessed 30 August 2008. VE

Growing Your PracticeContinued from page 32…

Whether you do one valuation a year or 100, if you’re a CPA or a non-CPA working for a CPA firm, as of January 1, 2008, you must comply with the AICPA Statement on Standards for Valuation Services No. 1 (SSVS). This seminal

course—Working through the BV Standards Maze—will guide you through the intricacies of the regulations, provide a comparison of the various industry standards, demonstrate how they affect you and your practice, and show you how to ensure your engagements are consistent with the regulations. Given the increasing numbers of AICPA members performing business valuation engagements or some aspect thereof, an understanding of the business valuation standards issued by the AICPA will improve consistency and quality of practice among AICPA members performing such business valuation assignments.

Working through the Business Valuation Standards Maze

What You Will Learn

understanding of the specific development and reporting standards

provided fall within the scope of the AICPA BV standards

also have promulgated BV standards

performing business valuations

valuation credentialing organizations

business valuation credentialing organizations

Development and Instruction TeamThis timely course was developed and is taught by a team of 14 experienced, credentialed valuation practitioners, many of whom are members of NACVA’s Standards Committee.

Who Should AttendAll CPAs and other valuation practitioners who estimate the value of a business, business interest, security, or intangible asset for sales transactions, financing, taxation, mergers and acquisitions, financial reporting, and litigation.

Methods of Delivery, Dates, and LocationsWorking through the BV Standards Maze is presented both as a webinar (two hours duration) and in a live class-room seminar (typically four hours in duration and in some

classroom sessions now qualify as an option to earn 25 points towards NACVA Recertification, if you choose, with the payment of $125 processing fee due at the time the Reporting Form is submitted during the recertification cycle. Live course offerings are listed below. For webinars, consult the Training/CPE Calendar at www.nacva.com.

Live Classroom Dates and LocationsDecember 12—San Diego, CAJanuary 23— Little Rock, AR Co-sponsored with AR Society of CPAsJanuary 22—Phoenix, AZ

For additional dates/locations:www.nacva.com

RegistrationRemember: the Standards became effective January 1, 2008, so be sure you know how to comply. To register for either the webinar or live classroom version, call NACVA Member Services: (800) 677-2009.

National Association of Certified Valuation AnalystsConsultants’ Training Institute1111 Brickyard Road, Suite 200Salt Lake City, UT 84106-5401

Tel: (801) 486-0600 Fax: (801) 486-7500

Internet: www.nacva.com

Course materials include a Valuation Checklist, BV Reports: Standards Compliance Checklist, and an Industry Standards Comparison Chart, all of which are free of charge even if you don’t attend a seminar. To order, call NACVA Member Services: (800) 677-2009.

The Value Examinerc/o National Association of Certified Valuation Analysts (NACVA)1111 Brickyard Road, Suite 200Salt Lake City, UT 84106-5401

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