bobbyvklein

There are some concepts in forensic accounting that are fundamental! These concepts are generally, but not categorically, true. They serve reliably to give you a meaningful “gut reaction” to what the proper treatment is likely to be when understood and mastered. They are a foundation for what I call my “smell tests.”

Accountants (forensic and otherwise) sometimes miss the opportunity to learn valuable information from a client because an obvious question remains overlooked, or the accountant delivers their inquiry in an offensive or careless manner.

Years ago, after a small bank discovered that an employee had embezzled $30,000, they hired me to do an internal control study. They wanted to reduce risks going forward, and the bank’s president had other related questions about information documentation. A low-level middle-aged employee with minimal bookkeeping background discovered the embezzlement. I was curious to meet this person to see how they had found the fraud, so I made that my first chore after the initial talks with the president. I asked the employee to show me what they had seen, and they did. Then I ask the employee what turned out to be the critical question, “Is there anything else that bothers you about the system?” Nobody else had posed that question to this astute, alert, and caring employee! The employee went on to point out to me significant internal control deficiencies. These deficiencies answered the president’s expressed concerns and revealed several others.

Development of Useful “Gut Reactions” when Operating Your Business

There are some concepts in business valuation and forensic accounting that are fundamental! These concepts are generally, but not categorically, true. When understood and mastered, they serve reliably to give you a meaningful “gut reaction” to what the proper treatment is likely to be. They are a foundation for what I call my “smell tests”!

A client once asked me, “Chuck, what is my business worth?” I replied, “It depends on the purpose of the valuation! You can, in fact, appropriately get different values for the same business on the same date, depending on the purpose/use of the valuation!

I also told the client that today’s value is the present value of future cash flows coming out to you in your role as the owner—over and above what you are getting/will be getting in terms of a fair market value salary. So, several factors come into play:

• What percentage of the total outstanding stock do you own?
• How much experience do you have in this line of business?
• Are you working in the company, as well as holding some stock?
• What is the economic outlook for this industry?

I once had a client that was a large and very profitable regional firm with both wholesale and retail sales. The owner was the sole owner with both manufacturing and retail sales experience. Upon that owner’s premature death, he left all of his stock to one of his four sons—his only son who had never worked in the business. In less than three years, the 20-year-old company was bankrupt because the new owner had tried to run the business without industry knowledge or operational know-how.

1. LOOK FOR ANOMALIES —Sometimes, even the pennies can matter! Although this example deals with detecting fraud and not so much internal financial reporting, it illustrates that even pennies can mean a lot. Kern and Company had been hired by some municipalities to assess the fairness of sewer rates that Harrisburg City was charging the municipalities to use the Harrisburg sewer system. We were given copies of Harrisburg’s cost reports, which showed budget and actual costs “to the penny.” In every category of “general and administrative costs,” in every one of the six years statements that we were given, actual and budgeted costs were the same to the penny! I have never seen another instance of that in more than five decades of experience! Exploring my observation served to reveal an illegal movement of funds within the city over five years, amounting to more than $30 million! Ultimately, although in bankruptcy, the city was required to make substantial restitution.

2. “WHAT’S NORMAL FOR YOUR TYPE OF BUSINESS?” — Quite often, business owners will ask us that question relative to their own business. And believe it or not, in terms of things like financial ratios, “reality checks” for the owner’s idea as to the value of their business, and profit margins, there are scads of sources to go to—and Kern and Company knows where to look. But such data is often misunderstood. Let me tell you a little story. I have had the good fortune of frequently being in Christiansted, capital of St. Croix. A few of the locals let me know me about a new restaurant with incredible food, so we went there for dinner. The food was great! Prices were high (like New York City prices), and we were the only customers in the place. The owner/chef stopped by our table and asked how we liked it. We told him the food was excellent and suggested he reduce portion sizes and lower prices a bit. He said that he couldn’t do that because his accountant told him that he needed to get a specific “price per plate” to do well in that industry. The fellow just couldn’t bring himself to understand the assumptions behind such “rules of thumb.” The point is this: What is normal may not apply to your situation.

3. NOT ALL REPORTING NEEDS TO BE FINANCIAL TO BE VALUABLE — For a few years, I was the CFO of a large bedding manufacturer and sales business. I learned almost immediately that twin-sized bedding was far less profitable than double, queen, and king-sized bedding, because the differences in selling prices, which were set by the marketplace, were grossly different than the differences in per-unit manufacturing costs. So, if I saw a massive influx of orders for twin-sized bedding (for the likes of hotels, hospitals, and dormitories), I knew lower corporate gross profits were on their way.

4. INCOME STATEMENTS FOR EACH LOCATION — If you are operating two or more locations, each with a unique manager, performance evaluation is often a challenge. Evaluate your branch and manager’s performance by segregating fixed and variable costs based on traceability and make a fair allocation of expenses that are not uniquely traceable.

5. GRANDPA WAS STEPPING ASIDE — Some years ago, a fellow in his late 20’s approached me with significant concerns. He worked in a business owned and operated by his grandfather. The grandfather was retiring and giving the enterprise to him. The firm did very ornate wood carvings for entities like houses of worship and museums and had a long history of good profits. The grandfather had always done the estimating but had not been passed on this information to the grandson! The grandson had heard good things about Kern and Company and came to us for help. We were able to work with his grandfather and come up with an estimation system that institutionalized the grandfather’s knowledge and skills.

Building a framework for authentic service.

Good client service will cement a relationship with a client. Good client service will build political capital with the client for you and your company. Political capital is a goodwill reservoir that will help any client to overlook an occasional error on your part, even if the mistake was somewhat significant. This circumstance is especially true if you first detect the problem and tell your client about it before they are otherwise aware. You must apologize wholly and without qualifiers. Political capital will also cause an excellent client to dismiss out-of-hand any approaches from competitors. Good client service is essential—and it is rare.

At the very heart of client service is client perspective. Without client perspective, it is impossible to provide good service.

Client perspective comes at two levels—the general and the specific. Most firms and companies do not recognize these two levels and comprehend only the general level. They conclude that the general level is what client service is all about. Furthermore, almost everybody professes to believe in and possess the general level, but they miss the point.

The general level has to do with treating a client/customer the way that you would like to be treated as a client/customer. I believe that a sure sign of a decline in customer service and perspective is a business’ creation of a customer service department, desk, or toll-free number. That too often means that the salesperson or service provider you have been dealing with will abandon you now that you have a problem. Oddly, it is this general level that I believe every client/customer assumes to be a given.

The specific level of a client perspective is getting inside your client’s head—understand them, their personal needs and goals, and the needs and goals for their business. You must see the world through their eyes and know what makes them tick. The successful combination of specific and general client perspective is an unbeatable combination that will yield a happy paying client, lots of political capital, and referrals!

The Magic and the Mystique

Client Service Is the Fun Part of Our Accounting Services

1. Accounting services are the vehicle that establishes the trust, confidence, and objectivity that are the key to client service.
2. Accounting work is the competitive edge that allows us to be at the front line of real fun—client service.

The Core Precepts of Client Service

1. Empathy
2. Being Proactive
3. Honesty
4. Objectivity
5. Candidness
6. Timeliness

Client Service Is

1. Being a business friend
2. Helping people and or making them happier in their business
3. Solving a problem
4. Meeting a need
5. Making them more profitable
6. The art of listening
7. Not overselling
8. Asking how they are doing and mean it

In Addition to Doing Good Work

1. Referring them to other clients
2. Referring them to other professionals
3. Networking lunches
4. Getting them involved is flattering
   • Involvement in social and civic causes
   • Participation in helping other clients
5. Providing them with public recognition
6. Paying attention to the personal side of their lives