Identity Theft - Securing Your Personal Information

In no particular order, here are some steps that you should take to secure your personal information from identity thieves:

1. Order and review your credit reports from all three credit reporting agencies annually.
2. Use passwords on bank accounts, debit cards, and credit cards.
3. Minimize the number of credit cards, debit cards, and identification cards that you carry.
4. Absolutely do not carry your social security card or birth certificate.
5. Do not include your social security number on your checks.
6. Change your driver's license number to something other than your social security number.
7. Shred all documents with personal information on them when discarding.
8. If using a debit/credit card at a restaurant, pay at the counter.
9. Review bank and credit card statements when received.
10. Follow up delayed statements or new accounts requests that you did not make.
11. Never leave receipts at ATMS, cash registers, or gasoline pumps.
12. Investigate any credit cards that expire without a new card issued.
13. If a financial institution contacts you regarding unusual activity, do not give any information and call back at the phone number on the back of the card in question.
14. Get insurance against identity theft.
15. Don't leave purses, wallets, debit cards, or credit cards unattended, even in your car (even if hidden).
16. Don't let others see or hear you enter passwords.
17. Mail payments and documents with personal information from a post office mailbox.  Never use your home mailbox.
18. Have mail and newspapers held if you are going out of town.
19. Do not write your social security number or account numbers on checks or envelopes.
20. Stop pre-approved credit card offers (1.888.5OPTOUT).

Using passwords effectively is an essential component of securing your identity.  Here are some guidelines for your passwords:

1. Avoid easily deciphered passwords - birthdays, anniversaries, names of children, spouses, or pets, last 4 digits of your social security number.
2. More characters is better.
3. Use alpha-numeric.
4. Use upper and lower case letters.
5. Use symbols if possible.
6. Change passwords periodically.
7. Do not tape login information or passwords to your desk or computer.
8. Do not carry passwords in your purse or wallet.
9. Do not allow Windows to memorize your password on internet sites.
10. Do not use the same password and/or login information for multiple accounts.
11. Maintain your login information and passwords on a password protected excel file.

Be careful out there.

Mississippi Court of Appeals - Cox v. Cox

On January 25, 2011, The Court of Appeals of the State of Mississippi affirmed the ruling of the chancellor in Cox v. Cox (No. 2009-CA-01233-COA).  Several points of the appeal were related to business valuations rendered by a court-appointed expert. 

For the primary business being valued, the chancellor accepted a 50% discount for lack of marketability ("DLOM").  DLOMs are component of the standard (i.e., definition) of  fair market value.  As such, businesses valued at fair market value will consider the DLOM.  50% is an extraordinarily high DLOM, especially when the business was valued using the asset approach, which excluded goodwill and other intangible assets.  However, the expert pointed out that the business had not been profitable in the years leading up to the valuation.  Furthermore, the company, a steel contractor, was having difficulty getting bonded and its primary financial institution was reluctant to continue extending credit.  Finally, the groundwater at the company's site was contaminated and the most recent real estate appraisal did not reflect the contamination in its value.  The preliminary estimate of the cost to cure the contamination exceeded $1 million. 

This case is hardly a mandate to begin using DLOMs around 50%.  However, it does show that the Court will consider higher DLOMs when the circumstances warrant.  Proper analysis supporting a reasonable DLOM should be upheld.

Secondly, the Court upheld the inclusion in the valuation of a contingent asset.  Generally accepted accounting principles preclude the recording of contingent assets because to do so would violate the conservatism principle.  The contingent asset was a lawsuit that settled subsequent to the valuation date.  The chancellor included this settlement in the value of the business.  In general, valuation experts are precluded from considering events that occur subsequent to the date of valuation.  This position raises opportunities or exposures depending on your point of view.

Finally, the Court addressed the issue of valuing patents.  One of the companies valued in this case owned patents related to computer programs used in steel fabrication.  Patents are intangible assets in that their value has limited or no correlation to their cost.  Similar to goodwill, which is an intangible asset, the value of a patent is very subjective and requires professional judgment to estimate. The court-appointed  expert excluded the patents from the value of the company.  The expert reasoned that the Court's definition of goodwill in Singley included all intangible assets.  The chancellor assigned no value to the patents and the Court affirmed this on appeal.  However, it is important to note that no one presented the chancellor with a value for the patents.  Had a value been rendered, it is uncertain whether the chancellor would have assigned value to the patents.

Avoiding Pitfalls on Fidelity Insurance Claims

Those of you who keep up with this blog have heard the statistics before.  The Association of Certified Fraud Examiners ("ACFE") estimates that the average business enterprise, including non-profit organizations, loses 5% of its annual revenue to employee fraud.  ACFE further estimates that only 25% of all fraud cases result in civil actions.  My experience supports both of these premises.  Fraud is very widespread and the victims are reluctant to take action beyond terminating the perpetrator.

Against this backdrop, one of the most recommended safeguards against fraud is fidelity insurance coverage for dishonest acts by employees.  If your clients do not carry fidelity coverage, they need it and it borders on malpractice if you do not inform them of this need.  That said, fidelity policies have very strict requirements for filing and collecting on claims (as an aside, remember that claims adjustors are hired to not pay claims).

The deadline for providing notice of a loss and submitting claims is immovable.  Make sure notice is provided immediately, before you conduct the investigation.  A lot of information is required with the claim.  Any missing pieces will delay or preclude payment of a claim. 

A certified fraud examiner ("CFE") can help organize and prepare the claim to ensure maximum recovery.  The kicker is that most fidelity insurance policies will pay for the services of a fraud expert.  Hence, it is a no-brainer to hire one to direct the investigation.  You will need to assign some employees to assist with the investigation; but the CFE will perform most of the work in preparing the claim and supporting documentation.  The CFE can also review and rebut any reports from the insurer's experts.

In summary, fidelity insurance is necessary.  Get a CFE involved early in the process so that the insurance covers the entire loss.

Fraud Alive and Well and Danger of Preliminary Valuation Reports

As the recession / recovery continues to stagnate, we are reminded that fraud is alive and well.  This makes sense intuitively because one of the primary factors present in fraud is pressure or incentive.  In economically uncertain times, pressures become increasingly prevalent as the uncertainty is prolonged.  A survey performed by the Association of Certified Fraud Examiners revealed, unsurprisingly, that certified fraud examiners ("CFEs") anticipated increased fraudulent activity during periods of economic recession. 

As a CFE who consults with smaller business enterprises, I have seen instances of fraud that begin with the perpetrator  encountering a financial need that he or she cannot meet.  It can be a car repair, medical bills, or other ongoing expenses.  As the pressure to make ends meet mounts, the perpetrator may rationalize the fraud by pretending that it is a loan that will be paid back, which, by the way, rarely occurs.  More often than not, if the initial fraud is not detected, the perpetrator becomes emboldened to commit additional frauds.  So what can a business owner do to protect himself or herself?

First of all, use common sense.  Ronald Reagan popularized the phrase, "Trust but verify."  No employee is above temptation.  As a business owner or manager, one needs to monitor employees and verify that they are functioning in an ethical manner.

Secondly, protect your checks.  Checks are one step away from being cash.  Restrict access to blank check stock.  Do not use a signature stamp or check-signing machine.  Sign all checks without exception.

Thirdly, and most importantly, receive (unopened) and review all bank statements.  Examine the checks that have been scanned for appropriateness of payee, amount, and timing.  If there are any suspicious items, review the back of the check online or request a copy of it from the bank.

Fourth, know your employees and beware of tell-tale signs of fraudsters.  Is someone living well beyond his /her means?  Is there someone who never takes vacation and works a lot of overtime?  Make vacations mandatory; and, more importantly, have another employee perform the vacationer's duties in his / her absence.

Finally, if you're uncomfortable with the effectiveness of your checks and balances (what auditors call internal controls), hire a qualified CPA / CFE to perform a fraud risk assessment for your business.

Here is an anecdote from my personal experience.  I had a client who just wanted a check up on his business to make sure that no one was stealing (by the way, if you think you are not making as much income as you should, you're probably right).  I arrived at his office at about 10:30 am and got introduced to his staff.  I interviewed him over lunch.  Upon our return, we discovered that his office manager, whom I had only met that morning, had left a note of resignation, never to return. In response to his question, I said, "Do you want to know how much and are you willing to press charges?"

As some of you are aware, there are two primary levels of service that a business valuation professional can render.  The first is a valuation engagement in which a valuator provides an opinion or a conclusion of value.  This is the higher level of service and it requires significant study and analysis, which translates into higher cost.  The lower level of service is known as a calculation of value or preliminary valuation.  A calculation does not involve the same analysis and study, which makes it less costly.  However, it carries very little weight with triers of fact.  In a calculation, the valuator and the client agree on what calculations to perform and the valuator exercises limited, if any, judgment.

For negotiation purposes, I often suggest a calculation of value because it is much less costly and it gives my client a starting point in determining the value of his / her business.  Furthermore, if the need arises, a calculation of value can be upgraded to a valuation engagement.  As a caveat, I would not prepare a calculation of value if I reasonably believed that the matter would ultimately be heard by a trier of fact.

Two cases support my opinion.  In Hagar, the Court rejected a calculation of value because it lacked sufficient professional judgment.  More recently, in the Marriage of Cantarella, the chancellor rejected a preliminary valuation that disputed a value previously stipulated to by both parties. As we say in Chicago, "Don't bring a knife to a gunfight."

New Case Law on Goodwill in Divorce

Last week, the Supreme Court of Mississippi released its ruling in the case of Lewis v. Lewis.  The Lewises owned a real estate development enterprise that, upon distributtion of assets, was awarded to Mr. Lewis.  No formal business valuation was performed on Legacy.  Upon appeal, the appellate court ruled that Legacy must be re-valued at fair market value including goodwill.  The Supreme Court upheld the requirement to have Legacy valued at fair market value; but, consistent with the Singley, Watson, and Yelverton cases, fair market value is to exclude goodwill. 

Based on the Lewis ruling and consistent with my rendering of the Singley ruling,  I believe that the Court's definition of goodwill extends to what accounts call intangible assets.  Intangible assets include, but are not limited to, workforce in place, customer base, patient charts, patents, and trademarks. 

In divorce proceedings, a caveat remains in situations where alimony is awarded.  In cases where alimony is involved, due consideration needs to be given to the level of compensation and /or income that is being used as the basis for the amount and duration of the alimony.  If the alimony is based on compensation that exceeds fair market value, goodwill has constructively been divided.