Chapter 11 Power Point - Forensic and Investigative...

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Unformatted text preview: Forensic and Investigative Accounting Forensic Chapter 11 Litigation Support in Special Situations © 2009 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com Antitrust Laws Antitrust laws are an outgrowth of the early Antitrust years of the Industrial Age in the United States when a small number of powerful businessmen used any tactic at their disposal to force competitors out of business. Because such business practices were not in the best interest of the country, federal legislation was passed that prohibits the formation and continuation of monopolies except when in the best interest of the public. the Chapter 11 Forensic and Investigative Accounting 2 Role of Accountants in Role Antitrust Litigation Antitrust Accountants may be called upon to Accountants determine whether there is liability under the antitrust laws. The primary issue that forensic accountants address is whether the defendant has engaged in predatory pricing. defendant Chapter 11 Forensic and Investigative Accounting 3 Predatory Pricing Predatory pricing is the act of pricing a Predatory product so low that the only logical explanation is that the pricing is designed to drive competitors out of business. drive The operational definition is whether a The company prices its products or services below “average variable cost” and, if so, predatory pricing is present. predatory Chapter 11 Forensic and Investigative Accounting 4 Cost Behavior Defined In its simplest form, cost behavior is In cost the way that cost(s) change with respect to changes in the volume of activity. activity. Chapter 11 Forensic and Investigative Accounting 5 Common Types of Cost Behavior Fixed costs Variable costs Mixed costs Semivariable costs Semifixed costs Chapter 11 Forensic and Investigative Accounting 6 Cost Behavior Assumptions Basis of cost behavior estimates – Relevant range assumption – Time assumption Ways of estimating cost behavior – Account analysis method – High-low method – Regression analysis – Engineering or work-measurement Engineering method method Chapter 11 Forensic and Investigative Accounting 7 Reasons Why Managers Want to Know About Cost Behavior Patterns About Patterns To use in many different types of cost-volume-profit To (CVP) analyses. (CVP) For use in flexible (dynamic) budgeting activities. For For use in standard costing, in particular, MOH variance For analysis. analysis. For use in determining Manufacturing Overhead (MOH) For application rates. application For use in litigating or defending a wide variety of costrelated legal issues: – Federal antitrust cases - predatory pricing. – Alleged contractual violations. – Measurements of damages for lost sales/profits/etc. Chapter 11 Forensic and Investigative Accounting 8 Common Types of Cost Behavior FIXED COSTS: Costs that fundamentally are not driven by changes in volume. not Y = Total Cost Y = a, where a is the amount of fixed cost where Common examples of fixed costs - Depreciation, Common Property taxes, Supervisor salaries Property Chapter 10 Forensic and Investigative Accounting 9 Common Types of Cost Behavior Common VARIABLE COSTS: Costs that change directly and proportionately with the volume of activity. and Y = bX, where b is the slope of the line (the bX, increase in cost relating to the increase in volume) and X is the measure of the volume of activity. Common examples of variable costs - Direct Common materials, Direct Labor, Sales Commissions materials, Chapter 11 Forensic and Investigative Accounting 10 Common Types of Cost Behavior Common MIXED COSTS: Costs that contain both a MIXED both fixed and a variable component. fixed Y = a + bX, Where a equals the fixed bX, component and bX is the variable component. component. Common examples of mixed costs - Some Common lease agreements, some utility costs, many overhead costs. overhead Chapter 11 Forensic and Investigative Accounting 11 Common Types of Cost Behavior Common SEMI-VARIABLE COSTS: Costs that change SEMI-VARIABLE but not proportionately with the volume of activity. activity. Learning curve costs - are costs that increase at a decreasing rate with the volume of activity. decreasing When graphed, learning curve costs slope upward When and to the right but not in a straight line; Instead they curve downward. they Chapter 11 Forensic and Investigative Accounting 12 Common Types of Cost Behavior Common SEMI-FIXED COSTS: Costs that SEMI-FIXED increase in steps or jumps. Also called set function costs Some argue that all fixed costs are step Some function costs over the long run function Chapter 11 Forensic and Investigative Accounting 13 Cost Behavior Assumptions Cost Relevant Range: Cost behavior estimates are usually based on historical cost observations and analyses. If cost behavior characteristics are projected outside of the observed range of activities, the projections may not be accurate. activities, Time assumption: As time passes, the business environment changes, and cost behavior may change as well. change Chapter 11 Forensic and Investigative Accounting 14 Cost Behavior Estimation Methods Cost Most organizations have very little cost information that is Most captured and reported by type of cost behavior pattern. In order to determine cost behavior characteristics, accountants must use a variety of methods to estimate cost behavior patterns. behavior – EXPERIENCE: Often a working knowledge of a firm’s EXPERIENCE: accounting system will provide some knowledge of the nature of cost behavior in the firm’s accounting system. cost – Merely trying to separate all current cost accounts into fixed and Merely variable costs is usually not a very accurate method of estimating cost behavior. cost Chapter 11 Forensic and Investigative Accounting 15 Cost Behavior Estimation Methods Cost PLOTTING COST DATA: “A picture is worth PLOTTING picture a 1,000 words”, is an old saying that has some merit in describing cost behavior patterns. merit – It is really easy now to take accounting cost data and It use many different software packages to plot data. – The resulting graphs can provide a good idea of the The general nature of the cost volume relationships, although precise descriptive cost models are not provided. provided. Chapter 11 Forensic and Investigative Accounting 16 Cost Behavior Estimation Methods Cost HIGH-LOW METHOD: The highest and lowest costs are identified along The with their related volume levels. These are used to estimate fixed and variable costs: estimate Example: Variable cost = $300,000 - $280,000 Variable 100,000 un. - 90,000 un. 100,000 = $20,000 = $2.00 / unit $20,000 10,000 un. 10,000 Forensic and Investigative Accounting 17 Chapter 11 Cost Behavior Estimation Methods Cost HIGH-LOW METHOD (cont.) Fixed cost = $300,000 - (100,000 units x Fixed $2.00 unit) $2.00 = $100,000 $100,000 Total cost = $100,000 + $2.00 X Chapter 11 Forensic and Investigative Accounting 18 Cost Behavior Estimation Methods Cost REGRESSION/CORRELATION ANALYSIS – An analytical tool for measuring the degree of An association between two or more variables. association It is a two-step process: – Regression measures the nature of the association Regression nature between the variables. between – Correlation measures the strength of the association Correlation between the variables. between Chapter 11 Forensic and Investigative Accounting 19 Regression/Correlation Analysis Regression/Correlation TYPES OF REGRESSION: 1) Simple Linear Regression or Bi-Variate Regression Regression – Two variables: – A dependent variable which is usually cost in dependent our analyses. our – An independent variable or predictor variable An which is usually the measure of the volume of activity in our analyses. activity Chapter 11 Forensic and Investigative Accounting 20 Regression/Correlation Analysis Regression/Correlation A positive (+) value for b indicates that the dependent and positive the independent variables are positively correlated (moving in the same direction). A negative (-) b value indicates that the dependent and the independent variables are moving in opposite directions. (Example, and increase in interest rates is related to a decrease in construction costs.) costs.) The a value indicates point where the regression line The crosses the “Y” axis. What does a negative? positive? value for a indicate? indicate? Chapter 11 Forensic and Investigative Accounting 21 Regression/Correlation Analysis Regression/Correlation The coefficient of determination measures the amount of The explained variance (i.e. Of the total variance of the dependent variable about its mean (average) value, the amount of that variance that can be explained by changes in the volume of activity is measured by the coefficient of determination.) For example, a coefficient of determination of .84 or 84% means that 84% of the dependent variable’s total variance can be explained by changes in the volume of activity. changes Association vs. Causation - Regression/correlation analysis Association shows the degree of association between variables, but it does not prove causation. does – Why this is true? Chapter 11 Forensic and Investigative Accounting 22 Reasons for the Unexpected Some of the accounting reasons that regressions may yield unexpected or perplexing results include: – Allocations. – Transfer prices. – Entity concept. – Accounting policies. Forensic accountants must be adequately informed about the nature and operation of the accounting system for each and every business that they are evaluating. Chapter 11 Forensic and Investigative Accounting 23 Federal False Claims Act The Federal False Claims Act was passed to The protect the government from the unscrupulous acts of a few government contractors that intentionally or carelessly overcharge the government for goods or services. government Chapter 11 Forensic and Investigative Accounting 24 Federal False Claims Act Litigation Fraud allegations Whistleblower allegations – Qui tam suits » Origin » Current application » The role of the US Justice Department in Qui Tam The suits – Reasons for bringing action Chapter 11 Forensic and Investigative Accounting 25 Accountant’s Role in Federal False Accountant’s Claims Act Litigation Claims Accountants may act as an expert Accountants witness for the defense, the government, or a whistleblower litigating the qui tam parts of the case. parts Accountants have a unique role to play Accountants in FFCA cases in Chapter 11 Forensic and Investigative Accounting 26 Accountant’s Role in Federal False Accountant’s Claims Act Litigation Claims Typical questions that accountants help courts to answer Typical are: are: – What costs should be included in the contract? – How should costs be measured under the contract? – What is the correct timing of the costs and/or What revenues under the contract? revenues – What accounting concepts, rules, etc., apply under What this contract? this – What is the magnitude of the damages that occurred What because of the fraud that took place? because Chapter 11 Forensic and Investigative Accounting 27 Accountant’s Role in Federal False Accountant’s Claims Act Litigation Claims Under the Federal False Claims Act, a person Under acts knowingly with respect to information if the knowingly person has: person – Actual knowledge of information. – Acts in deliberate ignorance of the truth or Acts falsity of the information. falsity – Acts in reckless disregard of the truth or Acts falsity of the information. falsity Chapter 11 Forensic and Investigative Accounting 28 ...
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This note was uploaded on 05/03/2011 for the course ACCT 574 taught by Professor Gardner during the Winter '11 term at Keller Graduate School of Management.

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