Forensic and Litigation Consulting Insights

WINTER 2013 • ISSUE NO. 8 FORENSIC AND LITIGATION CONSULTING INSIGHTS

WASHINGTON, DC

WINTER 2013 • ISSUE NO. 8

CONTENTS: INTERNATIONAL RISKS FOR U.S.-BASED

– International Risks for U.S.– GLOBAL COMPANIES: A GUIDE FOR THE CHIEF Based Global Companies: A Guide for the Chief ACCOUNTING OFFICER Accounting Officer by Jay Spinella – High-Tech Trials: Best Practices in War Room Equipment – A Source of Information Given the continued sluggishness in the U.S. economy, many U.S.-based companies are pinpointing the international marketplace (particularly emerging markets) as the best place for growth, either – Taxes, Taxes Everywhere! organically or through business acquisitions. Although the business strategy may be sound, there are numerous risks that U.S.-based companies should understand in dealing with international subsidiaries, global transactions, foreign personnel and unique business environments. This article is focused on the business and accounting risks faced by a chief accounting officer or controller of a U.S.-based global company and the leading practices that should be utilized to mitigate some of these risks.

INTERNATIONAL BUSINESS AGREEMENTS

One of the more challenging aspects of capturing international transactions is identifying any unusual aspects contained within international business agreements. Whether partnership agreements, purchase and sale agreements, leases or management contracts, among others, business agreements negotiated and documented outside the United States are structured to conform to business models different from what we typically see at home. These differences frequently are driven by country-specific laws or regulations, expectations of the local business community, foreign investor rules or a wide range of tax implications. Also, international agreements sometimes can merge several business concepts within one business document (such as a lease and management agreement), which is not typical in the United States. As such, it is vitally important for a chief accounting officer to review all new and existing business agreements, particularly older agreements with lengthy terms, pertaining to revenue recognition and off- balance sheet risks in particular. International growth through acquisition can be a challenge in this regard, and a thorough review should be performed during the purchase accounting phase of any acquisition.

U.S. GAAP KNOWLEDGE AT INTERNATIONAL SUBSIDIARIES

With today’s ever-changing Another often overlooked risk involving global U.S. companies is accounting risk resulting from lack market, companies are faced of expertise in U.S. generally accepted accounting principles (GAAP). Although seemingly obvious, with unprecedented challenges. international accounting personnel and department heads tend to view their roles with more of an FTI Consulting can drive, support operational focus toward financial close timing and upstream reporting. Many times, balance sheet and sustain solutions that help analysis, particularly off-balance sheet risk, is not a priority for accounting departments outside the organizations maintain and enhance United States. In addition, differences between U.S. GAAP and any local GAAP reporting (such as their enterprise value. In our International Financial Reporting Standards or country-specific GAAP) easily can be overlooked due to lack of management attention on compliance with U.S. rules. In other words, it is a mistake to assume eighth issue of the FTI Consulting globally based accountants have expertise in U.S. GAAP or knowledge surrounding our rules-based Washington, DC thought leadership accounting literature, which uses terminology, language and concepts with which international newsletter, our professionals share personnel may be unaccustomed. their unique and expert perspectives on best practices in war room International accounting groups may have visibility into financial balances and results that reside only equipment, international risks for within their sphere of influence. For example, international regions may be aware of intercompany U.S.-based global companies, source balances recorded exclusively at the international subsidiary. In that regard, it is essential at the code yielding key information in a U.S. parent level to confirm and reconcile all intercompany accounts (balances that exist among forensic investigation and rises in taxes. international subsidiaries, as well as those among international subsidiaries and the U.S. parent). Areas of additional scrutiny may include revenue recognition (particularly with regard to whether collectibility is reasonably assured1, lease classification, consolidation involving variable interest entities, timing of liability recognition and foreign currency accounting (discussed later).

LEADING PRACTICES In that regard, it is important for a chief only to Translation when such loans are not accounting officer to assess the need for anticipated to be settled in cash (e.g., they -- Leadership with Strong U.S. the establishment of business process are deemed long term). Long-term loans GAAP Background: International teams outside the United States. This may necessitate documentation (as to the intent subsidiaries or regional headquarters help assure that all business processes, not to settle in cash) at inception to obtain of U.S.-based companies need accounting controls and risk assessments Translation accounting. Otherwise, Re- finance and accounting leadership at the international level have been fully measurement accounting is required, which that is cognizant of the differences inventoried. Additionally, consideration may expose the U.S. parent to extreme income among U.S. and international should be given to the creation of sub- statement volatility. Additionally, it is critical accounting rules. This may involve certifications, similar to SOX Rule 302 to ensure that foreign subsidiaries (as well as executive leadership relocating to certifications, for international finance the U.S. parent) are using the same sources to key international subsidiaries or and accounting department leadership. obtain currency rates, as fractional amounts headquarters for a period of time. Although more of a symbolic gesture, ultimately can create large differences in having international personnel sign sub- this area during either a Translation or Re- certifications may stimulate attention measurement. Certain industries that utilize -- Balance Sheet Focus and Enhanced toward the seriousness of the U.S. regulatory a large number of individual reporting units Communication: International environment. Generally, creating a process to to capture financial data and results (such organizations often place attention regularly review the strength of accounting- as hospitality, energy, real estate and retail on operational results (such as based controls at the international level can companies) also may warrant additional performance metrics like EBITDA, help eliminate the risk of a material weakness scrutiny with regard to foreign currency issues. net operating margin or gross profit) and, at a minimum, track progress toward rather than on the totality of the compliance with U.S. rules. finance statements. It is important to put procedures in place to recognize LEADING PRACTICES and review balance sheet accounts COMPLEXITY OF FOREIGN and the drivers of period-over-period CURRENCY ISSUES -- Apply System-Based Controls: Due changes. Additionally, it is essential to the complexities surrounding for a chief accounting officer to Foreign currency accounting is another area Translation and Re-measurement communicate all business and that may appear simple at first but actually accounting, applying system-based accounting risks with international can have complex implications. Foreign controls for all foreign currency issues department heads on a regular basis. currency issues are broken down into two key can eliminate some of the guesswork concepts: and potential human error. Any -- Regular Training on U.S. GAAP process that is reliant on manual and Regulatory Updates: Regular -- Cumulative Translation Adjustment (CTA calculations carries extreme risk. training programs are critical for all or Translation): CTA captures the impact international finance and accounting from fluctuations in foreign currency -- Document All Foreign Currency personnel in order to continue to exchange rates after translating (into Cash Funding: In order to reinforce key U.S. GAAP concepts. U.S. dollars) a foreign subsidiary’s assets obtain long-term treatment on and liabilities (held in local currencies) intercompany cash funding, at end-of-period rates and holding it is essential that finance and retained earnings constant. The resulting accounting departments work CTA adjustment amount is recorded closely with treasury departments INTERNAL CONTROL on the balance sheet as part of other to certify that knowledge around DOCUMENTATION comprehensive income. foreign currency transactions and the accompanying documentation The amount of time, effort and cost needed -- Foreign Currency Cash Flow Exposure exist to support conclusions. for compliance with rules and regulations (Re-measurement): Re-measurement surrounding internal control compliance; captures the impact from fluctuations in namely, the Sarbanes-Oxley Act (SOX), can be foreign currency exchange rates as applied -- Hedging Foreign Currency staggering for an international organization. to business transactions (such as loans or Exposure: A company’s treasury While U.S.-based companies have seen receivables) denominated in currencies group should be actively involved unprecedented changes in this area over other than the functional currency of in all situations involving foreign the past decade, the establishment and the entity involved. These transactions currencies (both Translation and documentation of an organization’s internal ultimately will require settlement in cash, Re-measurement). This will allow control environment has not been given the and, as such, the Re-measured amounts the company to develop a strategy same concentration in many overseas areas are recorded as a foreign currency gain or to hedge potential cash flow and (particularly in the Asia region). Although loss on the income statement. income statement risks. certain controls may be in place, though undocumented, most auditors, regulators and other stakeholders will assume that Leadership at a U.S.-based global company controls do not exist unless fully documented. needs to be aware of the distinctions between This simply is the state of affairs with which these concepts since they sometimes overlap. we are dealing in today’s U.S. regulatory For instance, loans funded from a U.S. environment. parent to a foreign subsidiary are subject

1 As outlined within Accounting Standards Codification 605, “Revenue Recognition.”

HUMAN RESOURCES charges frequently include criminal and civil CONCLUSION CONSIDERATIONS penalties for both companies and individuals. Application of the FCPA may be best handled In order to effectively prioritize resources, Although traditionally not on the radar generally by a company’s general counsel and time and effort within a global organization, of a chief financial officer in the United regulatory compliance officers but shouldn’t leadership first must identify the primary States, human resources and personnel be overlooked by finance and accounting risk factors. Although all organizations are considerations may require more focus personnel. While a chief accounting officer different and have unique risk profiles, it is internationally than back home. In many doesn’t necessarily need to be an expert important to understand the key drivers and countries, employee rights such as workday on the nuances of all FCPA provisions, react accordingly. Many of the risks have and workload limitations, job security one certainly should be aware of the key been outlined here, but in an ever changing and position elimination notice, among provisions, internal control requirements and world, it is imperative to stay vigilant in an others, are commonplace. This results risks surrounding this hot button issue. The effort not only to survive but also to prosper. in the inability to make swift corrective FCPA was enacted by Congress more than action when dealing with personnel issues three decades ago, and it’s apparent that this or headcount challenges. With the type of legislation is not going away anytime soon. ABOUT THE AUTHOR employment climate currently in existence, it is important to be proactive when Jay Spinella establishing or acquiring international Managing Director accounting departments. When changes to LEADING PRACTICES Forensic and Litigation Consulting an international accounting department are +1 202.312.9226 made, they should be done collectively after -- Complete Detailed Compliance [email protected] careful consideration of country-specific Program, Including Training: While laws and in coordination with local and U.S. there are no bright lines here, Jay Spinella is a managing director in the parent human resources personnel. Having a it’s clear that having a fulsome FTI Consulting Forensic and Litigation long-term strategic vision for international compliance and training program Consulting practice and is based in accounting departments is vital. provides companies some leverage if Washington, DC. Mr. Spinella is an any issues do arise. accounting professional with more than 15 years of accounting experience gained in FOREIGN CORRUPT PRACTICES -- Enhanced Due Diligence on public accounting (Arthur Andersen and ACT IMPLICATIONS Acquisitions: Although it is unlikely Ernst & Young) and with the U.S. Securities that an acquiring company will be and Exchange Commission. He provides International accounting departments are exposed to significant liability resulting consulting services for law and accounting on the frontlines with respect to ensuring from breaches that occurred prior firms, public companies, and others compliance with the Foreign Corrupt to acquisition, an FCPA risk-based regarding financial reporting, technical Practices Act (FCPA). Effectively, the FCPA review should become part of the due accounting and SEC related matters. mandates comprehensive anti-corruption diligence process. and anti-bribery rules that include topics such as facilitation payments, proper and -- Analysis of Recent SEC Releases and improper gifts to foreign offices, and travel Monitoring of Enforcement Actions: and entertainment expenses and specifies It is critical to keep in front of all recordkeeping provisions. The recordkeeping FCPA-based literature produced by the provisions of the FCPA require internal DOJ or the SEC to gain insights into the controls that are strong enough to detect any regulatory backdrop. Recently, a joint violation, which is a relatively broad requisite. project titled FCPA: A Resource Guide Both the U.S. Department of Justice (DOJ) and to the U.S. Foreign Corrupt Practices the U.S. Securities and Exchange Commission Act2 was issued by the DOJ and SEC (SEC) have been aggressively pursuing some detailing interpretations of the FCPA of the largest global U.S.-based companies and recent enforcement practices. and bringing significant charges. These

2. Issued jointly by the DOJ and the SEC on Nov. 14, 2012.

HIGH-TECH TRIALS: BEST PRACTICES IN WAR ROOM EQUIPMENT by Jamey Johnson

A high-tech trial typically will include Printers, copiers and scanners are a i.e., you can scan the document into a PDF equipment in both the war room - for necessity in the war room as well. Although file and print to a black-and-white or color trial preparation - and the courtroom today there are many multi-function devices printer. Finally, if you do decide to go with a - for in-court display of evidence and that combine all three, as well as faxes, large-footprint copier, make sure it is provided demonstratives. Whether in the war room unless your trial team is small or the trial by a local contractor and arrange in advance or the courtroom, the equipment must be is short, multi-function devices should be for fast turnaround on service calls. Copiers dependable. Nowhere is it more critical avoided in favor of singularly dedicated invariably have issues, such as paper jams and than during trial that equipment perform as devices. The old saying “Jack of all trades, toner clogs, and having immediate access to a intended. In the war room, attorneys and master of none” especially is applicable in local, on-call technician is a must. staff must be able to rely on computers and this context as each respective function is printers to speed up the preparation process slower on a multi-function device than on Now that you have your laptops, printers for the next trial day, and equipment failure a piece of equipment solely dedicated to and scanners set, it is time to think about could spell disaster, especially if your war its task. Moreover, multi-function devices “sharing.” The ability to share is crucial in a room is in a remote location away from your can contribute to time constraints: For war room: You will want to share printers, home office resources. example, when one person is printing to a data and, of course, the all-important Internet multi-function device, it cannot be used connection, and this is where a small network Well in advance of trial, contact your in-house for scanning or copying, and no one wants comes into play. To share Internet bandwidth, litigation support group or trial consulting to wait to complete a task, particularly at along with printers and data, you will need company and request a list of support trial when time invariably is in short supply. a network router connected to the primary equipment. Importantly, take steps to ensure Additionally, if such a device were to fail, Internet connection and shared with all that the equipment to be deployed is well- one loses all the functionalities of that computers via Ethernet cables or a wireless maintained and sufficient in specifications device—printing, copying, scanning and connection. You can leave the actual details to provide the speed and efficiency you will faxing—and such a single point of failure to your litigation support staff or outside require during trial. If you are working with should be avoided. consultants, but you will want to ensure the consultants and are leasing equipment, make network is secure. If Ethernet cables are used, sure the equipment provided is new and up With this in mind, the number of devices make sure they do not run through public to the task at hand. Some trial consulting deployed will be dictated by the size of your areas where someone could have tampered companies rent out their own equipment as a team. A good rule of thumb is to have one with the lines. Likewise, if you’re going to use means of profit, which can incentivize them high-speed black-and-white laser printer for a wireless network, make sure the network to hold on to outdated equipment. Make sure every five persons. These printers will be the is set up to send encrypted data and that you’re not getting the last few items in the workhorses at trial, whether you’re printing passwords or keys are required in order to warehouse. outlines, motions or witnesses binders. You get connected. Though wireless security has also need to have a high-speed color laser come a long way in recent years, it generally Though the type and size of the war room printer on hand. One color printer typically is is preferable to use a wired connection with and length of trial will play some role in the sufficient unless you will be relying heavily on cables running through secure areas. One amount and kind of equipment deployed, graphics and demonstratives; then you would can’t be too careful with confidential data and every war room, whether local to your firm need more than one. Be sure the color printer electronic work product. or remote, generally will have the same is a laser device and not an inkjet. Inkjet core complement of equipment. First and printers are cheap and convenient for home With the infrastructure in place, you need foremost, everyone in the war room should use but simply do not print fast enough for to plan how you’re going to access all be equipped with a reliable computer with use at trial, and they can run out of ink very that data and all those documents you’ve access to the Internet, which typically means quickly. Even color laser printers can be put accumulated for trial. The first question to a small network setup (discussed below). to task at trial when printing from programs ask is whether you will be bringing data Laptop computers are favored for remote such as PowerPoint. Be sure your in-house with you for easier/faster access and, if so, environments as they are much easier to ship support department or outside trial consulting how much data? The more data you bring, and deploy than their desktop cousins, as well company is providing a late-model color laser it becomes increasingly important to have a as transport between war room workspace printer with a sufficient print speed. Ask for file server on-site. For shorter duration trials and sleeping rooms. Moreover, today’s specifications and print speeds: A minimum with small document databases, you may laptops are far closer to desktops in speed and of 20 color pages per minute is recommended not need any centralized, on-site hosting or processing power than in the past. Attorneys for a war room environment. Importantly, network sharing capabilities. What’s stored on likely will use their own firm-issued laptops make sure you have a full complement of each individual’s laptop may be acceptable, during trial as these devices are presumed to consumables for all your printers, including and, with sufficient bandwidth, you always be well-maintained by the firm’s IT staff, and toners, fusers, drums, etc. There is nothing can access your office network via Citrix they will be configured for remote access to more frustrating than running out of toner or VPN. However, for larger engagements, the firm’s network, as well as for security. If at 3:00 in the morning before an important you normally will have some sort of shared your support staff also has firm-issued laptops, witness is scheduled to appear. With respect network on-site with the ability to share they will suffice for most engagements - an to copiers and scanners, one of each generally printers and data - and, of course, an Internet exception is longer duration matters or will be sufficient unless the trial team is very connection. At a minimum, your litigation serial/multi-district litigation with larger trial large. Conversely, if the team is small or the support staff or outside consultants should teams and a central server where it can be duration is short, a large-footprint copier have access to a central storage location in advantageous to rent identically configured may not be necessary, as a scanner connected the war room to house the trial presentation laptops. This is covered in more detail below. to a laptop can be used as an ad hoc copier; database, video depositions and any

demonstratives that may be used. A central constantly accessing files likely will result in location from which to access these data, staring at an hourglass. This is not to say you ABOUT THE AUTHOR coupled with a small network, allows the need to bring all 25 discovery databases to support team to share and print information, the war room. Rather, schedule a meeting Jamey Johnson access e-mail and the Internet, and back up with your in-house support group or outside Senior Managing Director important files. Any changes made during consultants to discuss on-site hosting vs. Forensic and Litigation Consulting an evening of preparation are stored in the Citrix/VPN access and come up with a plan to +1 202.312.9107 central repository and can be loaded to the mitigate bandwidth erosion during the trial. [email protected] trial computers each morning for display The result may be some combination of hosted during court. Depending on the amount of data with an increase in Internet bandwidth. Jamey Johnson is a senior managing data, number of users and trial budget, the Regardless, when faced with significant director in the FTI Consulting Forensic central repository need not be a full-blown, data, plan well ahead to make sure all the and Litigation Consulting practice and is enterprise-level server; for example, a desktop information is at your fingertips when you based in Washington, DC. Mr. Johnson computer with a shared or external drive need it. is the national leader of FTI Consulting’s connected to a laptop and configured to be Trial Technology practice and is ultimately shared over the network may be sufficient. Finally, regardless of the decision pertaining responsible for managing, staffing and to having a local file server in the war room coordinating trial technology consulting Longer engagements, such as multi-district or remote access to your firm’s resources services nationwide. His areas of expertise litigation and large-exposure matters with back at the office, always maintain a backup include courtroom and war room complicated products, may demand a proper of the work product and database(s) used technology, management of large scale file server with significant storage for locally on-site in the war room. This can be a function and multi-district litigation, discovery hosted data. These types of engagements of a properly configured file server, use of management, work flow and process usually require large trial teams that will a separate device such as tape backup or consulting and trial logistics, as well as need sustained access to trial and discovery network attached storage device, or even an deposition video management and editing. databases and video depositions, which, by external hard drive. Much like running out themselves, demand a lot of storage and of toner for the printer or copier at 3 a.m., cannot be accessed over the Internet. Indeed, failure of your principal data storage device the Internet can become a bottleneck in this can be disastrous—make sure you have a situation if there is no locally hosted data. complete backup of the data and plan in Multiple persons using Citrix or VPN to access advance with your litigation support team data back at the office can grind even the or outside consultants for the protocols most robust Internet connection to a slow and equipment to be used to ensure data crawl. Every file accessed in such a manner redundancy. must be pulled across the Internet to the user’s laptop and, thereby, uses bandwidth; In sum, whether configured in your office for additionally, such connections typically a local hearing or set up in a leased space for are encrypted, adding to the load on the a remote trial, make sure you have access to Internet connection. A T1 or faster connection quality computers, equipment and peripherals generally is sufficient for moderate remote and the ability to efficiently share printers, access, but 10 to 20 associates and paralegals data and Internet connectivity. relying exclusively on such a connection and

A SOURCE OF INFORMATION Analysis of source code can yield key information in a forensic investigation by Joseph Sremack

The success of any forensic investigation company’s claims processing group writes Analyzing the logic used to create hinges on information. Sources of a program to assign a score to each of the and process that data, however, can information that now are standard for many claims received that day. The program is expedite the investigation by allowing investigations—such as e-mails, working scheduled to automatically run every day, the investigator to uncover relationships papers and transactional data—help the and the program assigns a score and stores between the systems, as well as identify the investigator answer critical questions. E-mails the claim data and score in a database. business rules used to generate particular and working papers detail who knew about The scoring logic can be reviewed by an values, thereby allowing an investigator to key activities and who was responsible for investigator to determine how the company know more about the data and potentially them, as well as what the business policies assigns scores. cull which data need to be analyzed. Source and procedures were. Transactional data are code for key business operations can be quantitatively analyzed to answer questions analyzed to serve such a purpose. involving “When?” and “How much?” WHY ANALYZE SOURCE CODE? Those sources of information, however, may not offer a complete view of how the Source code is a valuable resource for an WHY NOT ALWAYS ANALYZE events occurred. The logic for automated investigator for a number of reasons. First, SOURCE CODE? operations, known as source code, is a source source code contains information about the of information for answering key questions business rules used to perform operations. A Source code analysis is a time-consuming about how the events occurred. company’s policies and procedures documents process that necessitates programing language do not always match the actual operations expertise. Much like spoken languages, of a company, and source code can be used reading and understanding a programming WHAT IS SOURCE CODE? to identify those discrepancies. Second, the language require detailed recognition of the source code for key business operations syntax and semantics of the programming Source code, taken broadly, is a term used contains information about how and where language in order to be able to decipher the to describe computer instructions that are the data from that operation were stored. An source code. An investigator may or may written by people and executed by computer investigator can more quickly identify the key not need to testify about the findings, which programs. A source code file contains the databases and other sources of information mandate a court-acceptable and demonstrable logic that is to be executed by a program in by knowing where the source code program level of expertise. a form that can be read and understood by stored them. a person. Source code is either compiled into To expedite the time-consuming process, an executable file or is interpreted by another Source code also can be analyzed vis-à-vis the virtually all companies have automated the program that translates the source code into data repositories to identify discrepancies. majority of their data-related operations. computer operations. Source code provides the business rules The automation of the complex operations for how the data were to be stored. If an requires thousands, if not millions, of lines of Source code files are written in a investigator believes that data should not code. While automated source code analysis programming language that is understood have been altered by anything but that techniques exist, the majority of the source by the program used to execute the logic. program, the data can be tested to identify code analysis is performed by reading each Each programming language is different and anomalies. These anomalies, in turn, may line of code. typically is used for particular purposes. point to non-standard or fraudulent activity. Some examples of source code include Source code is not always complete or logic written for Microsoft Visual Basic Transactional data help form the backbone of easily identifiable. Source code can reside in for Applications, database scripts and virtually all forensic investigations, but, with numerous places such as the programmer’s compiled .NET programs. Older financial the recent explosion in corporate data volume computer, a network file server or a firms occasionally have programs that and complexity, additional information about source code database repository. Many initially were developed in the 1970s using the data can assist the investigator in answering versions of the source code may exist, and, mainframe programming languages such questions about the data. The storage volumes sometimes, the source code is converted as AS/400 Control Language and COBOL. of one form of transactional data, known as into a program, and the original source code Web-based startup companies, on the other Big Data, are growing at exponential rates. A is lost. These factors can severely hinder a hand, favor modern programming languages 2011 McKinsey Global Institute study found source code analysis. like Ruby and Python. that companies in every sector had at least 100 terabytes of data stored and that one financial Program source code is developed by a firm employing less than 1,000 employees had HOW DOES SOURCE CODE FIT company’s IT and business function groups 3.8 petabytes of stored data.1 Analyzing that INTO AN INVESTIGATION? to perform specific operations. A software much data may not be feasible given time and developer translates business requirements budget constraints. Source code, like other forms of information, into a source code file that then is executed is analyzed entirely or partially, depending on via a compiler. For example, an insurance the nature of the investigation. A full analysis

1. Big Data: The next frontier for innovation, competition, and productivity, McKinsey Global Institute, May 2011, p. 4: http://www.mckinsey.com/Insights/MGI/Research/Technology_and_ Innovation/Big_data_The_next_frontier_for_innovation.

is warranted when the amount of source code The requirements of an investigation will ABOUT THE AUTHOR is small or the business operations must be determine how the source code is analyzed. analyzed in depth. In that scenario, a business The investigation can be performed against Joseph Sremack operation is in question, and data and working every line of code or a subset of a specific Senior Director papers alone are not sufficient. The source operation. The source code can be analyzed Forensic and Litigation Consulting code is analyzed by hand to identify the key in conjunction with working papers and +1. 202.728.8746 business logic and data sources involved. The transactional data or on its own. In any of [email protected] analysis findings will be a complete picture of those scenarios, if a company has developed the automated operations. its own processing logic, an investigator needs Joseph Sremack is a senior director in the to remember that source code is another FTI Consulting Forensic and Litigation An analysis of a subset of the source code source of information that can be the key Consulting practice and is based in is performed when specific information is piece of the investigation. Washington, DC. For the past 11 years, required, but the entire automated process Mr. Sremack has provided technical and does not need to be known. When an consulting services in the areas of complex investigator wants to know how a particular data analytics, computer forensics, software task was performed or how a data point development, electronic discovery, and was generated, automated searches of the digital security. Mr. Sremack’s expertise source code are performed to pinpoint the is in complex data analytics involving source code file, and an analysis of that file transactional and disparate data. is completed.

TAXES, TAXES EVERYWHERE! by John R. McGrath

You would have to have been marooned on a that failure to address these issues could send As it stands today, automatic tax increases desert island not to have heard that the fiscal the economy into a second recession with that would be effective on Jan. 1, 2013, cliff is upon us. Hundreds of commentators truly unknown consequences for the U.S. and include higher income tax rates for all wage have written thousands of pages on what world economies. earners, increased investment tax rates for could happen if Congress and the president long-term capital gains and dividends, a don’t take some action to avoid the Speculation as to what could happen is all return of the marriage penalty, and higher elimination of the Bush tax cuts scheduled to over every media outlet in the nation. Rather estate and gift tax levels. The president’s expire on Jan. 1, 2013, and the sequestration than adding to the multitude of possibilities Social Security 2 percent tax break for 2011 (across-the-board budget cuts) negotiated being advanced, I thought it might be useful and 2012 also expires at the end of the year. to avoid addressing the budget and deficit to briefly outline what is scheduled to Other changes to individual and business tax problems that have plagued prior discussions happen if no action is taken and then report provisions are too numerous to mention. to deal with the U.S. debt limit. While many what positions have been advanced by the of the theories advanced are interesting administration and congressional leaders. Although not a part of the automatic tax and make sense to reasonable people, the Almost no commentator believes that the increase, new taxes related to the healthcare government “ruling class” is too busy playing unthinkable could happen (expiration of legislation also are effective Jan. 1, 2013. politics to advance its respective agendas, and tax cuts and sequestration), but it certainly The new taxes includes a 3.8 percent tax little, if any, progress has been reported on is a possibility when you consider the on investment income for individuals with proposals to avoid the automatic tax increases diametrically opposed solutions sponsored by adjusted gross income of $200,000 ($250,000 and budget cuts facing the nation. All of this the political parties. for joint returns) plus 0.9 percent on wages negative news takes place while the country earned above the same amounts. is mired in a slow- or no-growth environment. In the past four years, the government has COMPARISON OF EFFECTIVE TAX RATES FROM THE AUTOMATIC CHANGES nationalized, at least partially, the U.S. car industry, the health insurance industry and 2012 2013 the student loan industry and has arguably Top income tax rate 35.0% 39.6% made it more difficult for U.S. energy producers to operate in this country. These Capital gains 15.0% 23.8% purely political issues have focused even Dividends 15.0% 43.4% more attention on tax policy: Government spending and the increasing budget deficit as Estate and gift rate 35.0% 55.0% the polarization between the administration’s Estate and gift tax exemption $5.12 million $1.00 million proposed solutions meet strong opposition from the Republicans in Congress. It is possible Social Security rate 4.2% 6.2%

THE CURRENT POSITIONS ADVANCED could be increased to $500,000 or even $1 BY THE ADMINISTRATION AND million. The Republicans still oppose tax ABOUT THE AUTHOR CONGRESSIONAL LEADERS: increases as these legislators believe such increases would adversely affect job creation, John R. McGrath Specific proposals from the administration as although the GOP seems to support closing Managing Director reported by Deloitte and others suggest that certain tax loopholes as a means of raising Forensic and Litigation Consulting President Obama’s fiscal 2013 budget package revenues without increasing rates. +1 202.728.8718 remains the outline of the administration’s [email protected] position. This plan would increase the top The debt ceiling is another pressing issue, marginal income tax rates and investment tax and the administration’s plan includes a John McGrath is a managing director in rates for upper-income individuals, extend provision to allow the White House to raise the FTI Consulting Forensic and Litigation the lower Bush rates for low- and middle- the federal debt ceiling by limiting Congress’ Consulting practice and is based in income taxpayers, and return the estate tax power to block future debt ceiling increases. Washington, DC. He provides litigation to its 2009 levels with a top rate of 45 percent It is doubtful that Congress will permit the support, expert testimony and advisory with a $3.5 million exemption. Reportedly, president to remove the power of the purse services in connection with forensic the administration also wants to extend the from its control to his. accounting investigations, partnership and 2 percent Social Security tax reduction and shareholder disputes, mergers, acquisitions patch the alternative minimum tax among We are fast approaching D-Day for a solution and divestitures, tax compliance and litigation other benefits. On the sequestration issue, the to the fiscal cliff, and the general consensus is matters. He is an experienced professional administration wants a one-year delay on the that the can will be kicked further down the in matters involving generally accepted automatic spending cuts and an extension of road so that tax reform, deficit reduction and accounting principles (GAAP) and generally unemployment insurance benefits. spending cuts will need to be addressed later accepted auditing standards (GAAS). in 2013. Certainly, it appears that virtually all What about Congress? The Republicans the automatic spending cuts will be restored complain that the administration has no plan one way or the other by congressional to protect Medicare and Social Security or to action. It will be interesting to see how this attack the national debt in any substantive complicated situation plays out as the political way. The Democrats in Congress are not as considerations have long since relegated wedded to the $200,000 threshold as is the sound tax policy, spending cuts and deficit president, and it is possible that the ceilings reduction to the back burner.

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