Contents

• Court and BV Expert Cope With Lack of Financial Data in Difficult Divorce
• Case Includes a List of Facts By Which to Assess a FLP's Non-Tax Business Purpose
• Case Shows the Importance of Distinguishing Lost Profits Versus Lost Business Claims
• Inexperienced, Unprepared Expert Caught in Deposition
• Managing the Explosion of Electronic Evidence with Your Financial Expert
• A Current Snapshot of BV Professional Reporting Standards

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Past Articles

Valuation in the Current Environment

The current economic environment has challenged the valuation community in determining the value of most businesses.  Valuators not only have to deal with the subjectivity of valuation overall, but are now struggling to support some of the most basic valuation issues such as cost of capital and marketability discounts in quickly changing economic times.

The need for increased self-review, research and support for valuation methods utilized has never been greater.  Methods to develop the costs of capital and marketability discounts should look familiar but also include an element to account for the current economic environment.  Additional thought and support should be given to the following areas:

• Treasury bond yields should be adjusted to a more normalized level.
• Equity Risk Premiums should be considerable higher in the current environment.
• Decrease in liquidity, resulting from more stringent lending practices, should lead to higher lack of marketability discounts.

These are just some of the factors that should be noted when reviewing valuations in the later part of 2008 and early 2009.

Our valuation experts are available to discuss these issues with you and are capable to address the current economic conditions in a supportable manner.

For more information about our Business Valuation practice, email BVLS@SCandH.com or call (410) 403-1500 | (800) 832-3008.

Valuations Insights, Second Quarter, 2009

Managing the Explosion of Electronic Evidence with Your Financial Expert

The current proliferation of electronic information is having a definitive impact on the way financial experts and attorneys are managing litigation matters. In fact, the "information explosion" may well be the single largest issue now facing the Bar and the business valuation profession. By and large, discovery today means the discovery of electronically stored information (ESI), and that means trial lawyers and their forensic experts must become discovery litigators and experts, familiar not only with the recently enacted amendments to the Federal Rules of Civil Procedure governing the production and preservation of ESI, but also the systems that store and supply the data.

Emerging trends

A new cottage industry of IT professionals is emerging to accommodate the demand for systems oversight and intervention in litigation matters. In addition, large businesses and corporations are now hiring "e-discovery counsel," in-house attorneys who are adept at ESI discovery and who can work with IT professionals to comply with the federal rules during the e-discovery process, deposition, and then trial.

However, is the current judicial system prepared to adapt to the onslaught of e-discovery matters? Consider: Current technology may have already outpaced the limits of the medical profession. In the legal profession, time and cost are major limiting factors, and the expense of e-discovery impacts financial experts, too. Litigation experts must also ensure the quality relevance, reliability, and authenticity of the information that forms the basis of their opinions. The quality of ESI will often determine an expert's credibility and the admissibility of their testimony in court.

So far, federal judges have expressed two major concerns: 1) whether the ESI produced in litigation has been manipulated, either intentionally or by routine systems management (e.g., automatic back-up or deletion systems); and 2) whether the programs and procedures used to maintain the records are reliable and have remained intact during normal operations.

Seminal cases serve as warnings.

In the recent case, Lorraine v. Markel American Insurance. Co., (D. Md. 2007), the U/.S. Federal District Court (Judge Grimm) offers a comprehensive analysis on the evidentiary issues affecting ESI. The court also cites In Re Vee Vinhnee, 336 B.R. 437 (B.A.P. 9th 2005), in which American Express failed to recover amounts from a Chapter 7 debtor because it failed to authenticate its paperless business records. "It is becoming recognized that early versions of computer foundations were too cursory, even though the basic elements covered the ground," the Vinhee court said (as quoted in Lorraine):

The logical questions extend beyond the identification of the particular computer equipment and programs used. The entity's policies and procedures for the use of the equipment, database, and programs are important. How access to the pertinent database is controlled and, separately, how access to the specific program is controlled are important questions. How changes in the database are logged or recorded, as well as the structure and implementation of backup systems and audit procedures for assuring the continuing integrity of the database, are pertinent to the question of whether records have been changed since their creation.

"Although it may be better to be lucky than good, as the saying goes, counsel would be wise not to test their luck unnecessarily," the Lorraine court continued. "If it is critical to the success of your case to admit into evidence computer stored records, it would be prudent to plan to authenticate the recorded by the most rigorous standard that may be applied."

These cases serve as a warning to litigators and financial experts that they will need an audit trail for ESI, to show if the records have changed and why. From its review of Vinhnee, the Lorraine court listed 11 steps for attorneys to follow in preparing a sufficient foundation for ESI:

1. The business uses a computer.
2. The computer is reliable.
3. The business has developed a procedure for inserting data into the computer.
4. The procedure has built-in safeguards to ensure accuracy and identify errors.
5. The business keeps the computer in a good state of repair.
6. The authenticating witness had the computer readout certain data.
7. The witness used the proper procedures to obtain the readout.
8. The computer was in working order at the time the witness obtained the readout.
9. The witness recognizes the exhibit as the readout.
10. The witness explains that he/she recognizes the readout.
11. If the readout contains strange symbols or terms, the witness explains the meaning of them to the trier of fact.

Financial experts and forensic accountants can help litigators meet these immediate, broad challenges in e-discovery by:

• Determining the owner/creator of ESI
• Understanding the limits of technology in the authentication process
• Analyzing the threats to the integrity of ESI (possible forgery, etc.)
• Identifying the location and volume of ESI

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