FTI Company Overview June 2007

1. FTI Company Overview June 2007 FLBA Autumn Lecture SeriesForensic Accounting and Family LawJulia Wallace-Walker FTI Forensic Accounting Limited

2. Agenda • A recent case study (FZ v SZ 2010) • The Role of Accountants in drafting the Form E • Ex parte Applications • Developments in the use of Hildebrand Documents • Role of Experts • Valuation methodology

3. 1. A recent case study- FZ v SZ

4. THE JUDGMENT • 3 lessons: • 1) initial move of a divorce can colour the rest of the case • 2) every action gives rise to an equal and opposite reaction • 3) allegations of dishonesty should be very carefully considered • The expert accountant’s role in preparing the Form E • The expert accountant’s role in ex parte applications

5. THE JUDGMENT • Experts must put their resources to good use • If documents are produced then they must be considered by the Expert.

6. 2. The role of Accountants in drafting the Form E

7. Issues • Complicated affairs • Pressure of time (no excuse for production of defective Form E) • Accountant’s responsibility for non-disclosure • Undertaking of in-depth due diligence • Costs • Independence: Performing further work or accepting appointment as Expert

8. 3. Ex parte Applications

9. 4. Developments in the use of Hildebrand documents

10. The use of confidential information in divorce proceedings • Essential rules from Hildebrand [1992]: • - Documents left lying around the family home or in the dustbins can be legitimately copied and used • - Unacceptable for locks to be breached or for mail to be opened • - Originals should not be retained • - Early disclosure should be given • - No real guidance on data from personal computers • - Problem; if documents show dishonesty then the process is justified but if nothing revealed then the H/W can say that his privacy has been violated.

11. The use of confidential information in divorce proceedings • Tchenguiz v Imerman [2010] • Spouses can no longer take and copy confidential documents they find lying around the marital home • The Court of Appeal ruled there was no legal basis for the Hildebrand rules • Costs order imposed on the W- dangerous strategy • Impact of the ruling • Increasing practice of rich parties dishonestly hiding their assets • Can we do our job without Hildebrand?

12. 5. The role of the expert- Independence?- Single or joint?- Costs issues

13. THE EXPERT • Enhances understanding of accounting issues • Provides commercial and financial reality • Assists in determining complex issues • Offers opinion and gives evidence • Must be independent, impartial and credible • Part 35 of the Civil Procedure Rules (“CPR”) provides detailed rules on the role of expert witnesses • Hiring an expert outside Court Approval (FZ v SZ)

14. Independence? • Are expert accountants “Inevitably partisan?” • Is an expert entirely Independent • No previous commercial relationships with client

15. SINGLE OR JOINT EXPERT? SINGLE EXPERT SINGLE JOINT EXPERT • Single experts are not advocates of their party • Experts may assist from an early stage • Frame further requests of information during disclosure • Assist in the inspection of disclosures • Examine other lay, and expert, witnesses • Usually appointed by the Court, requiring both parties to agree joint instructions • The Court has the power to direct that one expert give the evidence only • Parties should, if possible, agree upon a single joint expert whom they can jointly instruct.

16. WHAT IF THE SINGLE JOINT EXPERT GETS IT WRONG Cost issues • If the valuation is complex and highly reliant on opinion it may be better to seek judgement from more than one expert. • Reality is both sides may hire an expert to verify the amounts for their own interests, and if necessary challenge the findings. Thus pushing costs higher.

17. 6. Valuation methodology

18. VALUATION A fair market value is the price that would be negotiated in an open and unrestricted market between a willing, knowledgeable, but not anxious buyer and a willing, knowledgeable, but not anxious seller, acting at arm’s length.

19. ISSUES TO ADDRESS BEFORE PROCEEDING WITH VALUATION • Would a broad, “at a glance” assessment be most appropriate to achieve a cost-effective result? • Is the valuation to cover the total value of assets (such as a business) or only the spouse’s equity stake in the total assets. • The difference between paper wealth and true wealth.

20. BASES OF VALUATION • Net Assets • Future Maintainable Earnings • Dividend Yield

21. NET ASSET BASIS • Company not reliant on trading i.e. if it is a property holding company. • Firstly, establish the asset value by a valuer in that particular field. • Secondly, the appropriate premium or discount should be applied. • The balance sheet does not show the value of a company in any way – it is merely a snapshot of the company at any given date.

22. FUTURE MAINTAINABLE EARNINGS BASIS • STEP 1: • Assess future maintainable earnings after adjusting for extraordinary and non-recurring items and for tax STEP 2: Determine an appropriate capitalisation rate/Price Earnings Ratio (PE Ratio) • STEP 3: • Multiply future maintainable earnings by PE Ratio = Goodwill • STEP 4: • Value = Goodwill + Surplus assets

23. DIVIDEND YIELD BASIS • Dividend Yield Basis is used in Valuations of minority shareholdings in large private companies paying dividends. • Firm Value = • There may be no dividend history if the shareholders are paid a salary, in which case, a more detailed investigation may be required. Maintainable Dividends Risk – Dividend Growth

24. VALUATIONS • Enterprise Value • Industry rule of thumb • Intangible assets • Date of the valuation • Discount for minority interest • Discount for lack of marketability

25. FTI Company Overview June 2007 Forensic Accounting and Family Lawjulia.walker@fticonsulting.com0207 979 7507Julia Wallace-Walker FTI Forensic Accounting Limited322 High Holborn London WC1V 7PB