Pretend that you are the owner of your own accounting firm. Your firm specializes in the start-up market. You advise clients on how to set up a new business including hiring and payroll. Since many of your clients are start-ups, they generally do not have ready cash to pay your fee. You have to make a living, though, and you have to pay your employees. In order to get paid, you have developed the following strategy. And, since you have a number of years of experience, you can usually tell which clients are going to be successful.

You generally assess the client and do one of the following before starting work:

1. Demand payment up front
2. Accept a written note payable which is due within one year
3. Accept stock in the company in lieu of payment

Here are the client files that are on your desk right now:

1. One of your senior associates wants to leave and open his own firm. Harry has worked for you for 4 years. Your firm works almost exclusively with start-ups which works for you because you know a lot of creative people and lawyers and, more importantly, most of the clients you have worked with have become successful.

Harry is a good employee, but he would rather open his own accounting firm and work in forensic accounting. Harry would use the same relationships with attorneys that were developed while working with your firm, but he wouldnt really compete because your firm does not provide forensic accounting services. Many forensic accountants are hired by or through attorneys.

Harry has come to you for advice in setting up his own firm. Initially, he does not expect to have any employees, but if he is able to bring in a sufficient amount of work, he plans to hire someone else. Harry actually is thinking of preparing some tax returns to earn money as he starts developing his forensic accounting business.

1. (no points) Which payment option are you going to offer Harry?

2. (8 points) List some factors that Harry should consider related to performing forensic accounting services.

3. (8 points) What are some red flags of financial statement fraud that you could share with Harry?

4. (6 points) If Harry decides to prepare tax returns to earn extra money while he is getting his business up and running, he is more likely to get sued if he dabbles in some high-risk specialty areas. What are two tax types of tax services where clients are more likely to make a claim against the tax preparer?