Are you a victim of payroll fraud?

Payroll fraud is a serious issue that can have devastating consequences for businesses of all sizes. In this blog post, we’ll explore what it is, how it happens, and what you can do to prevent it.

What is Payroll Fraud?

Payroll fraud is a type of white-collar crime that involves the manipulation of a company’s payroll system to steal money from the organization. This can be done by employees or employers and can take many forms. Some common examples of payroll fraud include:

  • Ghost employees: These are fake employees who are added to the payroll system, and their paychecks are then deposited into the fraudster’s account.
  • Falsified timesheets: Employees may inflate their hours worked or claim overtime they didn’t earn.
  • Misclassification: Employers may misclassify employees as independent contractors to avoid paying taxes and benefits.
  • Unauthorized bonuses: Fraudsters may issue themselves or others unauthorized bonuses or raises.
How Does Payroll Fraud Happen?

Payroll fraud can happen in many ways, but it often occurs when there are weaknesses in a company’s internal controls. For example, if there is no segregation of duties between the person who processes payroll and the person who approves it, it becomes easier for someone to manipulate the system. Similarly, if there is no oversight of the payroll process, it becomes easier for someone to commit fraud.

How Can You Prevent Payroll Fraud?

Preventing payroll fraud requires a multi-faceted approach that involves both technology and human resources. Here are some steps you can take to reduce your risk:

  • Segregate duties: Make sure that no one person has complete control over the payroll process. For example, one person should be responsible for processing payroll, while another should be responsible for approving it.
  • Implement internal controls: Establish policies and procedures that govern the payroll process. For example, require two signatures on all checks over a certain amount.
  • Conduct background checks: Screen all new hires thoroughly to ensure that they are who they say they are and have the qualifications they claim to have.
  • Train employees: Educate your employees about what payroll fraud is and how to prevent it. Make sure they know how to report suspicious activity.
  • Use technology: Implement software that can detect anomalies in your payroll data. For example, if an employee suddenly starts working more hours than usual, this could be a sign of fraud.

By taking these steps, you can reduce your risk of falling victim to payroll fraud. Remember, prevention is always better than cure.

Conclusion

In conclusion, payroll fraud is a serious issue that can have devastating consequences for businesses of all sizes. It’s important to understand what payroll fraud is and how it happens so that you can take steps to prevent it from happening in your organization. By implementing internal controls, conducting background checks, training employees, and using technology to detect anomalies in your payroll data, you can reduce your risk of falling victim to payroll fraud.  If you feel you could be a victim of payroll fraud, a fraud investigation is the best way to find out.

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How Common is Fraud in an HOA?

Homeowners Associations (HOAs) are typically formed by residents of a particular community.  The community shares common spaces and facilities such as swimming pools, parks, and clubhouses. The HOA is responsible for maintaining these common areas and ensuring that all residents adhere to certain rules and regulations designed to promote community harmony. While HOAs can be beneficial in many ways, they are not immune to fraud.  You may be wondering just how common is fraud in an HOA.

Fraud in an HOA can take many forms, and it is often committed by individuals who hold positions of authority within the association. For example, a board member might misappropriate funds or use their position to engage in self-dealing. Another instance when it is common to have fraud in an HOA is when contractors or vendors inflate their prices or submit false invoices for work that was not actually performed.

Unfortunately, it can be difficult to detect HOA fraud, especially when it is being perpetrated by someone in a position of authority. Many residents of an HOA are unaware of the association’s finances and operations, which makes it easier for fraudsters to hide their activities.

To prevent HOA fraud, it is essential for all members of the association to stay informed about its finances and operations. This includes attending meetings, reviewing financial statements and reports, and asking questions about any discrepancies or concerns. If residents suspect fraud, they should report it to the appropriate authorities and work with the HOA board to investigate and resolve the issue.

In addition, HOAs can take proactive steps to prevent fraud by implementing strong internal controls and conducting regular audits of their finances. These measures can help to identify potential fraud and prevent it from occurring in the first place.

Overall, while fraud in an HOA is not uncommon, it is possible to prevent and detect it with the right measures in place. By staying informed and vigilant, residents can help to ensure that their HOA operates in a transparent and honest manner, promoting a safe and harmonious community for all.

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Investigating Employee Embezzlement

Employee embezzlement is, unfortunately, a frequent occurrence in the workplace and often goes unnoticed for months or even years. Both outright stolen and mishandled funds can constitute embezzlement and lead to significant financial losses for your company or business. 

What Is Employee Embezzlement?

Employee embezzlement is when an entrusted person steals from the business they are employed by. Some examples include padding expenses, creating fake vendor payments, or stealing customer credit card data.  Vigilance is key to both preventing and eliminating these opportunities and others. When evidence or suspicion is present, action should be taken immediately. Recovering embezzled funds is a long and complicated process that requires the professional help of an experienced forensic accountant.

What Does Employee Embezzlement Look Like?

There are several questions to consider when establishing the likelihood of embezzlement at your company or business. Considering these questions can also help you to discover any opportunities for potential embezzlement which may exist, and which employees may be involved. 

  1. Is it one or multiple employees taking money from the company or business? According to this study, 79% of embezzlement cases include more than one culprit. 
  2. Do you see inconsistencies in your organization’s financial records?
  3. Missing financial records, unknown vendors, and unapproved payments are all red flags.
  4. Who has access to financial records and clearance to access funds? This study states 85% of employment embezzlement cases are perpetrated by an employee at the management level or above.

How Can I Investigate Employee Embezzlement?

If you suspect employee embezzlement is happening at your company or business, it is important to act fast. Theft of large sums can happen quickly and go unnoticed for years or even decades. Additionally, it is not always possible to recover all embezzled funds. The sooner you act, the more likely you are to recover as much money as possible.

Because so many cases of fraud include multiple people, uncovering the truth can quickly become complex and convoluted. A forensic accountant possesses the skill set to interpret and properly analyze discrepancies. They are specially trained to search for specific, key pieces of evidence and information. A forensic accountant methodically calculates both the magnitude and the duration of embezzlement, as well as identifies the employee or employees responsible for the misappropriation.  

A forensic accountant’s expertise is essential in quantifying all the damages sustained in a legal dispute. Once the forensic accountant determines the extent of the activity, the evidence is documented in the form of an investigation report. This report is critical to recovering the embezzled funds through subsequent legal prosecution. Without a detailed report, a successful resolution in the form of recovered funds may not be possible.

In addition to facilitating the possibility of recovering losses, a forensic accountant will work with you to pinpoint areas in which the opportunity to keep this from happening again. A forensic accountant will offer advice on methods and strategies to be more proactive about possible employee embezzlement in the future. This insight is critical in preventing future employee embezzlement.

If you suspect employee embezzlement, take control of the situation today. Contact a forensic accountant immediately to protect your company or business.

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Fraud starts with lack of ethics

The bright line in ethics

Ethics means

Ethics is your moral code. Its your values, your sense of right or wrong. Its the principles you live by. However, ethics has degrees based on one’s values and principles. Ethical conduct does not always equate to following the rules.

Breaking the law a little is the same as breaking it a lot. Its black or white, not shades of gray. If employees feels that breaking the rules a little is no big thing because it was not “major”, your organization is already at risk for fraud. Your company should have a clear, concise set of rules with as little ambiguity as possible. Punishment for violation of those rules should also be spelled out and most importantly, applied consistently to all violators.

The tone at the top

What is the culture of the overall management? Does management abide by the same rules that they expect employees to abide by or do they circumvent them? The tone at the top is important in establishing an environment of ethical work. Employees need to see that management values the rules, otherwise there is no reason for employees to value them.

What is the culture of the area where fraud could occur the most? This is an important question and even more important are the responses. Fraud occurs commonly where it is “encouraged” or unethical behavior is frequently overlooked. To reduce the risk of fraud, management should identify the areas most susceptible to fraud and evaluate the culture in those areas. This information will serve the basis for a risk assessment, i.e. how likely is fraud to occur.

Rationalization: It doesn’t hurt anyone

We always have reason why we did something wrong, don’t we?

What pressure is being placed on people? Pressure comes in the form of external and internal. External pressure could have to do with personal financial problem, where internal pressure could be related to promotions, performance, and job security. Pressure is probably the biggest reason that otherwise ethical people, commit unethical acts. Understanding the pressures faced by your employees can assist with reducing the risk of fraud occurring.

As humans, we all have a morale code that we follow, to some degree. For an organization, the varying degrees of ethics is why the risk of fraud should always be in the front of management’s mind. There are other reasons someone commits fraud, but reinforcing an environment of ethical behavior and reducing pressures, can go a long way in mitigating fraud.

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Financial Statement Fraud Red Flags

Over the last several years, the number of cases related to financial statement fraud has experienced a gradual increase. In fact, according to a recent Cornerstone Research report, Accounting Class Action Filings and Settlements—2014 Review and Analysis, shows the SEC has a heightened focus on accounting, with cases involving restatements reaching a 7-year high in 2014.

Corporate FraudWhen you first hear the phrase financial statement fraud, you might think of having a bank statement that does not reflect the actual transactions that took place relating to a particular account. To be precise, financial statement fraud is a calculated method to omit, include, or misrepresent information that would affect the interpretation of a statement by the reader.

Both private and public businesses commit financial statement fraud to gain financially, conceal misappropriation of funds, or satisfy stakeholders in various circumstances. Top-level management most often performs financial statement fraud but any accounting employees with the inclination, ethical ambiguity, or pressure to “cook the books” may do so.

Indicators of Financial Statement Fraud

Although businesses that commit financial statement fraud might carry out such activities for any number of reasons, they risk coming into collision with the IRS. If tax returns do not coincide with the businesses’ statements, financial statement fraud may be the underlying reason. Below are some ways financial statement fraud is manipulated in business:

1. Improper Income Recognition

When a company does not give the right figures on the revenue they are committing financial statement fraud. The reason for this can be something as simple as the business realizing that it has experienced an increase in revenue and does not want all of it taxed. To keep some of the extra revenue, they might decide to doctor their statements to reflect lower income entries so that taxes are reduced.

2. Manipulating Expenses

For companies that want to seek financial assistance from potential investors or stakeholders, altering expenses may be one way they aim to be appealing. If a company recognizes that a stakeholder will only offer financial assistance if expenses are up to a given level, increasing costs on the statement might prove to be a viable option. Inversely, a company that wants to conceal misappropriation of funds might alter the statement to display lower levels of expenses.

3. Complexities in the Statement

If an account displays some complex transactions that are not clearly reflected in the statement, it might raise a flag. Complex transactions are sometimes included in statements to deviate the attention of the reader from some irregularities that, if detected, would raise controversies. As a result, complex statements keep the observer occupied, hence, missing out on important information on the statement.

Benefits of a Forensic Accountant

The discovery of financial statement fraud can have far-reaching implications for a business that may undermine their credibility and integrity. Investors are predominantly at risk, either by being misled prior to investment being, or by invested funds being misused. Others that may be defrauded are banks considering loans, suppliers with outstanding receivables, and customers who get paid by performance or are contracted to hit certain revenue milestones.
To avoid the above issues, consulting a CPA who specializes in forensic accounting is strongly recommended—and as most will say, when fraud is suspected—the earlier, the better. A forensic accountant is experienced in tracing funds, identifying assets, recovering assets, financial intelligence gathering, performing suspect interviews, and performing due diligence. These are critical skills needed to address concerns before they become red flags for the IRS.
If fraud is possibly an issue or if you are picking up the pieces after fraud has been uncovered, hiring an outside independent CPA firm to prepare financial statements can bring an added level of reassurance that integrity and objectivity is being upheld.
If financial statement fraud activities are brought to light, a business not only threatens tarnishing its reputation but also may be at risk for costly lawsuits and encourages regulatory involvement. To avoid such a fate, it is important that the business takes every precaution to avoid being linked in any activities that might lead to financial statement fraud.
Resources:

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Following the Paper Trail for Corporate Fraud

How financial statements reveal corporate fraud

The U.S. economy is finally recovering from the effects of the recession, but at least one major financial risk remains — corporate fraud. Fortunately, a CPA certified in financial forensics (CFF) can help companies and investors minimize losses from fraudulent conduct by scrutinizing a business’s financial statements.

Fictional finances

Corporate fraud often is concealed when a company intentionally misrepresents material information in its financial reports. Such misrepresentations can result from the misapplication of accounting principles, overly aggressive estimates of figures and material omissions. For example, financial statements might report fictitious revenues or conceal expenses or liabilities to make a company appear more profitable than it truly is.

To cover fraud, perpetrators often conceal or omit information that could damage or improperly change the bottom-line results that appear in financial statements. Such omissions include:

  • Events likely to affect future statements, such as impending product obsolescence, new competition and potential lawsuits,
  • Liabilities such as loan covenants or contingency liabilities,
  • Accounting changes that materially affect financial statements — including methods of accounting for depreciation, revenue recognition or accruals — and are subject to disclosure rules, and
  • Related-party transactions, or those with a party with whom a member of management has a financial interest.

Perpetrators also might engage in fraudulent manipulation, particularly in the areas of revenues, expenses, reserves and one-time charges. Falsified financial statements can recognize sales prematurely, improperly value sales transactions (by, for example, inflating the per unit price) or report phantom sales that never occurred. Conversely, expenses can be manipulated by delaying their recognition — whether to match the expenses with their corresponding revenue or to avoid reporting a loss. Another trick is to improperly capitalize expenses so they appear on the company’s balance sheet rather than its income statement.

In some cases, fraudulent financial statements show reserves that have been calculated using bad-faith estimates. For example, fraudsters could justify a smaller amount of reserves by underestimating the percentage of uncollectible receivables. One-time charges, such as a write-off of goodwill or charge for research and development costs for a specific product, can further distort financial statement figures.

Reading between the lines

When fraud is suspected, a forensic CPA can dig into complex financial statements and uncover manipulation that might not be apparent to the untrained eye. A fraud expert begins by reviewing the suspicious statements for unusual trends and relationships. Any leads are followed by more intensive forensic accounting work, such as analysis of specific transactions, journal entries, work papers and supporting documentation. This type of examination goes far beyond a standard annual audit.

The CPA also may employ several types of analyses. Vertical analysis compares the proportion of each financial statement item — or groups of items — to a total within a single year that can be measured against industry norms. Horizontal analysis compares current data with data from previous years to detect patterns and trends. Financial ratio analysis calculates ratios from the current year’s data and compares those with previous years’ ratios for the company, comparable companies and the relevant industry. The expert, of course, must have experience in the subject industry and be able to recognize noncompliance with Generally Accepted Accounting Principles.

In fact, noncompliance is a significant red flag for financial statement fraud. The Association of Certified Fraud Examiners (ACFE) has identified several other behavioral red flags, including employees who live beyond their means and exhibit a cavalier attitude toward internal controls.

Keep a lid on fraud costs

The ACFE has estimated the median loss in financial statement fraud schemes at $1 million — to say nothing of the public relations damage that rogue executives who manipulate the numbers can cause. With their vast experience in crawling over financial statements, qualified forensic CPAs can help limit your clients’ losses.

This information is, in part, © 2014 TRTA

 

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Hidden Assets in a Business Owner’s Return

Experts look to tax returns in hidden-asset investigations

Business owners involved in divorce or engaged in fraudulent activity have plenty of motivation to manipulate their companies’ financial statements for their own ends. Fortunately, for financial experts such as forensic accountants and valuators investigating hidden assets, business tax returns aren’t so easy to misrepresent. In fact, these returns have some built-in protections that help ensure their accuracy.

Getting the real story

Taxpayers who falsify information on their returns risk being charged with tax evasion. In addition, many income and deduction items are reported directly to the IRS by third parties — such as employers, banks, lenders and brokerage firms — making it difficult to omit or alter them.

Tax returns are particularly useful if an expert can obtain them from several years early on in the investigation. Examining changes from one year to the next can provide valuable leads in the search for hidden assets or income sources.

Finding buried treasure

Many treasures to be discovered in tax returns are buried in attached schedules, including:

Form 1040, Line 7 — Income from wages, etc. This is where the taxpayer reports sources of income. If he or she receives wages from several businesses, it may be possible to discover previously undisclosed business interests. The attached W-2s also contain information about retirement plans and fringe benefits.

Form 1040, Line 8b — Tax-exempt interest income. This income may reveal other investment assets.

Form 1040, Lines 15 and 16 — Retirement plan distributions. These funds can be traced to determine whether they were rolled over into other tax-deferred plans or used for some other purpose.

Form 1040, Line 45— Alternative minimum tax (AMT). An entry on this line indicates the existence of tax preference items — deductions, credits and other tax benefits that are disallowed for AMT purposes. Obtaining more information about these items, which are listed on Form 6251, may lead to the discovery of hidden assets.

A potentially significant item is the exercise of incentive stock options, which may signal a sudden increase in the taxpayer’s net worth. Each of these items may provide clues about the taxpayer’s investments.

Form 1040, Line 73 — Refund. This line on previous years’ returns may reveal important information. Dishonest owners and unscrupulous spouses have been known to overpay taxes in previous years and then seek a refund after the dust has settled.

Schedule A — Itemized deductions. A comparison of real estate taxes (Line 6) with taxes on disclosed property may show additional income resulting from hidden real estate assets. Similarly, entries for state and local taxes (Line 5), personal property taxes (Line 7) and investment interest paid (Line 14) may reveal the existence of undisclosed assets.

Schedule B — Interest and ordinary dividends. It’s important to pay close attention to any foreign accounts or trusts reported in Part III. If the taxpayer has set up an asset protection trust in a foreign country with strict secrecy laws, this may be the only clue that such a trust exists.

Schedule C — Profit or loss from a sole proprietorship. Depreciation expenses listed in Part II may show that the owner has valuable business equipment. Entries for mortgage interest as well as pension and profit-sharing plans may reveal other undisclosed assets.

If insurance expenses are reported on Line 15, the types of insurance the business bought may be significant. Taxpayers sometimes use whole life insurance policies to hide assets.

Schedule D — Capital gains and losses. It’s important to review any capital transactions reported here and make sure the business has accounted for all sales proceeds. A large decrease in a taxpayer’s net worth from one year to another may indicate an asset sale.

Schedule E — Supplemental income and loss. Schedule E reports income from rental properties, royalties, partnerships, S corporations, estates and trusts. Entries here may reveal important information about the taxpayer’s assets and business interests. Income and expenses that seem suspicious or unreasonable may indicate that these entities are being used to conceal assets.

Leading to victory

Tax returns — again, especially several years’ worth obtained early in the process — can form part of a solid foundation to a successful legal action. Specifically, tax-related information can aid in the drafting of discovery requests that lead to victory.

© 2014 TRTA

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What Types of Cases Do Forensic Accountants Handle?

Hiring forensic accountants for cases involving fraud investigation, litigation support, disputes and more

With the seeming rise in corruption and financial related crime in both the for- and non-profit sectors, identifying when forensic accounting is required can help to uncover evidence and limit overall risks to your company or organization. Just this month, International Relief and Development (IRD) was suspended from working with the US Forensic Accounting in word collageGovernment over alleged misuse by the organization’s senior executives of finances. Kris Manos, IRD’s interim president who was brought in, hired an outside forensic accounting firm to audit finances, including charges on the credit card of former president, Arthur Keys, who retired last July. Reported in the Washington Post on February 9, 2015, it claims that a top USAID contractor allegedly billed taxpayers for Redskins tickets, alcohol. It is in cases such as these where forensic accounting is needed to uncover the details and possible cover up or hiding of evidence. This can usually be uncovered when investigated and analyzed properly by a qualified and experienced forensic accountant. Read on for more areas of business and financial operations where forensic accounting comes into play.

Fraud

Cheryl Jefferson and Associates summarizes fraud as “…the act of one party deliberately misrepresenting the truth or fact, in order to obtain something of value from or causing damage to another party.”

According to a survey conducted by the Association of Certified Fraud Examiners and reported in their 2014 Report to The Nations on Occupational Fraud and Abuse, organizations typically lose 5% of annual revenues each year to fraud, with the median loss totaling $145,000 and 22% of those being at least $1 million. The report goes on to reveal that the 3 primary categories of fraud are asset misappropriations, corruption and financial statement fraud. These statistics along with report details make a compelling case for anti-fraud expertise to identify fraud and recover losses.

Litigation Support

Comprised of several elements including discovery, fact finding, transaction testing, trial assistance and settlement, forensic accountants apply their expert accounting skills & knowledge to ensure the necessary analysis and evidential findings are determined for success of the case.

Dispute Analysis

Handling cases of disputes properly requires forensic accounting. Some of the areas of disputes can involve calculating commercial damages, settling financial matters from contract disputes, handling a violation of the False Claims Act or infringement of patents & intellectual property. These types of cases require forensic accountants to uncover the details and allow optimal resolution.

Bankruptcy

As laws involving bankruptcy & insolvency become more stringent, forensic accounting becomes necessary to assist in preparing the case, offering the proper records and providing the proper evidence for court proceedings.

If you know or believe your company or organization is involved in internal criminal activity or you are facing litigation, forensic accounting is necessary to ensure you are uncovering accurate findings, gathering the appropriate evidence, and garnering the expert support as litigation unfolds. Make certain your accountants hold the required expertise and knowledge for forensic accounting.

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Things a forensic expert for a government contractor knows

Forensic accountants/CPAs require unique skills and training in order to blend accounting, auditing, and investigative skills to uncover and analyze financial data. In addition, to uncovering fraud, forensic accountants/CPAs provide litigation support in a courtroom setting. If you are a government contractor, considering hiring a forensic accountant or CPA, here are five things your forensic expert should know:

1. Government Contractors and their Unique Accounting Needs

Extensive experience in assisting government contractors is critical. CPA firms like Cheryl Jefferson & Associates are familiar with the specific needs of government agencies, their frequently changing regulations, and how to navigate a government contract audit. An experienced forensic CPA can provide more accurate service, more quickly, and know what to look for as it relates to government contract requirements.

2. Small Businesses and Their Internal Control Limitations

Small business accounting may appear to be simpler than that of a larger business. This isn’t always the case as many subtle nuances must be considered when working with smaller companies. A forensic CPA/accountant that specializes in these types of clients and are aware of all the intricacies that come with them, will be more fluent their particular internal controls. This will significantly reduce the time spent on researching accounting and taxation matters.

3. Cost and Revenue Sharing Joint Ventures Disputes

Forensic accounting specialists that have a great deal of experience in analyzing cost and revenue sharing arrangements, and can greatly expedite resolving joint ventures disputes. Because joint venture disputes require special knowledge, your forensic expert should have experience with accounting for joint ventures in order to adequately resolve all issues. Cost analysis can dramatically change the outcome of such contracts so there is a lot at stake. It is important to hire the right team that can support a fair resolution.

4. False Claims Act & Unallowable Payments

An experienced forensic CPA/accountant can offer advice on accounting practices and transactions that  may violate the False Claims Act and other matters of unallowable payments. Such information can help your company avoid committing fraud against the government, as well as defend against false claims act charges. Government contractors often need consulting on how to navigate these issues to avoid further claims so a high-quality forensic advisory service is essential.

5. Fraud in Financial Reporting and Employee Theft

No company wants to deal with fraud, but the unfortunate truth is fraud, bribery and corruption cases continue to rise. A forensic CPA can conduct extensive review on financial reports to identify possible fraud. Employee theft can be uncovered by specialists through the examination of company financials records and assets. An experienced CPA will know what to look for in order to identify fraud or employee theft within your business.

Cheryl Jefferson & Associates provides accounting, auditing, and advisory services to small businesses and government contractors, in conjunction with the comprehensive forensic accounting services of CJA Forensic Accounting, for your business. Our principal is certified in financial forensics (CFF) and is dedicated to make sure you receive a high-quality experience. We are confident that we will be able to take care of your company’s needs. Contact us to get the facts today!

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