Buying a home is stressful enough without also having to worry about potential fraud. Unfortunately, real estate fraud is surging. According to Realtor magazine, scams targeting the industry rose 1,100% from 2015 to 2017, resulting in losses of more than $1.6 billion.

Home closing wire fraud should be of particular concern for prospective homebuyers. When schemes are successful, criminals can make off with buyers’ hard-earned down payments — several hundred thousand dollars’ worth in some cases. Here’s how to avoid losing the home of your dreams and the money with which to buy it.

The scoop

Home closing wire fraud involves hackers who typically use real estate agents’ email accounts to trick homebuyers into wiring money. Perpetrators send phishing messages containing links that, if clicked on, install malware. The hackers then infiltrate the agent’s email account and send messages to clients who are about to close on a home. Emails instruct buyers to wire closing funds to a specified account. Once the money is wired, the crooks quickly liquidate it. In most cases, the wired money isn’t recoverable.

Hackers also may target the email accounts of title companies, lenders, attorneys and sellers, and the process is the same. The criminals monitor emails to learn details about potential homebuyers and deals in progress and to learn how to create messages that will look and sound like they’re coming from a buyer’s agent or other real estate professional.

Group effort

Preventing home closing wire fraud must be a group effort. Homebuyers need to scrutinize emails they receive from their agents, attorneys and title companies. And those professionals need to ensure their accounts aren’t hacked in the first place.

Prospective buyers should ask their agents whether they’re aware of wire fraud scams and how they protect against them. For example, does the real estate company train agents to spot fraudulent emails? What type of firewall, antivirus and antimalware software does it use?

Many companies go to great lengths to prevent this type of fraud. They may, for example:

  • Prohibit their agents from emailing wiring instructions,
  • Require buyers to pay closing costs with a cashier’s check rather than a wire transfer, and
  • Employ cloud-based systems to screen emails and provide an extra layer of protection for confidential information.

At the very least, homebuyers should call their agents (or other real estate industry senders) to confirm the legitimacy of any message containing fund transfer or other potentially fraudulent instructions.

Natural target

Home purchases involve large sums, which makes them a natural target for fraudsters. Awareness of fraud schemes is the first step to avoid becoming a victim of them.

Contact us at 205-345-9898 or info@covenantcpa.com.

© 2019 CovenantCPA

For brick-and-mortar retailers, return fraud can be a serious financial threat. There are several types of schemes. But when they’re successful, they all end the same way: Stores issue refunds that they shouldn’t have. Here’s what to look for and how to limit losses.

Myriad schemes

Return fraud perpetrators could be customers, employees or even a criminal gang working with employee accomplices. In perhaps the most common scheme, an individual steals merchandise, and then returns it and insists on a cash refund, despite the lack of a receipt. Or a criminal steals merchandise from one retailer and then returns it to another for a cash refund.

Some thieves do supply receipts — but they’re fake. The “customer” hands over an altered or completely counterfeit receipt that the original payment was made in cash. The retailer then issues a full cash refund.

Other return fraud schemes might involve:

Stolen cards. The thief makes a purchase using a stolen credit card. He or she then returns the merchandise, usually on the same day (before the actual cardholder disputes the charge). The goal is a full cash refund.

Damaged goods. Instead of returning merchandise in new, as-sold condition, customers return items that are worn, damaged or broken. They distract the employee processing the refund from closely scrutinizing the merchandise with conversation or other diversions.

Crooked workers. An employee discounts merchandise and sells it to an accomplice who subsequently returns it to the same employee for a refund at full price. Workers might also steal merchandise and then instruct their accomplices to return it without a receipt for a cash refund.

Reducing crime

You can reduce the incidence of return fraud by making it hard for thieves to get their hands on cash. Issue refunds only when they’re accompanied by an original receipt and only to credit cards. Scan receipts into your point of sale system to ensure they were produced by your store’s registers. If a purchase wasn’t made with a credit card — or if the customer doesn’t have the card on hand — refund it with a store credit. You may also want to ask the customer to produce identification.

To help limit employee-perpetrated return fraud, install security cameras, ensure strong management oversight and provide a confidential fraud reporting hotline. In addition, monitor the frequency and value of returns processed by individual cashiers and investigate employees with higher-than-average return numbers.

Walking a thin line

Although you don’t want to encourage crooks, you may think a generous return policy is essential to providing superior customer service. So that you don’t alienate legitimate customers, state your return policies clearly at every cash register and on every receipt. And contact us for help writing a policy that balances all your priorities. 205-345-9898 or info@covenantcpa.com.

© 2019 CovenantCPA

Your board’s audit committee is a first line of defense against fraud. But to be effective, committee members need to do more than simply review financial statements and audit results.

Members should also adopt the following best practices:

Conduct risk assessments. Identify the types of risks faced by your company and their likelihood of occurrence. These assessments should include an evaluation of existing internal controls.

Be knowledgeable. Become familiar with relevant accounting issues and recent developments. Also ask questions and challenge management on the accounting for complex transactions. If your company’s industry has specialized accounting rules, consider consulting outside specialists.

Communicate with external auditors. Regularly touch base with outside auditors, because the external audit team performs many fraud prevention functions. Schedule formal meetings before the audit to elicit input on issues auditors should examine and after the audit is complete to follow up on those issues.

Verify compliance. Confirm that management is performing annual reviews of your company’s compliance programs and reporting systems. Also become familiar with ethics requirements, such as those in the Dodd-Frank Act, the Foreign Corrupt Practices Act and any applicable whistleblower laws.

Set the tone. Employees can’t reasonably be expected to abide by antifraud standards and processes if they don’t see proper behavior modeled and reinforced from the top of the organizational chart. Your committee can help foster a culture of accountability and integrity by establishing anonymous reporting mechanisms and requiring prompt investigation of, and follow-up on, whistleblower complaints.

Reach out. Don’t restrict internal communications to upper management or the CFO. Reach out to lower-level employees, too, so those employees feel comfortable reporting concerns and suspicions.

Audit committee members have a fiduciary duty to protect investors, lenders and other stakeholders from fraud. Contact us if you have questions about following best practices. We can also help you stay on top of fraud trends and compliance requirements. 205-345-9898 info@covenantcpa.com.

© 2019 CovenantCPA

In the restaurant industry, where long hours and thin profit margins are the norm, owners and managers often lack the time and resources to focus on fraud. Unfortunately, restaurants can provide crooked employees, customers and vendors with plenty of opportunities to steal. So you need to be able to recognize fraud threats — and nip them in the bud before they lead to heavy financial losses.

Opportunity on the house

Many restaurants have high transaction volumes but lack the technology linking point-of-sale, inventory and accounting systems. This leaves gaps for fraudsters to exploit. Employees could, for example, provide food and drinks to friends without entering the sales — or ring up only a portion of friends’ bills. They might issue voids or refunds when there was no original sale and pocket the proceeds. Or they could overcharge customers by, say, charging for premium beverages but serving cheaper alternatives.

Although it’s less common, intangible property theft is another risk. Your restaurant may use proprietary recipes and confidential marketing plans to compete in the dog-eat-dog world of food service. If a departing employee takes such secrets to a rival, it could threaten your restaurant’s survival.

Back-office book cooking

Owners often employ bookkeepers to manage back-office operations but may neglect to give proper oversight. Such an environment provides criminals — or even ordinary people experiencing unusual financial pressures — with opportunities to cook the books. In one frequently seen scheme, the bookkeeper creates a fake vendor account, submits and approves fraudulent invoices, then directs payments to a bank account he or she controls.

Even when bookkeepers are honest, the invoices they process may not be. It can be hard for managers to keep track of the daily stream of food, beverage and supply deliveries. Vendors might exploit such chaos by inflating their bills to reflect more or pricier items than they actually delivered. When vendors collude with restaurant employees, particularly receiving or accounting staff, theft can exact a heavy financial toll.

Ingredients for success

Successfully combatting restaurant fraud takes a multipronged approach. If you haven’t already:

  • Integrate your accounting, inventory and sales systems,
  • Use loss prevention technology to detect suspicious transactions such as excessive voids,
  • Process credit cards with EMV (chip) readers,
  • Conduct background checks on new hires,
  • Train supervisors to recognize red flags,
  • Set up a confidential fraud reporting hotline, and
  • Install video surveillance throughout your restaurant.

Also engage a CPA to review your financial records at least once a year for errors and discrepancies, and consider having this outside expert conduct occasional surprise audits. Contact us for assistance at 205-345-9898 or info@covenantcpa.com.

© 2019 Covenant CPA

From invoices and payments to discounts and write-offs, many business transactions are recorded to accounts receivable. This makes receivables a popular fraud target. But your business doesn’t have to become a victim.

Common schemes

Receivables fraud occurs when dishonest employees divert customer payments for their personal use. They use various methods, including:

Lapping. This is the most common type of receivables fraud. It involves the application of receipts from one account to cover misappropriations from another. For example, rather than credit Customer A’s account for its payment, a dishonest employee pockets the funds and later posts a payment from Customer B to A’s account, Customer C’s payment to B’s account and so on.

Write-offs and discounts. Instead of crediting a payment to the customer’s account, fraudsters might pocket the funds and then record a bad debt write-off or discount to the customer’s account. Despite the diversion of incoming payments, the customer’s account will reflect the expected current balance.

Prevention tips

Segregation of duties is critical to preventing receivables fraud. This means that the employee who handles incoming payments from customers should be different from the person who handles invoicing. Also consider assigning a different employee to manage customer complaints. Such complaints often increase when receivables fraud is occurring.

In addition, require mandatory vacation time for all employees. Receivables schemes typically require their perpetrators to remain vigilant — and in the office — to avoid detection. For this reason, it’s also advisable to rotate job duties among accounting staffers.

Tracking thieves

When receivables fraud is suspected, a forensic expert will use several methods to uncover illicit activities. For example, the expert might trace a sample of cash receipts to the sales ledger and deposit slips to find discrepancies in dates, payee names and amounts. The expert also may compare deposit slips against the books and send requests for confirmations to a sample of customers to verify current balances and payment histories. Other items that deserve scrutiny are:

  • Bad debt write-offs,
  • Accounts with unexplained credits,
  • Increased customer credit limits, and
  • Random adjustments to the accounts receivable ledger.

To identify perpetrators and find internal control weaknesses, experts often interview employees.

Take control

Even though fraud experts have methods of finding receivables fraud, it’s better for companies to stop these schemes before they start. Contact us for help strengthening your business’s internal controls at 205-345-9898.

© 2019 Covenant CPA

Estate planning aims to help individuals achieve several important goals — primary among them, transferring wealth to loved ones at the lowest possible tax cost. However, if you have creditors, you need to be aware of how fraudulent transfer laws can affect your estate plan. Creditors could potentially challenge your gifts, trusts or other estate planning strategies as fraudulent transfers.

Creditor challenges

Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). The act allows creditors to challenge transfers involving two types of fraud.

The first is actual fraud. This means making a transfer or incurring an obligation “with actual intent to hinder, delay or defraud any creditor,” including current creditors and probable future creditors.

The second type is constructive fraud. This is a more significant risk for most people because it doesn’t involve intent to defraud. Under UFTA, a transfer or obligation is constructively fraudulent if you made it without receiving a reasonably equivalent value in exchange for the transfer or obligation and you either were insolvent at the time or became insolvent as a result of the transfer or obligation.

“Insolvent” means that the sum of your debts is greater than all of your assets, at a fair valuation. You’re presumed to be insolvent if you’re not paying your debts as they become due. Generally, constructive fraud rules protect only present creditors — those whose claims arose before the transfer was made or obligation incurred.

Avoid mistakes

When it comes to actual fraud, just because you weren’t purposefully trying to defraud creditors doesn’t mean you’re safe. A court can’t read your mind, and it will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. So before you make gifts or place assets in a trust, consider how a court might view the transfer.

Constructive fraud is risky because of the definition of insolvency and the nature of making gifts. When you make a gift, either outright or in trust, you don’t receive reasonably equivalent value in exchange. So if you’re insolvent at the time, or the gift you make renders you insolvent, you’ve made a constructively fraudulent transfer. This means a creditor could potentially undo the transfer.

To avoid this risk, calculate your net worth carefully before making substantial gifts. We can help you do this. Even if you’re not having trouble paying your debts, it’s possible you might meet the technical definition of insolvency.

Finally, remember that fraudulent transfer laws vary from state to state. So you should consult an attorney about the law where you live. Call us today at 205-345-9898.

© 2018 Covenant CPA

Charities typically receive most of their donations during the holidays and at year end. It’s critical for these organizations to be on the lookout for fraud throughout the year, but even more so during the busy season. Here are some fraud schemes nonprofits should watch out for and how they can use internal controls to protect against financial losses.

Culture of trust

Charities generally are staffed by people who believe strongly in their missions, which contributes to a culture of trust. Unfortunately, such trust makes nonprofits vulnerable to certain types of fraud. For example, if managers don’t supervise staffers who accept cash donations, it provides an opportunity for them to skim cash. Skimming is even more likely to occur if a nonprofit doesn’t perform background checks on employees and volunteers who’ll be handling money.

However, skimming isn’t the most common type of fraud scheme in the nonprofit sector. According to the Association of Certified Fraud Examiners, religious, charitable and social services organizations are most likely to fall prey to billing schemes. Falsified expense reports and credit card abuse are also common in nonprofits.

Internal controls matter

Even small nonprofits that consider their employees and volunteers “family” need to establish and enforce internal controls. Such procedures must be followed regardless of how busy staffers are processing donations and completing year-end duties.

Possibly the most important control to prevent occupational fraud is segregation of duties. To reduce opportunities for any one person to steal, multiple employees should be involved in processing payables and receivables. For example, every incoming invoice should be reviewed by the staffer who instigated it to confirm the amount and that the goods or services were received. A different employee should be responsible for writing the check.

And don’t forget to protect electronic records that include data on donors, vendors and employees. Staff members should be given access only to the information and programs required for their job. And all sensitive information should be password-protected.

Caution with special events

Many nonprofits depend on money raised from a big annual gala or other special event at year end. During crowded, chaotic fundraisers, you’ll want to discourage supporters from making cash payments. Instead, presell or preregister event participants to limit access to cash on the day of the event. If you decide to accept cash at the door, try to assign cash-related duties to paid employees or board members, rather than unsupervised volunteers.

For more tips on preventing fraud in your nonprofit, contact us. We can help you reinforce internal controls, as well as investigate suspected theft. Call us today at 205-345-9898.

© 2018 Covenant CPA

Your company probably has a contingency plan for such potential calamities as fires and natural disasters. But what about a fraud contingency plan? Even if you don’t believe that one of your trusted employees would ever steal from you, it pays to be prepared. A comprehensive fraud contingency plan can help facilitate an investigation and limit financial losses.

Imagine the possibilities

No contingency plan can cover every possibility, but yours should be as wide-ranging as possible. Work with your senior management team and financial advisor to devise as many fraud scenarios as you can dream up. Consider how your internal controls could be breached — whether the perpetrator is a relatively new hire, an experienced department manager, a high-ranking executive or an outside party such as a vendor.

Next, decide which scenarios are most likely to occur given such factors as your industry and size. For example, retailers are particularly vulnerable to skimming. And small businesses without adequate segregation of duties may be at greater risk for theft in accounts payable. Also identify the schemes that would be most damaging to your business. Consider this from both a financial and a public relations standpoint.

Put people to work

As you write your plan, assign responsibilities to specific individuals. When fraud is suspected, one person should lead the investigation and coordinate with staff and any third-party investigators. Put other employees to work where they can be most effective. For example, your IT manager may be tasked with preventing loss of electronic records and your head of human resources may be responsible for maintaining employee morale.

You’ll also want to define the objectives of any fraud investigation. Some companies want only to fire the person responsible, mitigate the damage and keep news of the incident from leaking. Others may want to seek prosecution of offenders as examples to others or to recover stolen funds. Your fraud contingency plan should include information on which employees will work with law enforcement and how they will do so.

Communicate inside and out

Employee communications are particularly important during a fraud investigation. Staff members who don’t know what’s going on will speculate. Although you should consult legal and financial advisors before releasing any information, aim to be as honest with your employees as you can. It’s equally important to make your response visible so that employees know you take fraud seriously.

Also designate someone to manage external communications. This person should be prepared to deflect criticism and defend your company’s stability, as well as control the flow of information to the outside world.

Review regularly

After you’ve created and implemented your fraud contingency plan, review and update it regularly to reflect business and personnel changes. Contact us for help making your plan at 205-345-9898.

© 2018 Covenant CPA

With millions of dollars at stake, an overextended real estate developer has a lot to lose if lack of funds causes a project to collapse. To attract investment capital, some developers have been known to resort to financial statement fraud. If you’re considering financing a project, you need to know how to spot such deception.

Ample opportunity to cheat

There are many ways to falsify a financial picture. For projects in the planning phase, a company seeking financing may provide overstated appraisals of the completed property. Or it may fail to mention its inability to secure utility access or approval from local authorities to rezone the property’s intended location.

For projects already under construction, the developer may inflate the percentage of development completed or amount of materials already purchased. Or a developer could neglect to report funds received from previous lenders or investors.

Sweat the small stuff

To avoid shady deals, review project proposals carefully. For example:

Look at supporting documents. In their rush to “improve” financials by manipulating income statements, balance sheets and cash flow statements, some companies may overlook supporting documents such as project-related budgets and forecasts. Compare these to the company’s primary financial statements and, if you find discrepancies, ask for a detailed explanation.

Scrutinize line items. Certain financial statement line items tend to correspond to each other. For example, labor expense and the accounts payable balance should increase at a rate similar to the percentage of construction completed to date. If line items appear out of sync, ask to see the books of original entry such as the accounts payable aging reports or salary expense reports.

Employ analytical techniques. Common size analysis can help you verify the integrity of specific line items. The process converts each item to a percentage of a base number. For example, to analyze wages and benefits expense, you would divide wages and benefits expense by revenue. Once you’ve converted every line item on the income statement to a percentage of revenue, you can compare the percentages within a reporting period and against prior and subsequent reporting periods.

Professional skepticism

Given the inherent complexity of commercial and residential construction projects, there are plenty of ways for unscrupulous developers to con lenders and investors. Contact us at 205-345-9898. We can help you determine whether a project’s financial statements appear sound.

© 2018 Covenant CPA

The expense of preventing fraud is minimal compared to the cost of cleaning up after fraud has been committed. One common fraud deterrent is to monitor employees on the job. But are you legally entitled to monitor employees? The answer is “sometimes.” One thing is certain: You must follow current employment law to the letter.

Two competing interests

Many laws apply to employees’ privacy rights. In general, they attempt to balance employers’ interests in minimizing losses and injuries and maximizing production with employees’ interests in being free from intrusion into their private affairs.

By adopting and clearly communicating employment policies, your company can, within limits, establish its authority to conduct searches and surveillance that might otherwise be deemed intrusive. But before you state your policies, check with your attorney to ensure they don’t violate any federal or state laws.

Allowable actions

In most cases, federal law allows employers to take the following actions (but keep in mind that some state laws may be more restrictive):

Electronic activities monitoring. As a general rule, you can’t monitor employees’ use of electronic devices (including tracking Internet use) without their knowledge. But there are two notable exceptions. First, you can monitor if you have a legitimate business need to do so (for example, to record a client’s buy/sell instructions to a stockbroker). The second exception is when one party to a communication consents to the monitoring. If your company clearly states a policy to monitor communications, an employee is usually considered to have consented by remaining in the job.

Phone call monitoring. You’re generally allowed to monitor business-related phone conversations to and from the workplace. However, you can’t monitor personal calls and must hang up as soon as it’s apparent the call isn’t work-related, unless the employee has given you permission to listen in.

Physical searches. Exercise extreme caution before searching an employee’s person. If you feel a body search is necessary, don’t threaten or apply physical force or prevent the employee from leaving the room or workplace. Aside from possible referral to law enforcement, keep the search results confidential. This is to prevent leaks that could form the basis for libel or slander suits.

Surveillance. You can install cameras in your company’s offices or production areas, but usually not in “private” areas such as restrooms and locker rooms. As with other searches, surveillance records must be kept confidential. Only individuals who must know the information to properly perform their duties should have access to evidence of possible wrongdoing.

Avoiding land mines

Protecting your company from fraud while also adhering to employee privacy regulations can be challenging. To avoid legal land mines, develop your company’s policies with the help of an employment law attorney. Contact us at 205-345-9898 to learn more.

© 2018 Covenant CPA