Category Archives: Fraud Prevention

How fraud can scuttle the purchase of your dream home

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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 [email protected].

© 2019 CovenantCPA

Is return fraud cutting into your store’s profits?

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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 [email protected].

© 2019 CovenantCPA

Prevent fraud with the help of your audit committee

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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 [email protected].

© 2019 CovenantCPA

Keep fraud off your restaurant’s menu

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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 [email protected].

© 2019 Covenant CPA

Ticket scams: When the price of admission is too high

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Concert, sporting and other event tickets can go for astronomical prices — when they’re even available. Hoping to find reasonably priced tickets (or to find tickets at all), many consumers turn to the online resale market. But while most resale transactions are legitimate, some involve ticket scammers. Buy from one of these sellers and you may end up with stolen or counterfeit tickets.

Playing defense

Ticket scams generally succeed because they exploit a common desire to bag a bargain or gain access to something that isn’t easily obtainable. But you can avoid getting tricked. Here’s how:

Buy direct. Whenever possible, buy first-release or secondary market tickets from the event’s official ticketing agent. The ticket may cost more, but buying from a reputable agent comes with peace of mind.

Look out for crooks. Ticket scammers often use spam email and fake websites to impersonate legitimate ticketing agents. Don’t click on links contained in unsolicited emails and don’t buy tickets from sites until you’ve researched their authenticity. Plug the ticket agent’s name into search engines and look at the agent’s social media accounts. Pay close attention to how the agent interacts with customers and handles disputes.

Ask questions. When buying from individuals, ask them to disclose how they received the tickets and why they want to sell them. If their story sounds suspicious, look elsewhere.

Verifying and reporting

It’s only when they’re turned away on game or concert day that many ticket scam victims learn they’ve been conned. So if you have any doubts about your tickets’ legitimacy, call or present them at the venue’s box office for confirmation as early as possible.

And if you’ve indeed been sold stolen or counterfeit tickets, notify law enforcement and report the incident to the Federal Trade Commission. You may not get your money back, but you’ll help prevent criminals from fleecing other unsuspecting ticket buyers. You can protect yourself from losing money on ticket scams by buying tickets only from agents that accept credit cards. In the event of fraud, most credit card issuers will refund the cost of your tickets and pursue collection with the seller. Contact us at 205-345-9898.

© 2019 Covenant CPA

How fraud experts help companies head off bad mergers

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Mergers and acquisitions are filled with risks, some of them unavoidable. But buyers can avoid risks associated with cooked books and other forms of deceptive accounting used by a seller to distort the value of its company. Before closing an acquisition, engage a forensic accounting expert to look for fake performance figures and hidden liabilities that might turn your deal into a disaster.

Something fishy

When reviewing a seller’s financial statements, forensic experts look for subtle warning signs of fraud. These include:

  • Excess inventory,
  • Increased accounts payable and receivable combined with dropping or stagnant revenues and income,
  • An unusually high number of voided discounts for returns,
  • Lack of sufficient documentation in sales records,
  • A large number of account write-offs, and
  • Increased purchases from new vendors.

Fishy revenue, cash flow and expense numbers and unreasonable-seeming growth projections warrant further investigation to determine whether financial statements represent fraud or they’re evidence of unintentional errors or mismanagement. The latter is common in smaller companies that don’t have their statements audited by outside experts or that may not have adequate internal financial expertise.

Systematic manipulation

To determine whether unusual income numbers indicate systematic manipulation, experts often consider whether owners or executives had the opportunity to commit fraud. A lack of solid internal controls makes financial statement fraud more likely. Regulatory disapproval, customer complaints and suspicious supplier relationships can also raise red flags. If warranted, a forensic expert may perform background checks on the target company’s principals.

It’s important to note that some accounting practices adopted to present a company in the best light may be perfectly legal. However, if your expert finds evidence of intentional fraud, you’ll probably want to rescind your acquisition offer. In less serious cases, you may simply need to make purchase price adjustments or even change the deal’s structure — such as offering to buy only part of the company or only certain assets.

True story

Even when a target company attempts to conceal weak performance or questionable business activities, a forensic accountant can reveal the true financial story. Contact us for help evaluating your potential business acquisition at 205-345-9898.

© 2019 Covenant CPA

Are your employees flying the red flags of fraud?

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Forensic accountants are best qualified to unearth the “hows and whys” of occupational fraud. But it’s up to employers to know when it’s time to call for professional help in the first place. The signs of fraud can be easy to miss, but they’re usually there.

Something doesn’t belong

Dishonest employees may use anything from fictitious vendors to false invoices to cover up theft. To ferret out potential fraud, look for such signs as:

  • Duplicate payments,
  • Out-of-sequence entries,
  • Entries by employees who don’t usually make them,
  • Unusual inventory adjustments,
  • Accounts that don’t properly balance, and
  • Transactions for amounts that appear too large or too small, or transactions that occur too often or too rarely.

An increase in the number of complaints your company receives is another warning sign. An investigation may lead to a relatively innocent explanation, such as a glitch in your shipping system — or it may lead to a fraudulent billing scheme. Pay equally close attention to declines in product quality. They could just stem from a faulty batch of paint or indicate that a thief is working in purchasing.

Living it up

Changes in an employee’s lifestyle can be evidence of fraud. Although such changes usually are difficult to spot initially, a pattern is likely to emerge over time.

For example, one piece of expensive jewelry could be a gift, and a good investment return may pay for an exotic vacation. But if your warehouse manager brags about his new state-of-the-art home theater, buys an expensive car and decides to install a backyard pool, you should question how that’s possible on the salary you’re paying.

Multiple personalities

When employees steal, especially if they’re first-time offenders, they may no longer be on their best behavior. In fact, you may not even recognize them. People who have always been cooperative may become argumentative. Or, alternatively, someone who typically is difficult to work with may suddenly become everyone’s friend.

If an employee starts drinking to excess or takes up smoking, ask what’s wrong. If they can’t sleep, or if they worry obsessively about the possible consequences of actions and resent other employees’ participation in “their” projects, be concerned. They may be wrestling with a family problem — or stealing you blind.

Don’t jump to conclusions

The signs of fraud are easy to overlook, in part because they aren’t necessarily signs of fraud. There may be explanations for suspicious behavior that have nothing to do with fraud, but you won’t know unless you investigate further. If you begin to suspect fraud, contact us at 205-345-9898.

© 2019 Covenant CPA

Stop receivables fraud before it starts

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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

Fraudulent transfer laws could sabotage your estate plan

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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

How gift card scammers target companies — and what you can do

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Gift cards offer businesses a convenient way to reward employees and thank customers. However, as the FBI recently warned, gift card scams specifically targeting companies are on the rise. Since January 2017, losses from such fraud schemes have surpassed $1 million. Here’s what you need to know to avoid being cheated.

Anatomy of a scam

Fraudsters use classic “spoofing” strategies to execute what law enforcement terms Business Internet Compromise (BIC) scams. They email or text an employee, claiming to be someone who can authorize gift card expenditures, such as the company’s CEO or HR director.

Messages typically instruct the employee to purchase gift cards for the executive to give as gifts or to use for office expenses, such as holiday party supplies. The employee is told to send the gift card information, including card numbers and PINs, back to the “executive” (in reality, the scammer) who then cashes out the cards’ value. By the time the business catches on, it’s already too late to recover the stolen funds.

All companies are vulnerable to this type of fraud. But certain sectors seem to be at increased risk, including real estate, legal, medical, and distribution and supply businesses, as well as nonprofit organizations.

Simple steps

Prevention starts with education. Inform employees about the scam and ask them to be on the lookout for emails or texts that ask them to buy multiple gift cards on someone else’s behalf. They should be particularly suspicious if the email urges them to act quickly or to reply with the gift card numbers and PINs.

To be on the safe side, require employees to follow up on any electronically delivered purchasing request with a phone call to the requesting party. And to reduce the chance that employees will receive spoofed emails, ensure that your network security is robust and up to date.

Report and control

The FBI asks businesses to report BIC gift card incidents to its Internet Crime Complaint Center at www.ic3.gov. Also, contact us at 205-345-9898. We can help you implement strong internal controls to prevent fraudsters from taking advantage of unsuspecting employees.

© 2018 Covenant CPA