Tag Archives: red flags

Is there a fraud perpetrator behind those behavioral issues?

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The recently released 2020 Association of Certified Fraud Examiner’s (ACFE’s) occupational fraud study, Report to the Nations, reveals that the most common behavioral red flag exhibited by fraud perpetrators is living beyond their means. Also high on the list are financial difficulties and unusually close relationships with vendors and customers.

Some of these signs may be tough to spot if you don’t work closely with an occupational thief. That’s why the ACFE report also looks at correlations between fraud and non-fraud offenses and human resources issues. When these issues are present, supervisors and HR managers may need to increase their scrutiny of an employee.

Recognize red flags

The vast majority (96%) of occupational fraud perpetrators have no previous criminal record and 86% have never been punished or fired by their employers for fraud. This may make identifying the thieves in your midst difficult, but not impossible. The ACFE has found that approximately 85% of perpetrators exhibit at least one behavioral red flag before they’re discovered.

Although a perpetrator may be the friendliest and most cooperative person in the office, many thieves come into conflict with colleagues or fail to follow rules. The survey participants (more than 2,500 defrauded organizations) were asked whether the perpetrator in their cases engaged in any non-fraud-related misconduct before or during the fraud incident. Close to half (45%) responded “yes.” Some of the most common offenses were:

  • Bullying or intimidation of others,
  • Excessive absenteeism, and
  • Excessive tardiness.

A small number also was investigated for sexual harassment and inappropriate Internet use.

In addition to misconduct, some fraud perpetrators exhibited work performance problems. Thirteen percent received poor performance evaluations, 12% feared the loss of their job and 10% were denied a raise or promotion.

Get involved

When misconduct or poor performance leads to disciplinary action, supervisors and HR managers have a golden opportunity to potentially stop fraud in progress. After all, the longer a scheme goes undetected, the more costly it is for the organization. Fraud schemes with a duration of less than six months have a median loss of $50,000, but those with a median duration of 14 months (the typical scheme in the ACFE report) experience losses of around $135,000. 

So if you detect smoke, look for fire. Of course, most underperforming employees aren’t thieves. But it probably pays to observe any worker who routinely flaunts the rules, antagonizes coworkers or lets job responsibilities slip. You may discover other red flags, such as family problems, addiction issues or a lifestyle that isn’t supported by the employee’s salary.

Limit opportunities

Knowing your employees is only part of the solution. You also need comprehensive internal controls to limit opportunities to commit fraud. Contact us for help.

© 2020 Covenant CPA

Recent efforts to corral COVID-19 fraudsters

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The novel coronavirus (COVID-19) pandemic has opened the floodgates to scam artists attempting to profit from sick, anxious and financially vulnerable Americans. On the frontlines fighting fraud are the Federal Trade Commission (FTC), U.S. Justice Department (DOJ) and other government agencies. Here are some of the fraud schemes they’re actively investigating —  and the perpetrators they’ve rounded up.

Peddling false hope

The FTC has sent warning letters to almost 100 businesses for making scientifically unsubstantiated claims about their products. Companies from California to Virginia, Indiana to Florida have touted (mostly online or by phone) “treatments” for COVID-19, even though the federal government hasn’t approved any vaccines or cures for the disease.

Letter recipients must stop making deceptive claims immediately and notify the FTC within 48 hours about the actions they’ve taken. Noncompliance can result in a federal court injunction and an order to refund deceived customers. Just last week, the FTC took the seller of a “wellness booster” to court. Originally, the product — capsules containing Vitamin C and herbal extracts — had been marketed as a cancer cure. But the enterprising fraudster pivoted in March 2020 to exploit COVID-19 fears.

Technological accomplices

Producers and marketers of fake cures aren’t the only companies under scrutiny. The FTC, in joint letters with the Federal Communications Commission, has warned several Voice over Internet Protocol (VoIP) service providers for “assisting and facilitating” illegal telemarketing and robocalls related to COVID-19. This is a violation of the FTC’s Telemarketing Sales Rule.

The DOJ has also come down on several VoIP providers for knowingly transmitting robocalls from “government officials.” Although there’s uncertainty about whether VoIP and similar services can be considered liable for the actions of their users, law enforcement officials are clearly serious about taking down those who would exploit the pandemic for personal gain.

Opportunity knocks

Government agencies also have their sights on smaller, opportunistic scams. Recently, the FTC warned consumers to beware of fake COVID-19 testing sites set up in parking lots with realistic looking signs, tents and workers. Not only have these criminals obtained Social Security and credit card numbers from test-seekers, but they may have helped spread contagion through unsanitary contact with them.

And the DOJ is raising the alarm about the role cryptocurrency is playing in many COVID-19 schemes. Everyone from snake-oil sellers to bad-investment promoters are asking their victims to pay with cryptocurrency. Therefore, it should be recognized as a red flag.

How to stay safe

Many fraud schemes present since the start of the COVID-19 crisis in the United States — small business loan scams, charity fraud and attempts to steal stimulus payment checks — also continue apace. Your best defense, as always, is to hang up on suspicious calls, delete fake-looking emails and be wary of any claims that sound too good to be true. If you encounter fraud, report it to ftc.gov.

© 2020 Covenant CPA

Beneish model helps detect earnings manipulation

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Financial statement manipulation is the costliest type of occupational fraud. The latest Report to the Nations published by the Association of Certified Fraud Examiners found that the median loss from financial statement fraud was $800,000, compared to median losses of $114,000 for asset misappropriation and $250,000 for corruption.

With any type of fraud, the sooner it’s detected, the more likely losses can be mitigated. One tool management and fraud experts might use to assess the likelihood of earnings manipulation is the Beneish model.

M score

The Beneish model measures the probability that a company’s revenue has been inflated and its expenses have been understated. The model generally computes an “M score” from comparisons between consecutive financial reporting periods of various metrics, including:

  • Days sales in receivables,
  • Gross margin,
  • Asset quality,
  • Sales growth,
  • Depreciation,
  • Sales general and administrative,
  • Leverage and
  • Total accruals to total assets in the current reporting period.

These metrics are designed to capture the effects of earnings manipulation or preconditions that can prompt a company to engage in earnings manipulation.

Cautionary notes

The economics professor who created the Beneish model admits there are some important limitations to the technique. Notably, the model can’t reliably be applied to privately held businesses because it was developed using public company data. Additionally, his sample involved manipulation to overstate earnings. Therefore, the model isn’t useful in circumstances where it could prove advantageous to reduce earnings — for example, to push revenue into the next quarter to help meet a target for that quarter.

Some distortions in financial statement data also could have a cause that’s unrelated to earnings manipulation. A metric might be distorted by, say, a material acquisition during the period examined, a material shift in the company’s strategy for maximizing value or a significant change in the relevant economic environment.

Simply a red flag

Because it’s relatively easy to use, the Beneish model can be an efficient screening tool for earnings manipulation. It’s important to note, however, that a high M score doesn’t prove fraud. Rather, it suggests that further investigation, preferably by forensic accounting experts, is necessary.

© 2020 Covenant CPA

Be careful when applying for a Small Business Administration loan

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A Small Business Administration (SBA) loan can make big things happen for your small company. But the agency’s loan program is sometimes abused by con artists who know that many small business owners have little experience applying for financing and are, therefore, vulnerable to scams. Here’s what you should know.

Background on SBA products

The SBA provides various financing options with favorable terms and greater flexibility to small businesses and start-ups. It doesn’t disburse loans directly but gives lenders federal guarantees and backing to reduce lending risk. Individual businesses must themselves make arrangements with financial institutions that make loans.

Three key SBA programs are:

1. SBA 7(a) loans. This is the flagship product. It typically frees up working capital needed to acquire equipment, real estate or inventory.

2. Microloans. This program is more targeted. Smaller amounts are disbursed quickly to address short-term needs.

3. SBA 504 loans. This program is commonly used for commercial real estate purposes, such as the cost of buildings, land, equipment and renovations.

Look for red flags

If you’re applying for one of these types of loans, how can you avoid becoming a fraud victim? The government warns small business owners to be wary of companies offering to help them secure money from an SBA program. In particular, watch out for services that charge exorbitant fees or that guarantee you’ll get a loan if you work with them. In general, legitimate services don’t charge upfront fees to broker loans, perform credit checks or “process” applications. So if you’re asked to pay, walk away.

Fraud perpetrators also might claim that your business will be issued a forfeiture letter making it ineligible for any SBA funding if you don’t use their services. High-pressure sales tactics, such as threats or limited-time offers, are reliable indicators that you’re dealing with a fraudster. One way to verify suspicious claims is to call the SBA yourself.

Other bad actors may not ask for money at all. They’re simply after personal information that will enable them to steal your identity or access financial accounts. Don’t provide your Social Security number, bank account information or credit card information to any unsolicited caller or emailer.

Choose assistance carefully

Of course, many reputable businesses help companies apply for SBA loans — and they can make the process easier. But be sure to investigate the reputation of any business that contacts you. Better yet, ask trusted advisors or other small business owners for referrals.

© 2020 Covenant CPA

How you can help stop elder financial abuse

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It’s one of the most difficult types of fraud to unearth. But it doesn’t directly affect businesses or the average consumer — in large part because its victims rarely report it. In fact, they’re often prevented from doing so by perpetrators.

What is it? Financial abuse of seniors, or elder fraud. Many thousands of Americans are victimized each year and some observers fear these crimes are becoming more widespread. But you can help put a stop to elder fraud. Learn the signs and, as the saying goes, if you see something, say something.

Vulnerable targets

Older individuals with retirement savings, accumulated home equity and other significant assets make appealing targets for unscrupulous family members, caregivers, financial advisors, fiduciaries and scam artists who insinuate themselves into their victims’ lives. Seniors could be at risk due to isolation, cognitive decline, physical disability or health problems. Even the recent loss of a spouse can make an otherwise discerning individual unusually vulnerable.

Exact statistics on elder financial abuse are hard to come by, largely because victims hesitate to report it out of fear of their abusers or embarrassment. But various studies estimate that the percentage of the elderly who have experienced financial exploitation in the past 12 months is between 2.7% and 6.6%. Although there’s no reliable national estimate of the financial losses suffered by victims, one study concluded that financially abused seniors in New York state alone lose approximately $110 million annually.

Red flags

There are many red flags associated with the financial exploitation of vulnerable seniors. If you notice that an individual seems fearful or submissive toward a guardian or that a caregiver prevents the elder from speaking for him- or herself, start asking questions. For example, has the elder recently authorized a change in financial management, such as who has power of attorney? Or does the senior:

  • Have a new guardian or caregiver who conducts financial transactions, such as cash withdrawals, on his or her behalf?
  • Seem unusually reluctant to discuss financial matters?
  • Appear unable or unwilling to handle basic financial responsibilities such as paying bills or reviewing financial statements?

If you can gain access to the elder’s financial records, look for frequent large withdrawals (particularly daily maximum currency withdrawals from ATMs), insufficient fund notices, uncharacteristic attempts to wire large sums of money, and recently closed accounts. Any of these could suggest financial fraud or abuse.

Do your part

If you have vulnerable elderly relatives, friends or neighbors, do your part to protect them from fraud and exploitation. Report any concerns to law enforcement or your municipality’s senior services division. And if you’re a family member, consider engaging a forensic accounting expert to perform a thorough investigation.

© 2019 Covenant CPA

The chances of an IRS audit are low, but business owners should be prepared

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Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, audit rates are historically low.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor. And it helps to know what might catch the attention of the IRS.

Audit red flags

A variety of tax-return entries may raise red flags with the IRS and may lead to an audit. Here are a few examples:

  • Significant inconsistencies between previous years’ filings and your most current filing,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them • for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.

How to respond

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS chooses you for an audit, our firm can help you:

  • Understand what the IRS is disputing (it’s not always crystal clear),
  • Gather the specific documents and information needed, and
  • •Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.

© 2019 Covenant CPA