Tag Archives: scams

No season is the right season for ghost employees and other payroll scams

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Ghost stories can be good fun, particularly this time of year. Ghost employees, on the other hand, are trouble for employers. They may be just as fictional as the paranormal activities in your favorite scary book or movie, but if you have ghost employees on your payroll, you have fraud. And if you have fraud, you have potentially significant financial losses.

Anatomy of a scheme

Ghost employee schemes usually are perpetrated by employees who have easy access to payroll records. If your company’s internal controls are loose enough to be exploited, a greedy or disgruntled staffer could invent an employee, put this “person” on the payroll and direct deposit paychecks to a bank account in the ghost’s name.

It may seem like it would be easier to hide ghost employees in large companies. In fact, small businesses, where a single employee may handle all the payroll accounting, are more vulnerable. In some cases, perpetrators enlist friends or relatives to forge endorsements or deposit checks. In others, no assistance is necessary. The thief simply exploits weaknesses in the payroll system.

Look for traces

Ghost employees are just one way for dishonest employees to manipulate your payroll system. Perhaps the easiest scam to perpetrate is to overpay withholding or payroll taxes. The government sends a refund to your company, and the employee deposits it in an account in his or her name. Other methods of defrauding your payroll system include falsifying hours, increasing commission rates and filing false workers’ compensation claims.

The good news is that ghost and other payroll schemes usually leave traces. Look for:

  • Paychecks with no tax, Social Security, health insurance or retirement plan deductions,
  • Dual endorsements on paychecks, and
  • Duplicate names, addresses or Social Security numbers in payroll records.

Also scrutinize higher-than-budgeted payroll expenses, and unusual spikes in the number of payroll checks presented for payment.

To prevent this type of fraud, segregate your business’s payroll duties. If one employee writes checks, reconciles statements and keeps the books, that employee may be tempted to steal. Divide the duties among more than one employee. You might also consider outsourcing your payroll process. If that’s not practical, make sure your computer system is secure and that all records are password-protected and access-limited.

How we can help

Ghost employees go unnoticed in many companies because employees are trusted too much and internal controls are only haphazardly applied — if they exist at all. We can audit your internal controls and suggest improvements to prevent losses. And if you suspect a ghost employee is haunting your business, contact us immediately.

© 2020 Covenant CPA

Journal entries may signal financial statement fraud

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With a median loss of $954,000, financial statement fraud is the costliest type of white-collar crime, according to the Association of Certified Fraud Examiners. Fortunately, auditors and forensic accountants may be able to detect inflated income and other financial manipulation by testing journal entries.

Unearthing suspicious entries 

Financial statement frauds come in many forms. For example, out-of-period revenue can be recorded to inflate revenue. Repair costs can be improperly capitalized as fixed assets to boost earnings. Accounts payable can be understated by recording post-closing journal entries to income. Or expenses can be reclassified to reserves and intercompany accounts, thereby increasing earnings.

To detect these types of scams, auditors:

  • Learn about the company’s financial reporting process and controls over journal entries, 
  •  Identify and select journal entries and other adjustments for testing, 
  •  Determine the timing of the testing, and 
  •  Interview individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries.

Financial statement auditors may call on forensic accounting experts when they notice significant irregularities in a company’s financial records.

Testing journal entries

There generally are several common denominators among fraudulent journal entries. Experts look out for entries that are made:

  1. To unrelated, unusual or seldom-used accounts, 
  2. By individuals who typically don’t make journal entries, 
  3. At the end of the period or as post-closing entries that have little or no explanation or description, 
  4. Before or during the preparation of the financial statements without account numbers, and 
  5. To accounts that contain transactions that are complex or unusual in nature and that have significant estimates and period-end adjustments. 

Other red flags include adjustments for intercompany transfers and entries for amounts made just below the individual’s approval threshold or containing large, round-dollar amounts.

Technology tools are critical. Computerized testing enables auditors to evaluate entire datasets, thus reducing the risk of overlooking critical evidence. Such testing also allows fraud experts to devote more time to other aspects of an investigation, such as gathering information about the business and interviewing employees. Computerized testing can prove particularly helpful in situations where manual testing is largely ineffective — for example, when entries exist only in an electronic format and the desired data must be extracted.

Technology and expertise

Computer-assisted journal entry testing doesn’t replace a skilled auditor or fraud expert. Instead, these tools free up the expert’s time. Contact us about examining your company’s financial statements for signs of fraudulent activity. 

© 2020 Covenant CPA

Seniors face a double threat with COVID-19

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The coronavirus (COVID-19) pandemic may pose a double whammy for seniors. The elderly are considered the most vulnerable population for medical complications associated with the virus. They’re also prime targets for COVID-19 scams. If you’re a senior — or have elderly relatives and friends — read and share the following information.

Everyone a potential victim

There’s nothing new about fraud perpetrators attacking seniors, who may be less savvy about phishing emails and online scams and more trusting of strangers. As a study conducted by the FINRA Investor Education Foundation and several other groups found, a major risk factor for losing money to scams is social or physical isolation, which is more common among the elderly.

Of course, during the current crisis, everyone’s a potential fraud victim. As with all consumers, seniors should watch out for:

  • Emails promoting vaccines and cures that contain malware-laced attachments,
  • Fake charities soliciting donations,
  • Scams that promise high returns for investing in COVID-19-related stocks, and
  • Requests for personal information or a fee to receive an economic impact payment from the federal government.

Senior benefit scams

Some scams are tailor-made for older Americans. For example, the nonprofit Senior Medicare Patrol warns that perpetrators are contacting Medicare recipients and offered sham COVID-19 tests and treatments in exchange for Medicare numbers or money. It’s important to remember that actual government agencies will never call and ask for personal or payment information. As Medicare.gov instructs, “if someone calls asking for your Medicare Number, hang up!”

With local Social Security Administration (SSA) offices temporarily closed, scammers are also trying their luck with benefit payment recipients. The SSA states emphatically that, “any communication that says SSA will suspend or decrease your benefits due to COVID-19 is a scam, whether you receive it by letter, text, email, or phone call.” You can report suspicious contacts at oig.ssa.gov.

Other threats

Fraud perpetrators have also updated several old frauds for the COVID-19 age — including the classic “grandchild” scam. You could receive a phone call claiming that a grandchild is sick or in trouble and needs your help. Fraudsters usually ask for payment via a gift card and instruct you to act fast. Gather facts from the caller, then hang up and verify the information with other relatives. Chances are, your grandchild is just fine.

Also be wary of anyone using the virus to pitch home services. If someone offers to clean and sanitize your home, check the business’s reputation online or with the Better Business Bureau and make sure you don’t pay the service provider until the job is complete. As an extra precaution, you might invite a friend or relative to be with you when cleaners are in your home.

Reporting crime

This is an anxious time for everyone, but elderly Americans need to be on guard even more than other segments of the population right now. If someone attempts to scam you or a family member, contact law enforcement and, if applicable, the proper government agency. Reporting these crimes is essential to stemming senior-targeted fraud.

© 2020 Covenant CPA

Fake COVID-19 treatments and other new fraud schemes

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Like the coronavirus (COVID-19) pathogen itself, incidents of COVID-19 fraud are surging and financial losses are piling up. The Federal Trade Commission (FTC) reports that the number of 2020 COVID-19-related complaints doubled in just one recent week. As of March 31, losses attributed to the outbreak stood at $5.9 million. Here are some of the scams criminals are perpetrating.

Bad medicine

Although travel and vacation company disputes top the FTC’s most recent list of COVID-19 complaints, most of these relate to cancellations and refunds, not fraud. Much more worrying for American consumers are the many online vendors hawking suspect treatments and tests. On March 9, the FTC sent warning letters to seven companies advertising everything from virus-fighting tea to essential oils. The Commission has informed companies that don’t immediately cease making such false claims that they face legal action.

For the record, the Food and Drug Administration hasn’t approved any vaccines, drugs or at-home tests as effective in the fight against the virus. Fortunately, it’s relatively easy to protect yourself from ineffective and potentially dangerous products. Simply ignore pitches that sound too good to be true.

If you want to get tested for COVID-19, visit the Centers for Disease Control and Prevention’s (CDC’s) website  at cdc.gov for information. Contact your healthcare provider directly if you’re experiencing symptoms of the disease.

Law enforcement on the case

The FBI and U.S. Attorney’s office are also closely tracking COVID-19 fraud. A recently assembled task force warns consumers and businesses about several novel scams, including:

App malware. Fraudsters are creating new — and hacking existing — mobile apps that supposedly provide COVID-19 data. In fact, the apps are infected with malware that gathers financial and personal information.

Healthcare provider scams. Some people have received calls from a “doctor” or “hospital” that claims it treated a family member and demands payment. Know that recent federal legislation makes most COVID-19 testing and treatment free.

Hot stocks. There’s nothing new about investment scams, but con artists are using the pandemic to promote dubious stocks. You might hear, for example, that a pharmaceutical company’s stock will soon go through the roof because it has a miracle drug in the pipeline. Bottom line: Check with a trusted advisor before investing your money.

Exercise skepticism

As always, exercise caution when answering the phone, opening email and reading texts. These days, scammers may claim to represent the CDC or another government agency to try to con you out of money or personal information. When in doubt, be skeptical. And if you believe you’ve fallen for a scam or are worried about protecting your assets or your business from fraud, contact us.

© 2020 Covenant CPA

Jury duty fraud rears its ugly head again

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Some fraud schemes refuse to die. Jury duty scams existed long before phishing, malware and other cybercrime methods became synonymous with identity theft. Yet just this month, the U.S. Marshals Service issued a fraud advisory about this old-school con that’s enjoying a resurgence.

Common methods

Here’s how jury duty scams work: Perpetrators posing as court officers, U.S. Marshals and other members of law enforcement call unsuspecting victims, warning them that they’re about to be arrested because they haven’t reported for jury duty. When the targets assert they haven’t been notified that they’ve been selected, the scammers ask for information to “verify their records.”

The information the scammers want, of course, is a victim’s Social Security number and date of birth. Some go a step further and request bank account information, claiming they need an account routing number and other details to facilitate the direct deposit of jury checks.

Alternatively, scammers tell victims that they can pay a fine in lieu of arrest. They request payment via a prepaid debit or gift card and ask the victim to read the card number over the phone. In some cases, crooks ask victims to deposit cash into a bitcoin ATM. Both methods ensure that the funds are unrecoverable once they’re transferred.

Know the facts

The truth is, courts virtually never call prospective jurors — even those who don’t report as scheduled. Most courts rely on the U.S. postal system for follow-ups and they never ask for confidential personal information.

Unfortunately, many people are caught off guard by this scam. Disconcerted to learn that they may be arrested for evading jury duty, even those who ordinarily would be cautious about providing personal information over the phone may give the callers what they want.

Remember that the spiel doesn’t matter. What’s important is that bogus jury duty calls are the same as any other telephone scam. You should never give confidential information or transfer funds to unverified callers&ndsh;even when threatened with arrest.

Report and verify

If you think you’ve been scammed by a con artist posing as a court or other official, report it to your local FBI office or the Federal Trade Commission. And if you’re unsure about whether you really do need to report for jury duty, contact your local courthouse.

© 2019 Covenant CPA

How to put the brakes on lapping schemes

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Lapping is one of the most common ways crooked employees skim money from their employers. In these schemes, a perpetrator uses receipts from one account to cover theft from another. Here’s what lapping looks like and how you can help prevent it.

Starting small

Lapping scams usually start small, with an employee pocketing a payment from ABC company and using a payment from XYZ company to hide the loss. As time goes on, however, the amounts get larger and the employee is forced to maintain detailed records to track the movement of money.

This house of cards usually tumbles when the employee makes an error. One commonly cited example is the man who stole $150,000 by programming an elaborate computer scam based on 29-day cycles. It collapsed because he forgot that February normally has only 28 days.

Warning signs

As with any fraud, there are usually warning signs that can alert you before a minor lapping scheme grows to epic proportions. These include excessive billing errors, accounts receivable writeoffs, decreasing accounts receivable payments and accounts receivable details that don’t agree with the general ledger.

Customer complaints are another red flag and always merit investigation and follow-up. Also look closely if you see delays in posting customer payments.

Protecting accounts

Often, lapping signals that a business has inadequate internal controls. The man who stole $150,000, for example, was his company’s chief programmer and had unlimited access to customer accounts. To ensure lapping doesn’t tempt greedy or desperate employees, take a few simple preventive measures.

Have someone review and compare every check that’s deposited to the receivables ledger. This takes a little time but can offer a big payoff. Better yet, require that two people review the records. To be truly effective, the review should include the actual checks, not just ledgers. Because employees who are lapping may set up their own accounts in the company’s bank, it’s important for reviewers to have a list of valid accounts by bank name and number for authentication.

Another easy protection is to closely monitor aging accounts. If you routinely send overdue notices to customers, pay attention to the responses. When customers say they’ve already paid an invoice, for example, follow up.

Stronger controls

As with most occupational fraud schemes, internal controls are essential to help prevent lapping. If you suspect fraud is occurring in your organization or need to strengthen your controls, contact us.

© 2019 Covenant CPA

Don’t become a victim of bankruptcy fraud

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Your company has landed a lucrative new account, and the customer has already placed several small orders, paying in full, on time. Now the customer wants to place a larger order, but has requested that you first expand its credit account. Warning! There’s a chance that you could become a victim of bankruptcy fraud. Your new customer may be planning a “bust-out” — a common bankruptcy-related scam.

Bust-out scams

In a bust-out, fraudsters create a bogus company — often with a name similar to that of an established, reliable business — to order goods they have no intention of paying for. In fact, they plan to sell the products for fast cash, file for bankruptcy and leave you, the supplier, holding the empty bag.

In a variation of the scheme, bogus operators buy an existing company and use its good credit to order the goods. Either way, they sell the products they order below cost, for cash, and then file for bankruptcy, writing off the amounts of the supplier’s bill.

You can avoid becoming a bust-out victim by carefully vetting businesses that were formed only recently. Also be wary of established companies with new ownership — particularly if the new owners seem to want to keep their involvement under wraps. And pay particular attention to customers that have:

  • Warehouses stuffed with high-volume, low-cost items,
  • Disproportionate liabilities to assets,
  • No corporate bank account, and
  • Principals previously involved with failed companies.

Fraudulent conveyance schemes

Bust-outs are far from the only bankruptcy-related scams. In fact, the most common type of bankruptcy fraud is concealing assets — or fraudulent conveyance. This scheme involves hiding or moving assets in anticipation of a bankruptcy. The owner of a business on the brink of collapse may, for example, transfer property to a third party — most commonly, a spouse — for little or no compensation. The third party holds the property until bankruptcy proceedings have concluded, and then transfers it back to the business owner.

Alternatively, the business owner files for bankruptcy and then, with the court’s approval, sells property below value to a straw buyer. The owner’s relationship with the buyer isn’t disclosed, but the buyer holds the property until the owner is ready to reclaim it at an agreed-upon price.

In either case, the goal is the same: to keep property and monetary compensation out of the hands of creditors.

Prevention first

Fighting bankruptcy fraud typically requires professional legal and financial help. The best protection is prevention, but if you suspect one of your customers is trying to pull a fast one, contact us at 205-345-9898.

© 2018 Covenant CPA