Tag Archives: tips

Actively look for fraud and reduce financial losses

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The Association of Certified Fraud Examiners’ (ACFE’s) Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse provides ample evidence that some fraud detection methods are better than others. In general, passive methods, such as accidental discovery or notification by police, coincide with longer-running schemes and higher financial costs. To nab dishonest employees quickly and limit losses, your company needs to be proactive.

Shorten time, minimize costs

Active methods include IT controls, data monitoring and analysis, account reconciliation, management review, surprise audits and internal audit. These methods can significantly lower fraud durations and losses.

For example, frauds detected by IT controls had a median duration of six months and a median loss of $80,000. Those found through account reconciliation ran for a median of seven months and totaled a median loss of $81,000. By comparison, fraud detected through notification by police or stumbled upon by accident had a median duration of 24 months. When companies learned about a scheme from law enforcement, the median loss was $900,000.

Surprise audits and proactive data monitoring and analysis can be especially effective ways to fight fraud. On average, victim organizations without these antifraud controls in place reported more than double the fraud losses, and their frauds lasted more than twice as long as frauds at victim organizations with these controls in place. Yet only 37% of the organizations in the ACFE study had implemented surprise audits or data monitoring and analysis.

Tips are most effective

The leading fraud detection method, tips, could be considered active or passive. But there’s no arguing that this method is effective — particularly when organizations offer employees and other stakeholders confidential fraud hotlines. Organizations that had hotlines for reporting misconduct detected fraud by tips more often (49% of cases) than those without hotlines (31% of cases).

To ensure that tips are used as an active detection method, your organization should set up a hotline and promote its use. Increasingly, companies offer other reporting forms, including email and Web-based submissions. Also, the ACFE has found that in 33% of cases where a tip was made, the whistleblower reported suspicions to a supervisor or other person in a position of authority.

Budget-friendly options

Even if your organization’s budget is tight and you think you have few resources to commit to fraud prevention, know that there’s always something you can do. Active methods can be surprisingly low cost and they certainly are less expensive than being defrauded. Contact us for more information.

© 2021 Covenant CPA

Business opportunity or scam?

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The investment “opportunity” could be anything from a new nutritional supplement to a foolproof method for “flipping” houses. But if the investment or product is advertised as “easy money” or promises immediate high earnings, beware. Although there are plenty of legitimate business opportunities out there, there are also plenty of fraudulent schemes that exist for no other reason than to steal your money.

Simple or complicated

These schemes can be relatively straightforward. For example, one New York state man was convicted of enticing investors to sink $10,000 each into a vending machine distribution business he promised would be profitable — even though it was set up to fail.

But they can also take the form of complicated pyramid schemes that generally offer no actual product or service and are sustained by constantly recruiting new participants. Often, these schemes are couched as “clubs” or “gift programs” and promoted through social networks. Whatever they’re called, they usually end the same way: When the pyramid collapses, only the “founders” walk away with any money.

FTC safeguards

To assist potential investors, the Federal Trade Commission (FTC) has established a Business Opportunity Rule. Among other things, the rule requires sellers to produce a disclosure document and to detail any earnings claims in a separate statement.

Sellers also must disclose prior civil or criminal litigation involving claims of misrepresentation, fraud, securities law violations, or unfair or deceptive business practices; outline any cancellation or refund policy; and provide references nearest to the potential buyer’s location. Furthermore, the disclosure document must be written in the language in which the buyer and seller discussed the opportunity. For more about the rule, visit ftc.gov.

Practical tips

In practical terms, you can protect yourself by studying the disclosure document, earnings claim statement and proposed contract, looking for potential loopholes that might benefit the seller at your expense. For example, are start-up costs particularly high? Is the seller required to buy back inventory you’re unable to sell or would you be out-of-pocket?

Other tips to protect your money:

  • Research the seller’s history and reputation online and check for complaints with the Better Business Bureau. (Note that the absence of complaints doesn’t necessarily mean the seller is aboveboard.)
  • Find out if there’s an actual market for the business’s products or services.
  • Talk to current investors or participants and ask tough questions.
  • Ask your legal and financial advisors to review any documents you don’t understand, including the contract.

When to walk away

If you suspect a business opportunity is fake, turn it down. Then report it to your state attorney general’s office, your county or state consumer protection agency, and the FTC. But if you’re unsure about the legitimacy of an offer, contact us. We can help you evaluate it.

© 2020 Covenant CPA