Can Fraud Happen at Your Business?

Let me introduce to you Ms. LeeAnn Dove.  Most likely you have not heard of her.  What makes LeeAnn worth noting is she managed to embezzle close to half of a million dollars from her employer Great Falls Landscapes over six years. 

According to the Herndon Patch, Dove has been indicted on six counts of wire fraud, one count of mail fraud and eight counts of bank fraud. She faces 20 years in prison for each wire and mail fraud count and 30 years in prison for each bank fraud count.  That totals to 380 potential years in prison. 

So what happened?  Did Dove run into financial difficulties?  Did she have a sick child, spouse, or parent to take care of and support?  It does not appear so.  According to United States Attorney's Office Eastern District of Virginia Dove "added fake employees to the company’s payroll, whose paychecks she deposited into her personal bank account. During her six-year scheme, Dove also used company credit cards for personal purchases, including electronics, furniture, limousine services, concert tickets, and thousands of dollars in gift cards."  I know you are asking, how did this go on for six years undetected?  It is hard to imagine that the owners did not miss $500k from their profits.  There are many potential reasons Dove was able to keep her scheme alive for this length of time including:

1. Did Dove have check signing authority?
2. Did Dove write checks and reconcile the bank accounts?
3. Did any of the owners review the bank statements?
4. Did any of the owners review the payroll?
5. Did any of the owners review the credit card statements?
6. Did Dove ever take vacation or let another employee assume her duties?
7. Did anyone notice that Dove was living beyond her means?

What happens frequently with a long term trusted employee is they are given to much authority and no one reviews their work.  With small organizations it is difficult to maintain strong segregation of  duties, but it can be done with owner oversight.  The impression given is that Dove was able to purchase items, pay bills, process payroll and have control over financial assets without answering to anyone.  Unfortunately, this is a recipe for fraud.  Strong internal controls, owner oversight and an intolerance of fraud tone from the top are excellent prevention measures. 

Community Service - Giving From Within

The American Woman's Socity of Certified Public Accountants - DC Metro Affiliate members volunteered at the Capital Area Food Bank distribution center on Saturday morning, August 20, 2011.  We were scheduled for three hours on Saturday morning.  During that time we helped to pack 550 bags of food for low income students in the DC metro area.  It was fun because we were in an assembly line ensuring that each bag had the required number of specific items.  Once the last bag was assembled and packed for shipping we then started to unpack donations and sort each item into bins of its respective type. 

By the end of the morning, we were hot (no air conditioning), tired, happy and had an all around good feeling inside.  So many times we are asked to give monetary donations for worthwhile causes, but we never see where the money goes or how it was used. By volunteering at the food bank we helped to save over $1.7 million in staffing costs annually by volunteering.  If you can spare three hours of your day, look into donating your time and effort.  It is amazing how giving of yourself makes you feel better about everything.  It is an easy feel good remedy.

Pictured above left to right:  Comora Brock, Megan Powers, yours truly, and Chau Phan of the AWSCPA DC Affiliate. 

Employee vs. Independent Contractor

The Internal Revenue Service is cracking down on companies that do not classify employees correctly.  This area seems to be gray to a lot of people, but if you look closely there are strict guidelines that should be adhered to.  You may ask why the confusion or why would a company try to avoid classifying an individual as employee and would rather classify them as an independent contractor?  The answer is TAXES!  That's right, the employer is responsible for matching the social security and medicare taxes on each employee's wages plus pay the federal and state unemployment taxes on these wages as well.  If an individual is deemed to be an independent contractor, the taxes become their responsibility.  The company is only responsible for issuing a 1099 stating the gross amount paid during the previous year. 

So what exactly distinguishes an employee from an independent contractor?  Don't let the term "contractor" fool you.  This does not imply what comes to mind for the construction industry.  An independent contractor is anyone that you pay for services rendered that is not an employee. 

 The IRS uses three characteristics to determine the relationship between businesses and workers: 

• Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
• Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. 
• Type of Relationship factor relates to how the workers and the business owner perceive their relationship. 

If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

Failure to classify workers correctly can cause penalties and interest due.  If you have questions regarding the classifications of your workers please review information at IRS.GOV.

The IRS Says "Whoa Nellie"

The IRS is overwhelmed, or that is what the Council For Electronic Revenue Communication Advancement (CERCA) stated in a press release last week.  CERCA was established in 1994 to assist the IRS in building e-file usage.  Evidently, the private sector tax preparers have submitted so many electronic income tax returns that the IRS is unable to keep up.  In all fairness to the Internal Revenue Service, Congress did make last minute changes to the tax code at the end of the year.  However, how long should it reasonably take for the IRS to get their e-filing systems updated?  If the software that tax preparers use has been written to include the tax code changes, why is is the private sector so far ahead of the IRS? 

What is so ironic about this is that the IRS requires preparers who prepare more than 100 individual, trust and estate  income tax returns to e-file.  If a client does not want to e-file the tax preparer must obtain a written declaration from the client for their return to be exempt from this requirement.  The IRS is becoming stricter on e-filing as time goes forward.  The threshold is 11 returns for 2011 to mandate e-filing.  You can read information on this new law here. 

I understand why many in public accounting are so frustrated.  Firstly, it is a very difficult time of year for tax professionals.  All are stressed out and working under such time contraints as it is.  Secondly, e-filing was prohibited until February 14, 2011 due to the tax law changes and the additional time the IRS needed to update their systems.  Therefore, returns that are ready to be filed and taken off the list as "delivered" had to be held in accountant's offices until last week.  Once the 14th came everyone wanted to get what they could filed.    Thirdly, the IRS is the one that has forced e-filing on all tax preparers and we have acquiesced.  Mandatory filing requirements should not be in place if the infrastructure is not there to support it.  Tax professionals work non-stop this time of year.  Software programmers must have worked a lot of overtime to get the software packages ready so quickly once Congress passed the tax changes.  Possbily the IRS personnel should be working weekends, holidays and late into the evenings to keep up with the demand.  Just a thought mind you.

Hopefully this is just another bump in the road and things will run smoothly going forward.  If you are not e-filing this year you will be next (unless you only prepare 10 returns the entire year) so we might as well grin and bear it. 

Maryland CPA's - A Voice To Be Reckoned With

Is there strength in numbers?  If so, 170 Maryland CPA's were a strong group in Annapolis on Wednesday to organize and meet with our respective delegates and senators to discuss issues important to us.  This was my second year in attendance and you can read my post about last year here. 

This event is sponsored by the Maryland Association of Certified Public Accountants (MACPA).  We were in Annapolis by 7 a.m. to be briefed by Tom Hood, the Director of MACPA, on the legislative issues affecting the CPA industry.  The legislators are only in session for 90 days so it is important that we meet with them at the beginning of their session before any decisions are made.  It just so happened that CPA Day fell on Governor O'Malley's Inauguration, so our time was very limited to spend with our delegates.  The issues discussed included:

• Sales Tax on Services - CPA's oppose
• Retain contributory negligence rule: Defeat efforts to legislate comparative negligence - CPA's support
• Educational Requirements for Examination & Licensure (120/150) - CPA's support
• Exempt CPA's from Debt Counseling Regulations - CPA's support
• Change Definition of "Practicing Certified Public Accountancy" (Safe Harbor) - CPA's support

I was very fortunate to meet with two of my delegates.  Mr. Benjamin Kramer invited me into his office and sat down for twenty minutes to discuss my concerns about the issues that could potentially affect the CPA industry.  Mr. Kramer was genuinely interested in the topics discussed and offered advice on reaching out the committees that legislate on these issues.  Ms. Bonnie Cullison, a first term delegate, welcomed me into her office.  Ms. Cullison is so new that she does not have business cards or anything hanging on her walls yet.  I was impressed with Ms. Cullison's attentiveness and note taking.  She asked good questions which indicated her interest in understanding the importance of these issues to Maryland CPA's.

The best for last.  The highlight of the day was meeting Adrienne Gonzalez, aka the Jr. Deputy Accountant, who is someone that I admire and have followed on Twitter and read her website for some time.  The Jr. Deputy Accountant is a fan of Maryland CPA's and took time from her busy schedule to be in Annapolis for CPA Day.  Above is a picture of yours truly with The Jr. Deputy Accountant at the Governor Calvert House. 

SSARS No. 19 Is In Effect

For periods ending after December 15, 2010 SSARS No. 19 (Statement on Standards for Accounting and Review Services No. 19, Compilation and Review Engagements) must be adhered to by accountants preparing reviewed and compiled financial statements for clients.  SSARS No. 19 makes significant changes to compilation and review engagements.   These are the first significant changes to compilation and reviewed financial statements in over 30 years.   

In December 2009, the Accounting and Review Services Committee (ARSC) issued SSARS No. 19.  The standard’s effective date is for periods ending on or after December 15, 2010, with the exception of paragraph 2.21, which may be implemented early. Paragraph 2.21 (AR sec. 80 par. .21) states in part, "The accountant is not precluded from disclosing a description about the reason(s) that his or her independence is impaired." From the AICPA website "The ARSC is the AICPA’s senior technical committee for compilations or reviews and is designated to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of nonpublic entities. Its mission is to develop and communicate comprehensive performance and reporting standards and practice guidance to enable accountants of nonissuers to provide high quality, objective compilation and review services in the best interests of the profession and the users of compiled and reviewed financial statements, with the ultimate purpose of serving the public interest. "

Another significant change is that this new standard separates the compilation guidance from the review guidance. Other significant changes to SSARSs, as the result of this project, include the following:  

• A discussion of how the accountant obtains limited assurance through the performance of review procedures.
• The introduction of the term review evidence to the review literature.
• A discussion of tailoring the review procedures based on the accountant’s understanding of the client’s industry, knowledge of the client, and awareness of the risk that he or she may unknowingly fail to modify the accountant’s review report on financial statements that are materially misstated. 
• A discussion of materiality in the context of a review engagement.  
• A requirement that an accountant document the establishment of an understanding with management through a written communication (that is, an engagement letter) regarding the services to be performed.  
• The establishment of enhanced documentation requirements for compilation and review engagements.  

Additional information on complying with SSARS No. 19 can be found on the AICPA website.

The CFE Credential Achieved

I am pleased to announce that I have earned the CFE (Certified Fraud Examiner) credential.  My goal in obtaining this prestigious certification was to assist my clients with any fraud concerns they have. As a CPA, auditors do not audit for fraud during the standard financial statement audit.  We do, however, inform those charged with governance of any instances we may become aware of.  With this additional credential and skill I hope to assist clients with implementing anti-fraud prevention controls within their organizations.

Many ask what a CFE actually does and what the credential means.  The ACFE (Association of Certified Fraud Examiners) "is the world's largest anti-fraud organization and premier provider of anti-fraud training and education. Together with nearly 55,000 members, the ACFE is reducing business fraud world-wide and inspiring public confidence in the integrity and objectivity within the profession. The Certified Fraud Examiner (CFE) credential denotes proven expertise in fraud prevention, detection and deterrence. CFEs are trained to identify the warning signs and red flags that indicate evidence of fraud and fraud risk. CFEs around the world help protect the global economy by uncovering fraud and implementing processes to prevent fraud from occurring in the first place."


 

The ACFE Mission (as listed on the ACFE website):

The mission of the Association of Certified Fraud Examiners is to reduce the incidence of fraud and white-collar crime and to assist the Membership in fraud detection and deterrence. To accomplish our mission, the ACFE:

• Provides bona fide qualifications for Certified Fraud Examiners through administration of the CFE Examination
• Sets high standards for admission, including demonstrated competence through mandatory continuing professional education
• Requires Certified Fraud Examiners to adhere to a strict code of professional conduct and ethics
• Serves as the international representative for Certified Fraud Examiners to business, government and academic institutions  
• Provides leadership to inspire public confidence in the integrity, objectivity, and professionalism of Certified Fraud Examiners

CFEs Are Leading the Fight Against Fraud Worldwide:

Cynthia Cooper, the CFE who discovered the WorldCom fraud, has shared her inspiring story with professionals and students worldwide, through her book and personal appearances.

Harry Markopolos, the CFE who repeatedly attempted to alert the SEC to the Madoff fraud, testified before Congress on how to improve government regulation and oversight of the capital markets.

“Sad as it may seem, fraud will always take place wherever there is opportunity. The feeding frenzy of fraud will not abate unless fraud prevention is embraced and instituted at all levels of a company, especially in the executive suite,” explains Martin Beigelman, CFE, Director of Financial Integrity for Microsoft Corporation.

It has been proven that fraud prevention methods are more successful and are easier to implement than fraud detection.  Anti-fraud controls are the responsibility of management and those charged with governance.  My role as a CFE will be to assist  clients with implementing anti-fraud controls and to assist them with any current fraud concerns that may exist. 

Making 24 Hours Go Farther

During the work week, we each have 24 hours a day to accomplish all that is necessary.  Deducting the hours we must sleep, sit in traffic, and take care of personal tasks we are left with eight to twelve hours per day to produce billable work.  Depending on what our professions dictate, we have different amounts of wiggle room with which to become more efficient and productive.  In reading In Search of Lost Time by Brett Owens I was reminded of daily techniques that we can all implement to decrease our lost billable time and to focus better. 

Owens recommends five simple ways, specifically for those of us in an industry where tracking billable time is essential, to increase our productivity and reduce our non-billable downtime.  Even if you are not in a billable time industry these ideas can help you as well. 

The most simple of recommendations is to invest in a smart phone.  You may think that everyone in business today uses one, but there are still some that do not.  I at times joke that if I lost my laptop and Iphone I would be in a state of chaos not knowing who to call, where to be, or what to do.  My entire life is scheduled in these devices.  What this does is eliminate the need for an address book, calendar, logging onto the computer to retrieve email, etc.  Not that I recommend texting or emailing while driving, I do read email when at red lights.  I read and correspond to email when on the metro, in line at the store and when waiting anywhere outside of my office.  It helps accomplish one of my worst pet peeves-wasting time.  I do not feel as though I waste nearly as much time as years ago when a phone was simply a phone. 

Three of the five suggestions deal with charging your billable time on a current, daily basis.  I can attest that if you do not enter your time to your clients account as you are working for them you have a high chance of  forgetting.  I am a firm believer of entering my time throughout  the day.  It is an easy way to be finished with the day instead of having to come back days or weeks later to fill in the gaps of lost time. 

The final idea is to try and keep your mind free of distractions and clutter by working on one task at a time.  This in part relates to a previous post I wrote on this blog entitled Conquering Email Overload in which I discuss not keeping your inbox open all day in order to eliminate the distraction.  I have read articles on time management that suggest viewing and responding to email a few times a day; answering and returning phone calls at scheduled times; keeping your desk free of anything not directly related to the task you are currently working on and so on.  This is harder than it appears.  I like to think of myself as an organized person and I can adhere to keeping my desk free of clutter, but the other two are tough.  I have tried to keep my inbox at arms length, and have made some progress.  I now only read and respond to email each hour, not constantly throughout the hour.  This has helped to retain focus and clarity on the task at hand.  I believe that these five suggestions can help us all increase our productivity levels and reduce distractions. 

Audited Financial Statements In Relation To Fraud

As auditors, unless specifically engaged, we are not conducting a fraud examination when auditing a clients' financial statements.  I believe this is a public misperception at times.  While we do inquire about any existence or knowledge of fraud during our financial statement audits, under SAS 99, we are not responsible for detecting any fraud.  Detecting fraud is not the goal of our audits.  A financial statement audit is to determine, if in our opinion,  that the financial statements are free of material misstatements that could affect a prudent readers judgement.  We would, of course, bring any instance of any fraudulent act to the attention of the necessary parties.  So what are some differences between financial statement audits and fraud examinations? 

As many of you may know I am in the process of obtaining my CFE (Certified Fraud Examiner) designation.  Contained within my study materials, provided by the Association of Certified Fraud Examiners is an excellent breakdown determining some main differences between auditing financial statements and a fraud examination. 

TIMING

Audit - Recurring, audits are conducted on a recurring basis.

Fraud Examination - Non-recurring, conducted only with sufficient predication.

SCOPE

Audit - General examination of financial data.

Fraud Examination - Conducted to resolve specific allegations.

OBJECTIVE

Audit - Purpose is to express an opinion on financial statements or related information.

Fraud Examination - Purpose is to determine whether fraud has/is occurring and to determine who is responsible.

RELATIONSHIP

Audit - Non-adversarial in nature.

Fraud Examination - Adversarial because involvement is to affix blame.

METHODOLOGY

Audit - Primarily by financial data examination.

Fraud Examination - Conducted by document examination, review of outside data (public records)  and interviews.

PRESUMPTION

Audit - Professional Skepticism is a requirement of independent auditors.

Fraud Examination - Resolution is approached by attempting to establish sufficient proof to support or refute allegations of fraud.

I recently wrote an article for my company newsletter about reducing fraud risk within your organization.  You can read the full article here.

Conquering Email Overload

In this day and age it is a common complaint.  Many are constantly overwhelmed by their inbox, myself included at times.  It is not unusual for us to receive hundreds of emails a day.  The digital environment has changed the way we conduct business, keep in contact with friends and family, read professional publications, and receive news alerts.  With all of this data constantly bombarding us how do we stay on top of it?  In addition to organizing our inbox we also need to be responsive in a timely fashion.  I am a huge believer in using the Out of Office Assistant in Outlook and I suggest if you do not already use some type of response notification during your absence that you start.  The sole purpose is a notification sent back to the email originator that you will not be responding to emails until a specified date.  No one is left hanging waiting for a response.    

I have read numerous articles on organizing and keeping current with our inboxes.  Many offer realistic solutions but still we don't follow the advice.  Why?  Is it because that takes time that many of us do not have.  Or do we?   It is human nature that when things are important to us we get them done.  In reading Tony Schwartz's article about email overload he states "But I don't believe it's just about time. Alan Mulally, the chairman and CEO of Ford, arguably has a busy life and he is known for answering nearly every email he receives the same day. That's my experience with him and with a fair share of other CEOs and senior executives. They simply make responding a priority. "  The highlighted last sentence says it all.  It must be a priority.  Schwartz gives three tips to destress your inbox:

• Share your email practice with key people in your life. Consider adding something like the following to the bottom of all responses: "I do my best to respond to emails within 24 hours" (or 48, or whatever works for you).
• Create a generic acknowledgement for those email exchanges you don't want to continue. Example: "Thanks for writing. I'm inundated and just won't be able to get to this any time soon. Many apologies."
• Chunk your responses. Choose specific times to answer emails for a half hour or an hour at a time, so that you're fully focused on getting through them, rather than constantly interrupting yourself throughout the day. You'll be far more efficient, and you'll likely feel less overwhelmed.

Email overload has been a topic of conversation at times.  A professional colleague of mine dictates his email responses once per day and his secretary types them in draft form and he reviews, modifies if necessary, and sends out.  He swears this is the most efficient method for him.  I can attest that his responses are within 24 hours.  The key must be to find the solution that works best for you and implement it.

I am going to make an earnest effort to utilize the third suggestion.  When in the office I tend to keep my inbox open on one of my monitors all day.  This does help me to respond quickly, however, I tend to look each time a new mail alert is sounded.  Going forward I will keep my inbox closed and only check every couple of hours and take the time to respond at that time.  I will let you know if this helps.  Please feel free to comment with any solutions you have that work in dealing with email overload.