THEFT, FRAUD, AND CHEATING

If Google and Facebook can be tricked out of $123 million dollars, you can be sure that your small business can be at risk due to fraud. This article will discuss some common ways small businesses lose money through theft, how to identify cheating, and steps to protect yourself and your business.

1. CONSUMER FRAUD SCHEMES

Consumer fraud involves false transactions or confidence schemes such as:

Confidence Schemes
Nigerian Prince
Phishing
Identify Theft
Credit Card Theft
Synthetic Identities
Telemarketing, Imposter Scams
Insurance Fraud
Mortgage Fraud

The Federal Trade Commission reported in 2018 there were 3 million consumer complaints with $1.48 billion in combined losses. The top three complaints were:

Imposter Scams – $488mm
Debt Collection Scams – 475,517 reports
Identity Theft – 444,608 reports

The top states for fraud overall are Florida, Georgia, and Nevada. Pennsylvania is number 20. Top states for identity theft reported by the FTC are Georgia, Nevada, California. Pennsylvania is number 20 on that list as well.

To protect yourself from consumer fraud here are some measures to take into consideration:

Spot Imposters, don’t believe Caller ID
Do online searches, talk to people
Strengthen passwords including your phone
Don’t pay up front for a promise
Consider how you pay
Make liberal use of a shredder
Hang up on robocalls
Show proper skepticism
Don’t deposit a check and wire money back
Check credit reports frequently, monitor financial statements

2. MISAPPROPRIATION OF ASSETS

Misappropriation of assets is employee insider theft, defalcation or embezzlement. This involves company assets and can be monetary or physical in nature. Common schemes include:

Authorized Check Maker – Ledger Editing
Forged Maker – Forged signatures, Signature stamp
Altered Check – Check Washing, Reproductions
Fraudulent Billing, Fraudulent Vendors
Inventory “shrinkage”
Payroll Fraud
Skimming
Expense Reimbursement Fraud

A recent and local occurrence of misappropriation of assets involved Matthews International in 2017. Cynthia Mills who was employed as a cashier and treasury specialist managed to steal $13 million dollars over a 16-year span!

3. FINANCIAL REPORTING FRAUD

Fraudulent financial reporting occurs through earnings management fraud. There is intentional manipulation of accounting policies or estimates to improve financial statements.

Financial Reporting Schemes:

Earnings Smoothing
Improper Revenue Recognition, Fictitious Sales
Falsified Inventory
Channel Stuffing or Trade Loading
Misstating Liabilities
Fraudulent Post-Closing Entries
Check Kiting
Improper Valuation of Assets

In 2011 Monsanto misstated company earnings relating to their most well-known product ROUNDUP. This scheme included three accounting employees and sales executives. Monsanto recorded revenue from a sales promotion that ran from 2009 through 2011. However, they failed to recognize the costs related to the promotion that affected profits. Monsanto was required by the SEC to pay $80 million in penalties.

To test for financial reporting fraud your team will need to identify trends, significant changes and examine account activity.

Three common analyses used are:

Horizontal Analysis is also known as “trend analysis”, uses two or more period that shows changes in related financial statement items over time.
Vertical Analysis is done by line item and calculated as a percentage of the base figure in the statement.
Ratio Analysis is a means of measuring the relationship between two different financial statement amounts. Calculating accounts receivable turnover, sales to total assets, working capital to total assets, leverage ratios, and ratios involving nonfinancial data can help spot that something is off.

IDENTIFYING AND PREVENTING FRAUD IN SMALL BUSINESS

Red Flags for Fraud

So what are some identifying red flags you can employ to spot possible attempts of fraud?

Look out for Financial Statement Anomalies – whole numbers are common.
Employee Actions – never taking a day off
External Communications – Bank or Regulatory letters involving missing forms and other similar notices
Missing Documents that support financial data
Complaints – Customers filing complaints, verbal or written
Excess Transactions or Duplicate Transactions
Inventory Shrinkage
Abnormal Volume

The Fraud Triangle

Nearly every fraud case includes three aspects – Pressure of Incentive, Opportunity, and Rationalization.

Pressure of Incentive. A common incentive is declining revenues. Individuals will commit fraud in order to meet debt covenants, achieve bonus targets or inflate stock prices.
Opportunity. There is accessible cash or valuable inventory, especially if it is small or can be easily removed. Also if there are limited internal controls in the accounting environment theft can be rampant.
Rationalization. Attitudes and behavior expressed by top management will drive company culture. If there is a lack of policy, controls, and accountability the employee can rationalize any transaction. Motivations of theft can be internal or external. The employee can have a shopping or gambling addiction that needs to be satisfied.

Offender profile

The typical profile of an employee who has been convicted of fraud is someone of good standing, employed an average of 5 years, and a first time offender.

Preventing fraud in the workplace

Implement a proper system of internal controls
Properly segregate accounting duties among staff
Perform background checks
Make employees aware of new financial controls
Rotate employees to various responsibilities
Insist employees take PTO
Scrutinize all business bank accounts
Focus on improving a transparent and open-door corporate culture
Train employees on fraud mitigation steps
Know your business partners
Get expert help

If you suspect fraud or have been a victim of fraud, we would be happy to help you navigate the deception. Please contact us to help by calling 412-278-2200 of contacting us electronically.

By Wilke & Associates, CPAs