News & Blog

June 29, 2019

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:

  1. Imposter Scams – $488mm
  2. Debt Collection Scams – 475,517 reports
  3. 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:

  1. Horizontal Analysis is also known as “trend analysis”, uses two or more period that shows changes in related financial statement items over time.
  2. Vertical Analysis is done by line item and calculated as a percentage of the base figure in the statement.
  3. 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.

  1. 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.
  2. 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.
  3. 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

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