Government charges Carter’s ex-No. 2 executive with fraud

From a recent article in the Chicago Tribune:

(Reuters) – A former No. 2 executive at Carter’s Inc was indicted on Tuesday for allegedly covering up a multi-million-dollar securities fraud at the children’s clothing company, the Department of Justice said.  Joseph Pacifico, 62, was charged with securities fraud, causing the filing of false financial statements with regulators, and falsifying corporate books and records while he was president of the company.

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LV Business Press Column: Recession Create Chances for Startups, but Beware of Fraud

Guest column from Mike Rosten and Emily Long published in the Las Vegas Business Press on March 12, 2012:

Starting your own business in a bad economy is not uncommon.  Actually, if you look back through history, more people start new businesses during recessionary times than any other period.  These tough times can motivate those who have lost their jobs or taken a pay cut to venture out, start a business, and become their own boss.

There are many great reasons why you should start your own business during tough economic times, including low interest rates, more affordable materials and equipment, and an abundance of qualified potential employees.  Many people who decide to start their own business look at these positive factors yet tend not to think about some of the risks, like the hidden danger of an increased susceptibility to fraud.  Startup businesses start small, and it is small businesses that are the most prone to fraud, not only from outside sources but internally as well.  According to the Association of Certified Fraud Examiners’ (ACFE) 2010 Report to the Nations, “…the median losses suffered by the smallest organizations are greater than those suffered by larger organizations.”

Startup Dangers:

When starting up your own business, be aware of the potential fraud schemes geared directly towards a startup.

  • Grant Fraud – There is a growing number of online grant scams occurring to young entrepreneurs.  Look out for claims of free startup money from the government.  In general, the U.S. government does not offer grant opportunities for entrepreneurs starting up a new business.  Also, look out for anyone who advertises government grant search services for a fee.  Government grants are public and free to lookup through the website www.grants.gov.
  • Intellectual Property Theft – In the early stages of creating your small business you need to protect your ideas and inventions from being stolen.  Make sure to get a non-disclosure, non-competition agreement signed by everybody who knows about your ideas (e.g. employees, investors, manufacturers, etc.).

Then, once you get your new business up and running, be vigilant of external frauds that exploit small businesses.

Outside Dangers:

  • Credit Fraud – There are many ways a fraudster can obtain and use someone else’s credit.  Request your credit report and set it up so that you receive email notifications of important changes.  Enrolling in a credit monitoring plan gives you will 24-7 access to your credit report and score.
  • Overpayment Scams – In this scheme, businesses are overpaid using stolen or counterfeit checks, money orders, or credit cards, and then asked to return the difference when the merchandise is shipped.  Although they may seem legitimate, they are not, and so you lose the difference you’ve sent them in cash, as well as the merchandise you shipped. Never accept or deposit checks or money orders written out for more than the selling price, and never agree to wire back funds.
  • Advance Fee Scam – An up-front payment is obtained for services to be rendered at a later date.  This advance fee is accepted with no intention of providing the service.  If you are asked to pay a fee for the promise of a loan or credit card, you can count on the fact that you are dealing with a scam artist.

These are just a few of the multitude of possible external frauds awaiting businesses.  Unfortunately, frauds from outside con artists are not the only dangers that employers need to prepare for.  The typical organization loses 5 percent of its annual revenue to employee fraud, according to the ACFE.

Dangers from Within:

Here are some of the most common frauds perpetrated by employees working at small businesses (less than 100 employees).

  • Billing Schemes – An employee receives payment from their employer by submitting invoices for fictitious goods/services, inflated invoices or invoices for personal purchases.
  • Check Tampering – An employee steals his employer’s funds by intercepting, forging or altering a check drawn on an employer’s bank account.
  • Skimming – Cash is stolen from an organization before it is recorded on the books and records (e.g. an employee pockets the money and doesn’t record the sale).
  • Expense Reimbursements – An employee makes a claim for reimbursement of fictitious or inflated business expenses.
  • Non-Cash Misappropriations – An employee steals or misuses non-cash assets (e.g. an employee theft of inventory or borrowing equipment for personal use).

According to the ACFE, “…small organizations had a noted deficiency in internal controls that allowed fraud to occur.  In nearly half of the cases at small companies, a lack of internal controls was cited as the factor that most contributed to the occurrence of the fraud.”  The following is a list of things start-up employers can do to reduce their chances of becoming victims to occupational fraud.

  • Segregate Duties – Make sure a single employee is not responsible for an entire accounting cycle (e.g. approve invoices, prepare checks, sign checks, post checks, and reconcile the bank account).  If there isn’t enough staff to divide the responsibilities, make sure review procedures are in place, and go over accounting activities frequently yourself.  You may also want to consider hiring an outside consulting accountant to review the books every quarter.
  • Establish a Third-Party Hotline – Using a third-party hotline to report suspicious activity offers a level of anonymity, making employees more likely to blow the whistle on fraudulent activity. Make sure the hotline is available to customers and vendors alike.
  • Know & Monitor Your Employees – Start by hiring the right employees by conducting background checks.  No matter whom it is you hire, treat them like employees, not friends, family or confidants.  Conduct surprise audits so that employees know you are watching; the perception of detection is a great deterrent.
  • Educate Your Employees – Create a fraud policy and educate your employees during orientation, training, or other communications. Let employees know the cost of fraud and how it can impact everyone’s financial future.  Make sure they are aware that you have zero tolerance for fraud.
  • Tone at the Top – Business owners must create a workplace culture of honesty and values by setting an example.

Perpetrators of fraud often display certain behaviors or characteristics that might be indicators of a heightened risk for committing fraud.  The most common behavioral red flags include employees who live beyond their means, have financial difficulties, control issues and an unwillingness to share duties, wheeler-dealer attitude, divorce/family problems, or irritability, suspicious or defensive personality.

Starting up your own business in a recession can be very attractive and beneficial, but make sure to educate yourself on what types of fraud risks may be lurking around the corner, and the best ways to spot and combat them.  With the amount of money lost due to fraud by small businesses every year, and the resources used to address the aftermath, any effort given to deterring fraud in the first place would be a great investment.

If a start-up organization suspects that they have been a victim of fraud, a detailed investigation may be warranted.  Forensic accountants and Certified Fraud Examiners (CFE’s) have specialized knowledge and skills to investigate the full-range of asset misappropriations through fraud and concealment.

Mike Rosten, CPA, CFE is a Principal with Piercy Bowler Taylor & Kern CPAs and Emily Long, CFE is a Forensic Analyst on his team. For more information on forensic accounting, visit www.pbtk.com.

Don’t Expect Luck to Protect You from Fraud

As St. Patrick’s Day approaches, many thoughts turn to wearing green, eating out at your favorite pub, and if there really is such a thing as the luck of the Irish. But you probably aren’t thinking about your luck in relation to your business and its success. After all, it is hard work and knowledge that leads to profitability, not just blind luck. But that is exactly the road many business owners seem to take when it comes to protecting their assets from fraud – they hope their luck will hold out against fraudsters and schemers who may also be their very own trusted employees. These are people who usually have no criminal record, but every now and then are tempted to cross the line.

Let’s use this holiday as a reminder each year to make your own luck when it comes to protecting all you’ve worked to build within your business. Here are a few tips that have nothing to do with luck – just some common sense, basic observations and knowledge about fraud that will help protect you from theft, embezzlement, and other scams that may already have a foothold in your company:

  1. Don’t wish on a four leave clover that nothing bad will happen to your company finances; rather study and watch for the four fraud motivators that influence an employee to commit fraud in the first place. This “fraud diamond” consists of opportunity, rationalization, pressure, and the fourth and latest addition of capability – having the necessary traits and abilities to pull off the fraud. These items work together on a person who, with the right combination of factors, is led to commit fraud.
  1. Watch out for leprechauns – someone tricky, a fraudster often has key characteristics that show up again and again. Does one of your employees fit the profile? According to a 2007 KPMG study, a fraudster is typically a male between 36-55 years of age. They will most often hold a position of trust in your organization and have been working for you for more than six years, most often in the finance department.
  1. The color green, the theme of St. Patrick’s Day, can represent hard-earned money for your organization, but it can also signify greed.  Greed and opportunity are motivating factors for those who may commit fraud. Do you notice someone in your organization that obsesses over the latest and greatest item or spends more money than they make on cars, jewelry or electronics? These are red flags and that person should be monitored closely, especially if they are in a financial position.
  1. Business owners know that the pot of gold at the end of the rainbow represents their retirement, the stability of their family and their employees’ families, and the chance to leave a legacy. Protect your pot of gold, because no one else will! Just basic understanding and awareness of the type of person who commits fraud, the basic ways they can steal from the company, and what internal controls can deter them will pay off in the end as you mitigate risk and manage financial systems.

So, Happy St. Patrick’s Day, and remember that we make our own luck in the business world. Keep your eyes wide open and never stop learning about ways to protect your company from fraud.

Tricia J. Cook is a senior forensic analyst with the forensic accounting and litigation services department at Piercy Bowler Taylor & Kern CPAs. She sifts through financial transactions to resolve allegations or evaluate suspicions, interpreting that transactional data and then organizing that information into easy to understand reports for use by counsel, or for presentation in a court-of-law. She can be reached at tcook@pbtk.com or 702-384-1120.

Tips for Hiring an Expert Witness

Hiring expert witnesses is oftentimes a key aspect of trying a case, and can be the difference between a win and a loss in court. But it can be difficult to know: 1) when to bring in the expert witness, and 2) how to make sure you are hiring the best person for the case and your client. As a forensic accounting expert witness for the past 15 years, I have been on the other side of the selection and hiring process and can offer attorneys some general tips for hiring an expert witness as part of a legal strategy.

Planning Stage

How do you decide if you really need to hire an expert witness?  Whenever specialized knowledge is needed, a report from an expert can help strengthen a case.   In addition to researching the subject area themselves, counsel should go over the following items with the potential expert witness before they are hired:

  • Scope of work.  Define the issues of the case for the expert as precisely as possible.  This will allow the expert to better focus on the critical issues and create a realistic fee estimate.
  • Depth and breadth of analysis.  Being excessively detailed or focusing on an extraordinarily long time period may result in excessive work-effort and increased cost.  However, a narrow analysis may result in a report that is ineffective in court. Is there a happy medium? Based on my past experience as a witness, cases often wind up settling as a direct result of reading an expert’s report so it is better to be more detailed than general in the analysis.
  • Case Budget.  With continuing economic struggles, litigation costs, including expert witness fees, will continue to be a significant issue for the foreseeable future.  It is important that expectations are clearly conveyed to the expert to minimize miscommunication and foster greater control over fees.

Who to Hire?

Research the background, reputation and qualifications of the potential expert witness – opposing counsel most certainly will. This includes:

  • Feedback from attorneys in the community.  Counsel should first speak with peers.  Perhaps others have used the expert and would be willing to provide their insight.
  • Verify credentials.  Confirm credentials and licenses.  For finance/accounting, the CPA credential may be confirmed online with the State Boards of Accountancy; other credentials (CFE, CVA, etc.) can be confirmed with the sponsoring organizations.  Lapses may occur, possibly from non-payment of dues or continuing education issues.
  • Verify representations.  Confirm other representations by the potential expert – even those that seem ancillary.  This should include education, speeches, articles, honors, etc.  On a prior engagement, I was unable to verify college-level education of an opposing expert and it called into question their credibility.
  • Prior testimony experience.  Seek to understand the potential expert’s level of experience at testifying, including results achieved.  Although past performance is not a guarantee of success, prior experience is an important factor.
  • Results of prior challenges.  Determine whether the potential expert has ever been challenged – either qualifications or basis for opinion, and the results thereof.  Research cases disclosed by the expert, and use databases such as Daubert-Tracker.  Challenges are commonplace, and surviving them may tend to enhance the potential expert’s qualifications and suitability.

Knowledge & Abilities

How can you know if the potential expert has the right knowledge for the task? You should consider exploring the following, either with them, or through other sources:

  • Subject matter.  Determine whether the potential expert has worked in this industry or with the relevant issues in the past.
  • Real world experience.  Practical experience is more desirable in an expert than text-book learning or academia.
  • Simplify the complex.   Can they articulate clearly the retention objective, complexities, processes and possible alternative methodologies?  Also, will they be able to educate the judge and jury, without using technical jargon?
  • Analytical ability.  The ability to conceptualize and analyze a problem is oftentimes a critical matter for expert witnesses, so this should be adequately assessed during the pre-retention interview process.
  • Detail oriented.  It’s the details that are often most important, particularly on forensic accounting matters, so ensure that the potential expert will be actively participating in analyzing the details to yield stronger expert witness testimony.

Personal Rapport

Even if otherwise qualified, if it is difficult to interact with the potential expert, the awkwardness may end up sabotaging your case. Before trial, plan on spending some one-on-one time with the expert witness, to develop a personal rapport that will shine through during court proceedings. You should consider exploring the following:

  • Personality and likeability.  Determine whether the potential expert will “play” well to a judge or jury and assess the level of abrasiveness (if any).
  • Public speaking.  The potential expert should be an effective communicator, which includes eye contact, vocal quality and confidence.
  • Adaptable and flexible.  Assess whether the potential expert is too rigid to consider other ideas, including suggestions of counsel.  It is essential that they be adaptable to events at trial and otherwise, which may be hindered if they can only speak from prepared notes.
  • Independent analysis.  Be wary of the potential expert that is seemingly pre-disposed to agreeing, without much independent thought and consideration, they may not be firm in their convictions and conclusions, becoming mere mouth-pieces who may be seen as puppets.
  • Convey objectivity.  The potential expert should speak in his or her own style, and be unbiased in approach and methodology.  Those are the experts that will be more believable on the witness stand.

Parting Thoughts

Over the years, I have appreciated working with those attorneys who invested the time to truly understand and learn from my reports and analysis as a forensic accounting expert witness. By being involved in the selection of and communication with expert witnesses, you can increase their effectiveness, thereby further bolstering your personal reputation and success as an attorney.

Mike Rosten is a Principal at Piercy Bowler Taylor & Kern CPAs and Business Advisors. You can reach him at mrosten@pbtk.com or 702-384-1120.

Fake Services, Fake Invoices: Learn From a Recent Embezzling Conspiracy

A Clark County employee was recently indicted on 15 counts of conspiracy to commit wire fraud from an insurance company over a four-year period. As a Certified Fraud Examiner (CFE) and CPA, the case caught my attention as one that possibly could have been prevented had the insurance company had the proper internal controls in place.  The county employee acted as a private investigator and was hired by the co-conspirator, the insurance company’s attorney, to perform investigations that were never done. They are accused of embezzling thousands of dollars from the insurance company by setting up fraudulent invoices to a fake vender. Why did it take so long to discover these fraudulent activities and what can a business owner learn from this case of embezzlement conspiracy?

  • Segregation of duties.  In this case, one person, the attorney, authorized checks to send to vendors such as private investigators, though there was never any proof that the work had been done. One person should not be able to both approve and pay vendor invoices. If the payment is to a false vendor, there is ample opportunity for fraudulent payments to go on for years.
  • Need for oversight and audits.  Did the insurance company let their attorney know there would be surprise audits held from time to time? It might have made him think twice before scheming with the fake private investigator. Fear of getting caught is an effective fraud deterrent.
  • Perform a fraud checkup yearly. The embezzlement went on for four years in this case. During the time before the fraud was discovered, the insurance company may have not noticed the missing money. It may seem a strange way to look at your employees in a negative light, but if you expect the worst you may catch the problem before it’s too late.
  • Look for warning signs. Personal problems or changes in behavior are red flags for fraud.  Did the attorney suddenly seem flush with cash? Buying new big ticket items or wearing expensive clothing? These are signs to watch out for in your employees, especially if it’s a new behavior.

If it took four years for this insurance company to detect a problem, could there be some small fraudulent act occurring today in your company? Don’t wait for it to snowball to a major conspiracy. Contact a CFE today to perform a fraud checkup on your business.

Mike Rosten, CPA, CFE is a Principal with Piercy Bowler Taylor & Kern CPAs. For more information on forensic accounting, visit www.pbtk.com.

Source: http://www.lvrj.com/news/pair-indicted-in-embezzling-conspiracy-140973043.html