Las Vegas Business Press Guest Article: Train Your Employees to Be Fraud Fighters

Train your employees to be Fraud  FightersOriginally published in the Las Vegas Business Press

By Mike Rosten, CPA, CFE

Fraud can be devastating to any business, but small business owners are especially vulnerable to the costs of financial betrayal by a trusted employee.  Companies with a small staff often ask their workers to wear many hats, which results in a lack of internal controls and a loss of the natural checks and balances that occur in a large department.

Small business owners need to do all that they can to be aware of the red flags of fraud so they can stop the theft as soon as possible, or prevent it altogether.  However, the owner’s knowledge is not enough; every employee of a small business needs to be trained on the warning signs for fraudulent behavior and how to report them. They should also be educated on the reporting protocol (e.g., systems in place) once a fraud red flag is detected.

In addition, if employees knew in advance what policies were enforced in relation to fighting fraud, imagine the change in their behavior or their perception of what could be hidden from management? For example, announcing that random audits and inspections would occur, or that vacation time is mandatory for all employees may help combat some of the temptation to commit fraud.

According to the most recent Global Fraud Study by the Association of Certified Fraud Examiners (ACFE), one fraud red flag was identified in 92 percent of the occupational fraud cases they studied, and two or more behavior red flags were identified in 64 percent of cases.  If these red flags can be identified early on in the fraud scheme, the damages can be reduced.

The ACFE identified the following as the top five Behavioral Red Flags typically displayed by a fraudster:

  1. Living beyond one’s means – The employee buys expensive jewelry, takes extravagant vacations or purchases new vehicles that are out of the employees’ salary range.
  2. Financial difficulties – The employee purchases everything on credit, the office receives calls from banks requesting payments taken out of paychecks, or collectors call during business hours looking for the employee at work.
  3. Unusually close association with vendor/customer – If an employee is often seen associating with a vendor or customer outside of work, take a second look at their relationship. Common fraud schemes involve payments to vendors who are actually friends.
  4. Control issues, unwillingness to share duties – Sometimes an employee does not delegate duties to others and is not willing to take any vacations, which would require another employee to see their work.
  5. “Wheeler-Dealer” attitude – shrewd or unscrupulous behavior in an employee can be a sign of someone willing to bend the rules to suit their needs.

Once employees are trained to be aware of   these five red flags, the next step is for them to take action. Employers should provide a way for employees to report concerns of fraud.  For example, either through an anonymous hotline or through a secure comment box.  If an employee identifies any of these red flags, they should report their concerns right away. On average, cases of fraud cost a business $8,500 a month and go on for 18 months before they are uncovered. A group of vigilant employees could potentially reduce the impact by shortening the length of time a fraudster is allowed to go unchecked, saving the business thousands of dollars for each month the fraud is cut short.

A recent example of employee misappropriation includes an investigation performed by our firm that was based on a tip given to the owner of a local business. The suspected employee had been with the company for many years as a bookkeeper in the office.  Duties included maintaining company accounts in QuickBooks, which involved handling accounts payable, payroll, recording daily deposits and reconciling the accounts on a monthly basis.  Even though the suspect was not an authorized signer on the checking account, they had access to the signature stamp. Apparently, the opportunity to use the stamp proved too great for the suspect.

Our investigation uncovered several schemes, which primarily included issuing checks in the perpetrator’s actual name or to Cash, and changing the payee in QuickBooks to that of a customary vendor.  When interviewed and confronted with selected examples unearthed by our forensic accounting procedures, the perpetrator admitted to the schemes, and to having a gambling problem.

Some behavioral red flags that should have raised suspicion included the purchase of a new vehicle, bank statements with missing check copies, and the suspect working on bank statements off premises.

Business owners can look to this real-life example to learn how employee fraud could be prevented:

  • Segregation of duties. The reconciliation of accounts, review of bank statements and inspection of paid checks should be performed by someone that is not responsible for both check writing and having full accessibility to the accounting system. This bookkeeper was given both the lock and the key – Write a check, post it to the accounting system as a seemingly valid vendor and perform bank account reconciliations to ensure that everything balanced.
  • Keep signature stamp in locked drawer. Only the authorized user of the stamp should have access – this stamp should be guarded as closely as cash, since ultimately it can be used to drain cash from a business’ accounts.

Consider these examples as motivation to train your employees to be an army of fraud fighters. If everyone is aware of the internal procedures in place to help prevent fraud and they know the five red flags displayed by the average fraudster, then they can be one of the first defenses in helping a business owner stop fraud before it causes irreparable financial harm. If a business owner receives a tip, it should be acted on immediately. A fraud examiner can then be brought in to perform an analysis of financial documents to uncover the fraud, interview the suspected fraudster and calculate the damages.

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

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Mike Rosten to Co-Host Financial Fridays Today

This Friday our radio show will air live in Las Vegas on March 27th at 3 pm on KLAV 1230 AM or listen online. You can also go to www.PBTK.com on Monday to listen to our line up of great guests. Michael Rosten, CPA, a PBTK Principal and PBTK’s forensic accounting practice leader will be both the co-host and guest today in Scott Taylor’s absence.

Our experts this week include:

Dan Shaffer, CPA, ChFC, a nationally recognized financial advisor with Shaffer Asset Management (Greenwich, CT). Dan is a frequent participant with national business media presentations and author of widely circulated book “Profiting in Economic Storms.” Dan is a regular Fox Business contributor from New York City and experienced specialist within the financial markets.

Reg Baker, CPA is the former two-term Chairman of the Nevada State CPA Society. He now resides in Hawaii where he currently serves as a Partner with PKF Pacific Hawaii in Honolulu focusing on the SMB Pacific and Hawaii markets.

Michael L. Rosten,  a CPA and Certified Fraud Examiner, directs the forensic accounting and litigation services at PBTK, which includes fraud investigations. In this capacity, he focuses on sifting through financial transactions to resolve allegations or evaluate suspicions, interprets that transactional data and then organizes that information into easy to understand reports for use by counsel, or for presentation in a court-of-law.

If you have any questions about anything discussed on the show, or if you would like to be a guest, please contact Financial Fridays host Scott Taylor at staylor@pbtk.com or 702-384-1120. Scott W. Taylor’s tax practice focuses on services for a wide range of clients including real estate partnerships, limited liability companies, large and small closely-held corporations and not-for-profit organizations. He started with PBTK in 1992 and was made a Shareholder in January 2005. In addition to his tax work, he also provides services for business consulting, deal structuring, receivership and litigation support services.

What is Affinity Fraud? And How to Avoid It

SEC.gov: Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are – or pretend to be – members of the group. They often enlist respected community or religious leaders from within the group to spread the word about the scheme by convincing those people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the fraudster’s ruse.

These scams exploit the trust and friendship that exist in groups of people who have something in common. Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often fail to notify authorities or pursue their legal remedies and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment.

Many affinity scams involve “Ponzi” or pyramid schemes, where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. This ploy is used to trick new investors to invest in the scheme and to lull existing investors into believing their investments are safe and secure. In reality, the fraudster almost always steals investor money for personal use. Both types of schemes depend on an unending supply of new investors – when the inevitable occurs, and the supply of investors dries up, the whole scheme collapses and investors discover that most or all of their money is gone.

How To Avoid Affinity Fraud

Investing always involves some degree of risk. You can minimize your risk of investing unwisely by asking questions and getting the facts about any investment before you buy. To avoid affinity and other scams, you should:

  • Check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

Continue reading at SEC.gov for more tips on how to avoid affinity fraud.

CFO Magazine: Most Internal Fraud Still Swept Under the Rug

LOS ANGELES — Even when employers have good cases against internal fraud, they often don’t refer them to law enforcement. Many companies handle instances of such fraud internally and very quietly make the employee “go away.”

But that can be a mistake, said fraud experts and prosecutors at Information Security Media Group’s Fraud Summit in Los Angeles last week.

So why do many organizations not report? The fear of bad publicity and that their share price will take a hit if investors and customers learn that the organization’s poor controls left it vulnerable to internal fraud, said Allan Bachman, education manager at the Association of Certified Fraud Examiners.

Continue reading at CFO Magazine.

How PayPal uses deep learning and detective work to fight fraud

Hui Wang has seen the nature of online fraud change a lot in the 11 years she’s been at PayPal. In fact, a continuous evolution of methods is kind of the nature of cybercrime. As the good guys catch onto one approach, the bad guys try to avoid detection by using another.

Today, said Wang, PayPal’s senior director of global risk sciences, “The fraudsters we’re interacting with are… very unique and very innovative. …Our fraud problem is a lot more complex than anyone can think of.”

In deep learning, though, Wang and her team might have found a way to help level the playing field between PayPal and criminals who want exploit the online payment platform.

Continue reading at http://www.msn.com/en-us/news/sports/how-paypal-uses-deep-learning-and-detective-work-to-fight-fraud/ar-AA9tis7.

IRS – 2015’s Dirty Dozen Tax Scams

Phone scams, phishing, and identity theft topped this year’s IRS list of the “dirty dozen” tax scams, which the IRS has been releasing, one scam at a time, since Jan. 22. The one-scam-a-day approach allowed the IRS to explore each one in more detail. Here is the complete list:

1. Phone scams.

2. Phishing.

3. Identity theft.

4. Return preparer fraud.

5. Hiding income offshore.

6. Inflated refund claims.

7. Fake charities.

8. Filing false documents to hide income.

9. Participating in abusive tax shelters.

10. Falsifying income to claim tax credits.

11. Excessive claims for fuel tax credits.

12. Frivolous tax arguments.

According to the IRS, the most serious scams this year are phone scams, in which criminals call intended victims impersonating the IRS. Many times, the callers disguise the number they are calling to look like an IRS number and may threaten the target of the scam with arrest, deportation, or license revocation.

Most Internal Fraud Still Swept Under the Rug

LOS ANGELES — Even when employers have good cases against internal fraud, they often don’t refer them to law enforcement. Many companies handle instances of such fraud internally and very quietly make the employee “go away.”

But that can be a mistake, said fraud experts and prosecutors at Information Security Media Group’s Fraud Summit in Los Angeles last week.

So why do many organizations not report? The fear of bad publicity and that their share price will take a hit if investors and customers learn that the organization’s poor controls left it vulnerable to internal fraud, said Allan Bachman, education manager at the Association of Certified Fraud Examiners.

Continue reading at http://ww2.cfo.com/fraud/2015/03/internal-fraud-still-swept-rug/.