Fraud Can Happen to Anyone, Even the Government

As published in the http://www.washingtontimes.com/news/2017/may/27/kuwaiti-company-agrees-to-pay-95-million-in-fraud-/

Everyone can be affected by fraud, even the US Government. In a recent story, we read how the U.S. government was defrauded by a Kuwaiti logistics company that was contracted to feed American troops in Iraq, Kuwait and Jordan. According to the indictment, the logistics company provided false invoices and statements, bought high-priced food items and then knowingly inflated the prices, received rebates and discounts that were not passed on to the government, asked vendors to manipulate product packaging so that inflated fees could be charged to the government.

These charges came from allegations originally raised in a civil whistleblower suit by a former vendor of the logistics company. The vendor filed the lawsuit under the whistleblower provisions of the False Claims Act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery. The Act also allows the government to intervene and take over the action, as it did in this case. In the civil complaint filed by the United States, it alleges that the company knowingly overcharged the Department of Defense for locally available fresh fruits and vegetables and falsely charged the full amount of invoices despite the agreement that they would pay 10 percent less than the billed amount.

According to the Association of Certified Fraud Examiners (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse, of the cases involving a government victim, those that occurred at the federal level reported the highest median loss of $194,000, compared to state or provincial at $100,000 and local entities at $80,000.

A whistleblower brought the fraud to light in this case – consider adding a fraud hotline to your organization to create a simple way for employees or even vendors to raise the alarm if they notice something isn’t right. Contact Mike Rosten, CPA, CFE for more information on fraud red flags or to receive a fraud checklist for your organization.

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Employee Fraud and Unsupervised Financial Access

Every business should have some controls in place when it comes to their money, but it takes more than just having words on paper. Policies must be enforced to be effective.

Recently, the accounting and compliance manager for the Oklahoma Beef Council was able to circumvent the internal controls and commit employee fraud. Why? The opportunity for fraud came from the lack of follow up on a written policy related to signing company checks.

For almost six years the accounting manager, not an authorized signer on the bank account, had a signature stamp. She was given authority to use it only on limited occasions. Sometime in 2010 she was instructed to stop using the signature stamp, but since management never physically took away the stamp, she was able to keep using it without their knowledge.

Lack of management oversight allowed her to forge 790 unauthorized checks from the business accounts and put those funds directly into her personal account. Through her position, she was also able to make false accounting entries to cover up the forged checks. She eventually pled guilty to embezzling $2.6 million and signing a false tax return.

Does your business need help detecting red flags for employee fraud? If you find yourself in need of a forensic accounting expert witness or investigator, contact Mike Rosten, CPA, CFE.

                                             

Lesson Learned from an Accounting Assistant Sentenced to Prison

No business owner wants to find out that one of their employees is stealing, but it happens all too often. Hopefully other businesses can learn from the unfortunate situation one organization experienced recently when a former accounting assistant pled guilty to embezzling more $70,000 in rent payments and was sentenced to five months in prison.

So how could this happen? Since the ex-employee was in charge of not only collecting the rent payments but recording them in the accounting system, putting the payments in the cash box and depositing the money at the bank, they were able to cover up the theft fairly easily. The accounting assistant reduced the amount collected in the accounting software to match the bank deposit, and she kept the difference. She stole 181 tenant rent payments between 2010 and 2015, primarily paid in cash. The fraud was only discovered when another employee noticed two rent payments were missing.

Some of the lessons that any business can take away from this case of employee fraud include:

  • Segregation of duties. No one person should be in charge of collecting, recording and depositing payments. In this case, one person handled every step of the rent payment process, providing the opportunity for someone motivated enough to commit fraud.
  • Surprise audits. Make it know that at your company, you hold unscheduled audits. When people fear getting caught it decreases their motivation to act, even if the opportunity may exist.
  • Fraud training. Have training for all employees that includes fraud red flags. In this case, another employee noticed the missing rent payments, but there may have been other red flags early on that if identified could have stopped the fraud much sooner. For example, the perpetrator not taking vacation, living beyond their means, and becoming secretive or territorial.

Not all employees will steal, but it is important to create a work environment that acknowledges the possibility. Build a system of internal controls – checks and balances that not only protect the company from fraud, but that shield the employees from their own opportunistic tendencies. Contact Mike Rosten, CPA, CFE at PBTK if you would like help strengthening your internal controls or if you suspect an employee of fraud and need a forensic investigation.

Fraud Friday – Caught Twice

A recent news story ran about a woman caught with $10,000 worth of checks and money orders that didn’t belong to her in her purse. Her employer, a property management group that receives check and money orders from its clients, was alerted to the theft through a company audit. Using a thick marker she would write her name on the money orders and checks and deposit them into her account. Ironically, she was on probation for stealing from her previous employer when she was caught for a second crime.

Read the full story

 

Lessons Learned from an Ex-Cashier Who Must Pay Back $12.9 Million in Embezzlement Case

Employers want to trust their employees, especially those in key positions who are tenured with the company. But yet again, the news brings us another story of how employees break that trust. This recent article reports that a long time employee used her position to embezzle company money to live a lavish lifestyle and allow her husband to retire. Cynthia Mills was a cashier and treasury specialist for a manufacturing company and was in charge of depositing checks and handling wire transfers. To accomplish her scheme, she set up a bank account in the name of a fake company and wired money into that account. It seems that her scheme was so well thought out that even the company internal auditors missed it.

What lessons can we learn? What controls may have prevented her ability to steal millions from her employer? These key components of fraud detection were missing:

  • Segregation of duties. No one person should have the ability to approve and set up new vendors and transfer money, no matter what their company ranking or position. At least two people should be involved in the process.
  • Vendor background checks. Know who your vendors are before doing business with them.
  • Review invoices. Implement procedures for reviewing and approving invoices. Different people should approve and set up vendors.
  • Checks and balances. All employees and departments should have checks and balances, no exceptions. Ironically, the most trusted, high-ranking and long-time employees are typically the ones who commit fraud.
  • Surprise Audits. Perform surprise audits and let employees know that this is standard procedure. Fear of being discovered may effectively neutralize the opportunity component of the fraud triangle, preventing embezzlement schemes from happening in the first place.

Long-time employees are trusted, but sometimes they abuse that trust and commit fraud. For more information on preventing fraud in your organization, contact Mike Rosten, CPA, CFE for a fraud checkup checklist.

Ignoring Red Flags for Corporate Fraud Can Cost Millions

Ignoring Red Flags.jpgIf you have employees, you have payroll; if you have payroll, you also have payroll taxes. For many businesses, it may be easier and more economical to use the services of a payroll company.  These services usually include processing payroll, filing required reports and paying required taxes.

However, this was not the case for some unfortunate businesses, as we see in this recent article about the CEO of Innovative Payroll Services, a payroll company in New Jersey, who pled guilty to an $8.4 million fraud scheme. He used funds deposited by customers for payroll taxes to pay for personal expenses, including credit card bills, a deposit on a $1.8 million house, payments for cars, boats and airplanes.  While these customers thought their payroll taxes were paid, this CEO was embezzling their payments to live a grand lifestyle.  The judge in this case said that more than 103 clients lost more than $8.4 million in local, state and federal tax deposits, as well $578,000 in associated penalties and interest.

One of these clients was the City of Trenton. The mayor of Trenton admitted that red flags were ignored that may have prevented such a great loss.

Some of the red flags that should have caused concern were:

  • Notices of unpaid balances, penalties and interest
  • Notices of late filings
  • Payroll company employees always “looking into it” with no resolution

Michael Pires, an industry expert and CEO of JetPay Payroll Services, offers some tips for hiring and using a payroll company:

  • Research the company thoroughly – number of years in business, track record, testimonials
  • Ask for a copy of the SOC (Service Organization Control) Report. There are two types of reports: a Type I report describes the company’s controls at a specific point in time, but a Type II report goes a step further to include detailed testing of the company’s controls over a period of time.
  • Register for the Electronic Federal Tax Payment System and the state’s filing system so you can verify that tax payments were made on time.
  • Know where your money is held until tax payments are due.
  • Make sure the company has a fidelity bond insurance policy that would cover any losses in the event of errors or thefts. Amounts will vary depending on the size of the company.

If you have noticed any red flags within your organization, contact a Certified Fraud Examiner for a fraud checklist. Mike Rosten, CPA, CFE and shareholder with Piercy Bowler Taylor & Kern can help review a company’s books and records to find potential fraud.

 

Control Employee Fraud Risks with Internal Controls

Written by Michael L. Rosten and Adam Bowler

Fraud costs companies 5 percent of their annual revenues each year, according to the 2016 Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners (ACFE). The median loss of 5 percent was observed across all types and sizes of organizations. This means smaller companies are at a greater disadvantage when fighting fraud; they typically have fewer resources to combat fraud and are less capable of absorbing its massive costs.

Additionally, smaller private companies are more likely to become victims of fraud than larger companies, publicly-traded companies or even non-profits. Unfortunately, the companies at the highest risk of exposure tend to have far fewer fraud prevention and deterrence mechanisms in place, even though the costs of certain prevention methods are low.

A strong internal control system reduces the opportunity to commit fraud, making it harder for dishonest employees to steal assets, engage in corrupt business practices or manipulate your company’s financial statements. The mere appearance that a company has increased detection methods can have positive deterrence effects.

A Worthwhile Investment

Business owners and managers may be reluctant to invest in internal controls for various reasons. They may have limited resources and underestimate the value of a strong internal control system. Or they may mistakenly believe that implementing internal controls will signal distrust toward employees, suppliers and customers.

In excess of 80 percent of frauds are committed by perpetrators that had never previously been charged with fraud. Therefore, pinpointing potential threat sources becomes challenging. With perpetrators difficult to identify, proactive fraud detection/deterrence measures are vital.

The most common internal control measures implemented by U.S. companies in the 2016 Report to the Nations include:

  • Corporate codes of conduct,
  • Independent external audits of the financial statements,
  • An anti-fraud policy, and
  • Employee support programs.

Investing in antifraud measures can be money well spent: The ACFE reports that the presence of strong internal controls was correlated with both lower fraud losses and quicker detection. A lack of internal controls was cited as the primary factor in 29 percent of the cases analyzed in the 2016 Report to the Nations. Moreover, some controls can be implemented at very low costs, such as management reviews, job rotation, clear lines of authority, fraud training and mandatory vacations. These simpler options can be effective for smaller private companies with limited budgets.

Fortifying Your Defenses

Fraud has been a hot news topic in recent years, which should be a reminder for companies to reinforce their defenses. The ACFE reports that, compared to 2010, the use of whistleblower hotlines is up 9 percent and fraud training programs for employees increased by 8 percent. With so much at stake, companies large and small should adopt company appropriate internal control systems for detecting and preventing fraud.

In our experience, the constant threads in past fraud investigation assignments were lack of oversight and lack of segregation of duties – both of which are addressed by an effective internal control system. A Certified Fraud Examiner can help evaluate your internal control system — or investigate fraud if you suspect wrongdoing.

Michael Rosten, CPA, CFE directs the forensic and litigation services at Piercy Bowler Taylor & Kern (PBTK) which includes fraud investigations. He can be reached at mrosten@pbtk.com. Adam Bowler is an attorney and Certified Fraud Examiner at PBTK. He can be reached at adam.bowler@pbtk.com.