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.

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Former Construction Union Leader Admits Embezzlement

Security Focus puzzleIt seems to be getting harder and harder to trust people, especially those in executive positions. Recent news reports describe yet another story about trust being violated by a high-ranking employee (Landa, Jeff. “Former Construction Union Leader Pleads Guilty to Embezzlement.” Los Angeles Times 27 Mar. 2017: Print.) Using his position as secretary-treasurer and business manager of the Bakersfield office of a construction workers union, Mr. Padilla was able to embezzle over $160,000 from the organization between September 2012 and December 2014 by writing unauthorized checks that were signature-stamped with the union president’s signature. In addition, he used his union-issued credit cards to make over 200 personal purchases.

When an executive is the one committing the fraud or embezzlement, it is a little harder to control or catch, but not impossible.

Here are some tips to help prevent fraud committed by a high-ranking company employee:

  • Segregation of duties. No one person should have the ability to approve expenditures and write checks, no matter what their company ranking or position.
  • Review of all credit card accounts. Someone other than the cardholder should review all credit card charges on a monthly basis. Any unknown charges need to be questioned. If the executive holds a company card, another person should receive the credit card statements.
  • Request receipts for all charges on company credit cards. It may be necessary to request that all charges to the credit card have a receipt. This may seem over the top, but it will let the cardholders know that if there is not a receipt, they may be responsible for the charge.

It is always difficult to put internal controls in place when those who are in control are breaking the rules or bypassing the controls.

For more information on preventing fraud in your organization, contact Mike Rosten, CPA, CFE.

Cooking the Books

Businessman cross finger .conceptWhat’s the most costly type of white collar crime? On average, a company is likely to lose more money from a scheme in which the financial statements are falsified or manipulated than from any other type of occupational fraud incident. The costs frequently include more than just the loss of assets — victimized companies also may suffer lost shareholder value, lower employee morale, premature tax liabilities and reputational damage. Let’s take a closer look at what’s at stake when employees “cook the books.”

Low Frequency, High Cost

The Report to the Nations on Occupational Fraud and Abuse published in 2016 by the Association of Certified Fraud Examiners (ACFE) found that less than 10% of the fraud schemes in its survey involved financial statement fraud. However, those cases clocked the greatest financial effect, with a median loss of $975,000. Compare that amount to the median losses for asset misappropriation ($125,000) and corruption ($200,000).

What makes financial statement fraud especially problematic is that the costs can quickly snowball out of control. For example, when an executive fudges the numbers to make a company appear more profitable, the company will likely incur greater liability for taxes or dividends.

Plus, it might be necessary to take on debt to make those payments, leading to higher interest costs. Or an acquisition of a healthy company might be pursued to hide the actual underperformance. In the end, more fraud may be necessary to pay for the original scam.

Common Schemes

The ACFE defines financial statement fraud as “a scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.” Common ploys include:

  • Concealed liabilities,
  • Fictitious revenues,
  • Inflated asset valuations,
  • Misleading disclosures, and
  • Timing differences.

Revenue recognition is a particularly ripe area for financial statement fraud, especially as companies start to implement the new revenue recognition guidance for long-term contracts. Early revenue recognition can be accomplished through several avenues, including 1) keeping books open past the end of the accounting period, 2) delivering products early, 3) recording revenue before full performance of a contract, and 4) backdating sales agreements.

Preventive Medicine

Victims of financial statement fraud often find their long-term survival severely threatened in a relatively short period of time. Hiring an outside forensic accounting specialist to evaluate internal controls can help identify red flags, ferret out ongoing schemes and deter would-be fraudsters. Also, an awareness of the actual reasons and methods for manipulating financial statements would likely be important. Contact Mike Rosten, CPA, CFE for more information on how to evaluate your internal controls to help prevent employee fraud.

Mike Rosten Promoted to PBTK Shareholder

Mike Rosten-SmallFebruary 23, 2017 – Piercy Bowler Taylor & Kern (PBTK), a full-service accounting firm based in Las Vegas, is pleased to announce that Michael Rosten, CPA, CFE has been promoted from Principal to Shareholder. Rosten is the first shareholder in the firm’s 26-year-history to come from outside the traditional tax and audit departments.

“Mike is an integral part of our forensic accounting and litigation support practice,” said Tom Donohue, PBTK President. “He has been with PBTK for 12 years, and has been a consistently solid performer. He is a team player that has earned the respect of staff and his peers alike.”

Outside of work, Rosten is an avid mountain climber who excels at pushing himself to surpass personal records and summit times. Just like his accomplishments in hiking, he set his sights on becoming a shareholder and he surpassed his new business goals to make it happen.

Rosten is often called upon by attorneys or the courts to be an expert witness in cases involving employee fraud investigations, loss profit analysis, damages calculations, and divorce proceedings. He can be reached at mrosten@pbtk.com.

About Piercy Bowler Taylor & Kern

Piercy Bowler Taylor & Kern is a full-service accounting and business advisory firm that provides accounting and auditing, tax, consulting, valuation and litigation support services. Founded locally in 1990, the firm specializes in the casino gaming and leisure time industries, governmental and not-for-profit organizations, real estate development and construction industries and the legal and general business communities. Now with offices in Salt Lake City, Reno and Las Vegas, PBTK is one of the few independent accounting firms in its local markets to perform SEC audits. For more information on PBTK, visit pbtk.com or call Shannon Hiller at 702.384.1120.

Original Document

Cutting Team Members Could End Up Cutting Your Bottom Line

In today’s economy, most businesses are reducing their workforce to stay profitable. When job cuts result in increased responsibility for the remaining employees, the likelihood that fraud may occur also increases.

According to The Association of Certified Fraud Examiner’s (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse, it is estimated that the typical organization will lose five percent of its annual revenue to fraud. The median loss caused by these frauds averaged $150,000. The most common fraud category is asset misappropriation, which accounted for more than 83 percent of the cases in the ACFE Report.

Why Fraud Can Occur

To prevent employee theft, organizations first need to understand why and how employees steal from organizations, which is best illustrated by the fraud triangle of pressure, rationalization and opportunity.

Employees are feeling pressured more than ever with the poor economy, and likely financial difficulties (pressure). Increasing the workload on these same employees without increased compensation or recognition may lead them to rationalize why it would be okay to ‘borrow’ some money or property from the organization (rationalization). Once an employee feels too much pressure and has come up with a rationalization for stealing, all they need is the right chance (opportunity). This is where layoffs can have the greatest impact on increasing the chances of fraud, because internal controls may suffer and the temptation of desperate employees gets the best of them.

Before You Reduce Your Workforce

Organizations should ask themselves these questions before they reduce their workforce:

  • What internal controls do we have in place to safeguard assets and ensure the employees act in the organization’s best interest?
  • Will the remaining employees be able to take over responsibilities of those laid off without compromising internal controls?
  • Will there be a real cost savings from laying off employees with key control functions, if asset misappropriations occur as a result, especially since the median fraud loss is about $150,000 per occurrence?

The Nuts and Bolts of Financial Statement Fraud

Financial statement schemes continue to rank among the most-costly types of occupational fraud for all types of organizations. The costs frequently encompass more than just the loss of assets. Victimized companies also may suffer lost shareholder value, lower employee morale, premature tax liabilities and reputational damage. You may be able to help your clients minimize their risks and losses by understanding how and why financial statement fraud occurs, and how such schemes could be uncovered.

The High Cost of Financial Statement Fraud

The Report to the Nations on Occupational Fraud and Abuse published in 2016 by the Association of Certified Fraud Examiners (ACFE) found that only 9% of the fraud schemes in its survey involved financial statement fraud. However, those cases clocked the greatest financial effect, though, with a median loss of $1 million. Moreover, in about 76% of the financial statement schemes, the perpetrator was also engaging in at least one other form of occupational fraud, such as asset misappropriation or corruption.

What makes financial statement fraud especially problematic is that the costs can easily snowball out of control, far beyond what was initially contemplated. For example, when an executive fudges the numbers to make a company appear more profitable, the company will likely incur greater liability for taxes or dividends. It might be necessary to take on debt to make those payments, leading to higher interest costs. Or an acquisition of a healthy company might be pursued to hide the actual underperformance.

In keeping with the established bi-annual update cycle, the 2016 Report to the Nations on Occupational Fraud and Abuse was recently released. Contact PBTK if you’d like us to send you a courtesy copy by email.

Common Financial Statement Fraud Schemes

The ACFE defines financial statement fraud as “a scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.” The methods for committing such fraud aren’t just limited to the overstatement or understatement of assets or revenues.

Some of the most prevalent schemes include:

Concealed liabilities. Here, liabilities or expenses are recorded improperly. For example, a fraudster might record revenue-based expenses as capital expenditures to increase net income and total assets for the current accounting period or omit significant expenses or liabilities to boost reported profits and working capital.

Fictitious revenues. Sales may be artificially reported or inflated. For example, perpetrators may record sales that are subsequently reversed in the next accounting period, or they may create phantom customers.

Improper asset valuations. Financial performance may artificially be enhanced by misstating the value of assets — such as failing to write off obsolete inventory — or inflating receivables by booking fictitious sales on account.

Improper disclosures. Fraud occurs when perpetrators fail to disclose material information to mislead users of the financial statements. For example, they may fail to report pending litigation, or a potentially material contingent liability.

Timing differences. Recording revenues in accounting periods different from those of their corresponding expenses can mislead investors.

Revenue recognition is a particularly ripe area for financial statement fraud. Early revenue recognition can be accomplished through several avenues, including 1) keeping books open past the end of the accounting period in respect to sales revenues, 2) delivering products early before sales have actually occurred that would otherwise be a liability, 3) recording revenue before full performance of a contract, and 4) backdating sales agreements. In addition, merchandise could be shipped to undisclosed warehouses and recorded as sales. In general, ask questions if a large percentage of revenue is recorded at the end of a period.

Causes of financial statement fraud

According to the ACFE, individuals who committed financial statement fraud were more likely to be under excessive organizational pressure compared with those who perpetrated corruption or asset misappropriation. Fraudsters may feel pressure to meet earnings expectations or satisfy certain conditions that are required to close a merger or acquisition. They might commit financial statement fraud in an attempt to make the company look more profitable than it truly is, thereby boosting share prices, fulfilling loan covenants or allowing them to earn bonuses.

Help your clients help themselves

Companies that fall prey to financial statement fraud can find their long-term survival severely threatened. By bringing in qualified forensic accountants, you can help these companies identify red flags, ferret out ongoing schemes and deter future fraudsters.

Who Commits Fraud?

The latest Report to the Nations on Occupational Fraud and Abuse compiled demographic information on more than 1,400 fraudsters. The findings indicate that the majority of occupational frauds (78%) were committed by staff at the managerial or employee level. But, not surprisingly, the frauds committed by owners and executives had the highest median loss ($500,000).

Some 7% of the fraudsters were in their first year on the job, and 53% had been with their organizations for more than five years. The longer the fraudster was with the company, the larger the losses typically were. Similarly, 52% of perpetrators were ages 31–45, but older fraudsters tended to cause larger losses. These figures coincide with the finding that greater losses are associated with fraudsters with higher levels of authority — and, in turn, more opportunity to commit costly fraud schemes.