It’s Fraud Week, everyone!

For the week of November 11 – 17, supporters around the globe are promoting anti-fraud awareness and education to minimize the impact of fraud.

There’s a lot of information and resources out there, but what is imperative to know about fraud, how to detect it and what to do if there is fraud happening? We’ve done a series of videos on this topic, as well as published articles and informative pieces, but here are five key things to always keep in mind:

  1. Small- and medium-sized businesses are particularly at risk, and what makes them susceptible is the struggle with having enough resources (cash, time, and/or expertise) to have traditional controls and segregation of duties. For more details, click HERE.
  2. Some common indicators of employee fraud include: overly close relationship with suppliers, vendors or customers; destruction of files without proper authorization, resistance to providing information to auditors; and much more. For more details to see if your company is a victim of fraud, click HERE.
  3. The hotline is the number one way for tips to be reported, and that is the number one method of detecting fraud. Having a hotline reduces the median loss for profit by about half. For more details, click HERE to watch this episode of Entrepreneur’s Playbook.
  4. One of the first steps to take when you detect fraud is, assuming you’re in the position to be the head of the company, you need to call your attorney first. Getting the attorney involved on the front end can help prevent missteps through the investigation process, which you can accidentally do illegal things as you investigate the fraud. For more details, click HERE to watch this episode of Entrepreneur’s Playbook.
  5. One of the most effective methodologies to reduce the risk of fraud, according to the ACFE, is having a proactive data monitoring process. That reduces your risk of median amount of loss, as well as the duration of the loss by over 50%. For more details, click HERE to watch this episode of Entrepreneur’s Playbook.

Stay committed to not commit fraud!

For more information, visit PKFTexas.com or contact me at dcheek@pkftexas.com.

This blog post contains general information only. Pannell Kerr Forster of Texas, P.C. (PKF Texas) is not rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This blog post is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The views expressed are mine and mine alone and do not represent the views of PKF Texas. PKF Texas is not be responsible for any loss sustained by any person who relies on this blog post.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, one of our directors, as well as one of our Certified Fraud Examiners. Danielle, welcome back to The Playbook.

Danielle: Good to see you again, Jen.

Jen: So as a CFE I know you work with attorneys on the fraud investigations. Now, attorneys have attorney/client privilege; does that extend to your work with their clients?

Danielle: In certain circumstances it can. CPAs traditionally – as rank in file CPAs – we have confidentiality with our clients, which means I can’t go blabbing your business out and about anywhere I want to. But I can be compelled to testify with a judge-signed court order.

In short, we’ll keep this simple. The difference is… privilege is a higher level. Attorney/client privilege that’s not an Attorney CPA client privilege, but there are certain circumstances where that attorney/client privilege can pass down to the CPA if the attorney manages the engagement correctly and puts proper procedures in place.

And what the benefit of that really is is if you’re doing a corporate investigation and you don’t necessarily know what you don’t know yet, and you have potential brand risk on the line, a lot of times you’ll want those investigations under privilege until you determine what to do or what is the result of those investigations. So many times we’ll be asked to work under privilege running through the attorney. Clients can wave the privilege if they want to; we’ve had ones where entities want to self-report a particular situation. Disclosing to the auditor actually does create disclosure to the third-party, which then can create privilege problems.

And so, working with the attorney to make sure we understand what is the scope, how the privilege is working. There’s also some tax controversy if you have some tax concerns; it’s called “Kovel,” where the privilege does move down as well. It’s a best practice to try to put the engagements in the type of engagement that they should be in for protecting the client. This is really a client protection matter, because you want to trust your CPA and be able to actually disclose information to your CPA that they can help you with.

Jen: Speak freely, give you all the information you need to help them out.

Danielle: Exactly. And I once had a client ask me, when this was just a regular confidentiality matter, they said, “Well, does that mean you’re going to sing like a canary?” And I go, “Well, that means I’m going to have to tell the truth if I’m asked the truth.” We can’t claim the 5th amendment, because it’s not self-incrimination, so making sure you bring in the attorney to manage that is really important.

Jen: Perfect, sounds good. We’ll get you back to talk some more fraud – interesting stuff always. For more about this topic, visit PKFTexas.com. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a director and one of our Certified Fraud Examiners. Danielle, welcome back to the Playbook.

Danielle: Thank you, Jen.

Jen: We’ve done a whole series on fraud, and I’ve heard people say, “Cash is king.” What can companies do to protect their cash?

Danielle: It’s actually… I won’t say “easy” but pretty cost-effective measures that can be put in place. Usually you have to work with your bank and see what treasury management your bank has, but honestly, requesting meeting with your treasury management department at your bank for your commercial banker and they will be able to go through a lot of the options. The biggest one I push is something about ACH protections.

What you need to initiate in ACH… Let’s use a personal example: you go to your online electric bill provider, and they say, “Do you want to pay by e-check?” because that’s cheaper than charging you for the 1-3% they try to charge you. And so, you put in your routing number and your account number – and what’s on every single check you’ve ever issued is your routing number and your account number – and so those checks are out there.

That means your account number is out there, and your routing number is out there. So, you need to protect an ACH, because those monies come out of your account; once they’re gone, they’re gone. Business bank accounts are different than individual bank accounts; individual bank accounts, usually, there’s some consumer protection. You call up, you say, “Hey, I’ve had fraud, and Bank, please give me my money back.”

Jen: And they say, “Oh, okay. Sure!”

Danielle: Okay, sure. Commercial accounts don’t work like that; the money is gone, the money is gone. You can call the police, and they can try to investigate; it crosses international, it crosses state borders – it’s gone.

Jen: It’s gone.

Continue Reading Putting Controls in Place to Protect Businesses from Fraud

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a director and one of our Certified Fraud Examiners. Danielle, welcome back to the Playbook.

Danielle: Thanks for having me, Jen.

Jen: Certified Fraud Examiner – clearly handle fraud for our firm – what happens if a company has fraud?

Danielle: The first step if somebody in a company finds fraud is you really should follow your internal procedures on what to do about fraud if you have some. So, if you’re a rank and file employee or even at the higher levels, if you have a hotline, you should follow your procedures to report that to the hotline first. And actually having a hotline reduces the median loss for profit by about half so have a hotline.

After that it gets a little bit harder and more confusing of what do you do once you’re the person receiving the tips from the hotline or if there is no hotline. Assuming you’re in the position to be the head of the company or up there really the first call needs to be your attorney. It really needs to be your attorney. I realize I’m the CPA, but the first call really should be the attorney. Getting the attorney involved on the front end really can help prevent some missteps through the investigation process. The investigation process – you can accidentally do some illegal things as you investigate the fraud.

Jen: Yikes, okay.

Danielle: You could also put your company at more risk than you already were just being subject to the fraud by mishandling your investigation. You could also put in jeopardy the ability to prosecute or go after from a civil side your potential fraud situation if you don’t have an attorney helping guide you on the proper steps.

Jen: So at what point do the CPAs or the forensic accountants come in?

Danielle: After the lawyer. Usually it’s the lawyer that comes in first, assesses the situation, gives us a call or the client brings us in. We actually get a fair amount of calls directly from clients wanting to investigate the fraud right away without their attorney, and we usually try to push back and say get your attorney first. We’re gonna probably spend the most time because financial fraud… they think we need a CPA – and you do – but you also need a whole team together, because the CPA is just one piece of the team. There’s also computer forensics, private I’s; honestly corporate security sometimes gets involved. There are some really sensitive HR matters that you sometimes need even just an HR specialist that’s a consultant, and then of course that kind of pinpoint person of the attorney.

Jen: Now do you recommend – and it’s probably based on the attorney advice – that some of these people be in-house to the company and some of them be external, or do you recommend them all be external?

Danielle: I think it can depend on the situation. A lot of times if a company has really strong HR resources there’s no need to bring in another HR consultant. Sometimes a lot of companies have some very strong accounting resources and the fraud doesn’t necessarily occur within the – or the risk of fraud or the concern of fraud – doesn’t happen within a particular team, so that team may be able to help on the investigation. But if that’s the team that you’re concerned about, you may not want to use them. So, I think it really depends on the facts and circumstances of a particular situation.

Computer forensics, though, is one that’s usually always external to the company. Your IT team at your company may be the best of the best of the best, the problem with it is the evidence collection technique; you are usually not set up for that at a company, and you probably don’t have the right software and the right imaging devices to get that forensic quality image of the computer and be able to have that chain of evidence go through. So, computer forensics is probably the one that you almost always want to use an outside firm for.

Jen: Sounds good. Well, we’ll get you back to talk some more about fraud, because it’s a really interesting topic.

Danielle: Of course. I would love to.

Jen: Thank you. For more on this topic, visit PKFTexas.com. This has been another Thought Leader production brought to you by PKF Texas the Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a PKF Texas Director and one of our Certified Fraud Examiners. Danielle, welcome back to the Playbook.

Danielle: Thanks for having me.

Jen: In your fraud and forensics practice, I know you work with a lot of not-for-profits. There’s fraud in not-for-profit?

Danielle: Unfortunately, yes. One of the risks that non-profits have is that—we’ve done a session before on small businesses and how small businesses are more susceptible for fraud because of their ability to, in effect, invest in their infrastructure and the size of their resources. It takes it one step further for non-profits.

The problem is that most non-profits are not profit maximizing entities, by the name, but really some kind of social good maximization. Most of their money goes toward spending on their mission. Accounting is not usually the mission of most non-profits, as much as I’d like it to be, and so what ends up happening is that a lot of metrics for non-profits on their success are based on the percent spent towards their mission vs. what they spend on their admin, or actually fundraising as well, but I care most about the admin for this little conversation and topic, because where you prevent fraud is on IT resources and accounting resources.

Since they’re actually theoretically penalized for investing heavily in IT and accounting infrastructure because of that percent spend, through lesser donations is the penalty, they tend to push the limit as far as they can go on cutting costs on overhead and not investing in the technology—

Jen: Not a lot of oversight, either. A lot of not-for-profits are working with volunteers, too.

Danielle: Yes, which creates additional risk for them.

Jen: Is it more complicated then for a not-for-profit?

Danielle: Accounting for a non-profit is more complicated than a rank and file business, and the reason for that is that because they are getting donations from either the public, just soliciting general donations, or a private foundation, or even actual the public US government, or a state and local government. There’s a certain duty to spend the money that you’re receiving for your mission in accordance with the donor stipulations. That tracking is actually pretty darn complicated to do, especially on a bootstrapped infrastructure from a spend perspective.

Jen: How would a not-for-profit not necessarily prevent fraud but eliminate some risk?

Danielle: There’s a lot of things that can be done to eliminate some risk. The key control is around cash, really tightening down cash, using the tracking feature of different accounting softwares and kind of hacking together at various accounting softwares to be able to track those restriction. And actually understanding what’s going on in your books and not overcomplicating it for the sake of overcomplicating but making sure that you’re figuring out where that money is actually going. Doing your best practices book keeping, bank reconciliations, that kind of stuff. The most important is tightening down cash more so than anything else.

Jen: Good to know. We’ll get you back to talk a little bit more about that.

Danielle: Sure thing.

Jen: For more about this topic, visit pkftexas.com. This has been another Thought Leader Production brought to you by PKF Texas the Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Danielle Supkis Cheek, a Director at PKF Texas and one of our Certified Fraud Examiners. Danielle, welcome back to the Playbook.

Danielle: Thanks for having me.

Jen: So, Houston’s an international city—we’ve had Frank Landreneau, one of our international tax directors on the program. There’s a lot of opportunity for fraud. What are you seeing in the international space?

Danielle: One of the concerns with the international space and fraud is actually the existence of the Foreign Corrupt Practices Act. It says you can’t bribe officials, which is a pretty obvious matter for international foreign officials.

Jen: One would think you don’t want to bribe people. So, what does the FCPA actually cover?

Continue Reading Understanding Fraud in International Business

Jen:  This is the PKF Texas’ Entrepreneur’s Playbook.  I’m Jen Lemanski, this week’s guest host, and I’m here today with Danielle Supkis Cheek, a director and one of our certified fraud examiners.  Danielle, welcome to the Playbook.

Danielle:  Thanks, Jen.

Jen:  I know the Association of Certified Fraud Examiners just recently released their 2018 report to the nation discussing fraud and various statistics.  What do small businesses need to know to prevent fraud or at least reduce their risk of fraud?

Danielle:  So there’s a lot of things small- and medium-sized businesses can do.  Continue Reading What Businesses Need to Know About Fraud

Many not-for-profit youth sports leagues are at risk for fraud and don’t even know it. Cash transactions are common and leagues are typically managed by volunteers with little oversight, it’s easy for crooked individuals to take advantage of the situation. Unfortunately, sports league fraud is usually committed by well known and respected board members or officers. How then can your league prevent this crime?

Simple steps

By far the most important step you can take is to segregate duties. This means that no single individual receives, records and deposits funds coming in, pays bills and reconciles bank statements. Assign someone uninvolved in handling deposits and payments to receive and reconcile the bank statement. A different person should monitor the budget, and every payment (or at least payments over a certain threshold) should require two signatures. If your league has credit or debit cards, ask someone an unauthorized user to review the statements.

Also, your league should:

Mandate board review. Your board of directors should receive and review financial reports on a quarterly or monthly basis — including when the league isn’t in season. The treasurer should submit a report for every board meeting, with bank statements attached.

Require online registration and payment. A lot of leagues still use paper registrations and accept payment by cash or check. Cash can be pocketed and checks can be diverted to thieves’ own accounts. But with online registration, payments are deposited directly into the league’s account.

Rotate treasurers. Treasurers are the most likely youth sports league officials to commit fraud because they have the easiest access to funds and the ability to cover their tracks. Make sure no one person stays in the treasurer position for more than a couple of years. If funds are available, consider hiring a part-time bookkeeper who will report directly to your board.

Not all fun and games

Many youth sports leagues are ripe for fraud, in large part because of their lack of formality and their environment of trust. Structure may seem counter to the spirit of amateur leagues, but if your group doesn’t adopt some smart business practices, it could end up out of business. Contact us for more information.

Greg: This is PKF Texas, the Entrepreneur’s Playbook. I’m Greg Price, Director of Consulting Solutions and I’m here again with Charles Philpott, a CPA and one of our Certified Fraud Examiners at PKF Texas. Charles. Welcome back to the Playbook.

Charles: Thank you, Greg.

Greg: Charles, I’m also a CFE and one of the things we talk about with folks that have questions around fraud and forensics is what I call the iceberg effect, which is no matter what you’re seeing, it’s about 5 percent of the surface and 95 percent is below the water. So how does that translate into what you’re seeing for medium-sized businesses around the country today?

Charles: The recent 2012 ACFE survey found that companies were reporting roughly five percent of their revenues being lost to fraud on an annual basis and the median for companies overall was $140,000.00 per fraud. When we move it down to the small business, 100 employees or less, turns out the median is roughly $150,000.00 per fraud, so again, you’re talking for a small business, this is going to have a major effect on them?

Greg: The numbers are stunning from my perspective. That’s very large. Are there any other things that you see that might be red flags or indicators of problems?

Charles: Yes, there are 3 primary red flags that account for roughly 70 percent of the frauds as reported in the survey. We have employee living beyond their means or a situation where employee’s in financial distress, or where they’ve got a very close relation with a vendor or customer such that the appearance of potential impropriety is evident.

Greg: Wow. Sounds like there’s a lot to cover in that regard.

Charles: Yes.

Greg: All right. Well thanks for sharing that insight with us today. We’ll have you back another time on The Playbook.

Charles: Thank you. Look forward to it.

Greg: All right. Thanks very much. This has been another Thought Leader Production, brought to you by PKF Texas, the Entrepreneur’s Playbook. Tune in next week for another chapter and remember if you’re looking to assess your company’s vulnerability to fraud, PKF Texas has a cool tool and we’d like you to go out and check it out. It’s at pkftexas.com/fraudsurvey.

 

Greg: This is PKF Texas, the Entrepreneur’s Playbook. I’m Greg Price, Director of Consulting Solutions and I’m here with Charles Philpott, a CPA and one of our certified fraud examiners at PKF Texas. Charles, welcome back to the Playbook.

Charles: Thank you, Greg.

Greg: Charles, the last time you were here we talked about risks and controls associated with spreadsheets. Can you elaborate on both of those for us today?

Charles: Well when we talk about spreadsheet usage in a company concerns here are these are highly accessible or can be, easily changed, modified such that the concern is whether you have reliable data coming out of them. So from a control standpoint, one wants to control access, they want to assure back-ups, archival is done correctly in a very similar manner that you might do with your regular ERP system. In terms of protecting formulas and things of that nature as well so that again you have reliable outcome.

Greg: So Charles, in your experience, do you think that these control issues can be overcome with some organization and structure in a plan to move forward?

Charles: Certainly. I think you’d start with just looking at the overall structure within a company. Who does have access to these items and what type of documentation is in place. We would go from there. What is a critical spreadsheet. We’d want to talk with a client, understand their situation, what items are they relying on and build in the controls such that they could feel confident going forward that their spreadsheets are serving them just as well as the regular enterprise tools.

Greg: So risk or mediation is definitely possible with some thought processes put behind it.

Charles: Absolutely.

Greg: Charles, thanks for being here today and sharing that insight with us. We’ll have you back again on the Playbook. This has been another Thought Leader Production brought to you by PKF Texas, the Entrepreneur’s Playbook. Tune in next week for another chapter and if you’re looking for more resources pertaining to internal audit, controls or forensic reviews, go to PKFTexas.com/internalaudit.