29 Mar

Making a Company Look Better with Asset Overstatement

When a company is struggling, it is tempting to manipulate the financial statements to make things look better. Even when things are going well, management may want or need the company to look even better than it already does. Banks, investors, and other interested parties are looking at the financial statements and making important decisions about the company.

Enhancing the balance sheet is a common financial statement fraud scheme, and asset overstatement is one part of it. Increased assets make financial ratios look better and generally make a company look stronger and more attractive. What are some of the most common methods used to inflate assets?

Improper valuation of investments can fraudulently inflate a company’s assets. The risk generally lies in classifying the investments correctly. They can be classified as trading, held to maturity, or available for sale. Each of these classifications requires a different value to be shown on the balance sheet. Management may be unwilling to record a write-down for unrealized losses, and may therefore try to misclassify an investment to avoid that. The classification may also change if management is interested in recording a gain. Read More

27 Mar

Digging into the Background of Company Owners and Executives

Have you ever wanted or needed to do a background check on an owner or executive of a company? If you’re considering investing in a public or private company, you may want to find out information on the people who started the company, those who currently own it, and those who currently run it. Tracy talks about the types of information you may be able to find.

Personal information you may want to review:

  • Personal history, such as family members, marital status, etc.
  • Professional history
  • Ownership and affiliation with other companies (both past and present)
  • Compensation agreements

Other interesting things that can tell you something about the people you’re looking into: Read More

22 Mar

Fraud Suspects in Companies

Those aware of fraud risks might think they should be on the lookout for likely fraud suspects. That is not a bad idea, and there are many potential personal red flags of fraud, but it is difficult to put those who commit fraud into one little box. Many different types of people commit fraud; it is difficult to pinpoint a few types who are more likely to steal from their employers.

It’s  important to recognize that there are inherently bad people who look for situations in which to take advantage of others. Companies try to avoid hiring these people but do not always weed them out because they may be good actors who are able to cover their evil intent. More likely, a company is a victim of a situational fraudster—someone who has a particular reason to commit a fraud at a certain time. This person would not normally be considered a bad or unethical person, but circumstances at home or work may motivate the employee to commit fraud.

A wide range of factors could cause a person to turn to fraud, including a legitimate financial need, a plan to get revenge on someone, a house going into foreclosure, a child support or alimony burden, an expensive addiction to drugs, a desire to engage in risky behavior for a thrill, or a feeling of power desired by the employee. Read More

20 Mar

Creative Accounting or Financial Statement Fraud?

Companies engaged in financial statement fraud sometimes use creative phrases to legitimize or cover up what they’re doing. Examples include:

  • Aggressive accounting – We’re following the rules, but pushing the limits to make the financial statements look as good as possible.
  • Earnings management – We’re doing our best to “manage” earnings and make sure that the numbers are in line with the expectations of investors.
  • Income smoothing – We’re leveling out the earnings to keep the numbers consistent from period to period.

This “creative” accounting is sometimes justified by people who say that the company is still following the rules, and just using the rules to their benefit.

Aggressive practices like this often cross the line into fraud, as companies are purposely manipulating the numbers to paint the picture they want to see, rather than show the reality of the numbers.

16 Mar

Fraud Tips at Companies

Companies rely heavily on reports about questionable behavior from employees, customers, vendors, or other outside parties. Tips are the most common way that fraud is detected by companies, so any credible tip should be taken very seriously.

How does a company evaluate the credibility of a tip? Generally, it does not matter if the tipster is anonymous or not, although it’s reasonable to believe that those willing to put their names behind information do bring some measure of credibility to the information they are providing.

Reliable tips usually have a sufficient amount of detail as to be believable. The more vague the tip is, the less reliable it is likely to be. The information provided by the tipster should also make sense in light of known circumstances surrounding the company’s operation and the accused. Read More

12 Mar

Finding Hidden Income and Assets With a Tax Return

One of the most common financial documents reviewed in a divorce or child support case is the income tax return. Tax returns don’t seem all that exciting, and appear to just be a record of what was earned by a party. But a personal income tax return can be an excellent starting point for identifying hidden income and expenses.

Certain income and expense items will be reported to the Internal Revenue Service, and therefore must be included on an individual’s tax return. Income and expenses reported on a tax return should be traced back to the underlying assets. In some cases, the assets uncovered are also sources of income that may have been hidden, including things like rental properties, investments, or business ventures.

The following are items on a personal federal income tax return, along with the assets which might exist based on the data on the tax returns. Read More

09 Mar

Internal Company Records Used in a Fraud Investigation

In a corporate fraud investigation, the most abundant source of information about the fraud will likely come from internal records of the company. Remember, of course, that the internal records will be not only be paper records, but will be digital as well. In fact, the volume of digital records will likely be greater than the paper records, as companies reduce the amount of paper in favor of computerized records.

Typical internal records requested by a fraud investigator include accounting system data, financial statements, tax returns, sales and accounts receivable records, expense documentation, and proof of payments to vendors. The financial data requested often starts with broader requests (financial statements and tax returns) and moves toward more detailed requests (account detail, invoices, etc.). This is because the broader requests are generally used to get background information about the company and its finances. As the investigation progresses, the investigator will dig further into the specifics, which will require the detailed documentation. Read More

07 Mar

Income Included in Spousal Support Calculations

What sources of income are commonly included when calculating spousal support in a divorce case? While the specifics vary by jurisdiction, in general the courts will commonly consider: wages, investment income, business income, rental income, and royalties. Tracy talks in this video about why it is important to have a forensic accountant evaluate these items and how they should be factored into the spousal support calculations.

05 Mar

Fraud Investigation Work Programs

If you’re familiar with the process of a financial statement audit, you know all about audit work programs. They’re basically the checklists and guides that auditors use to make sure they follow all the required steps for auditing the financial statements. Because these audits are fairly standardized, the work programs ensure that all critical work is completed, all important questions have been answered, and all key concerns are documented.

In contrast, fraud investigators have very little that resembles work programs or investigation guides. Each investigation is unique, which makes it difficult to create a one-size-fits-all approach to performing the engagement. Fraud investigators are more likely to rely on some basic checklists to guide the engagement in general, with specific investigation procedures being developed and performed as the engagement progresses. Read More