26 Nov

IRS Audit Rates Keep Falling

Accounting Today had an awesome article about IRS audits and the recent trends. The good news for taxpayers is that audit rates are down overall. In 2010 the audit rate was 0.9%, or 1.735 million tax returns. Last year it was only 0.5%, or 991,000 tax returns.

There is even better news with some of the specifics:

  • Most audits are done by mail. The IRS asks for information and the taxpayer sends in the responsive documents. The number of field audits (an IRS auditor working directly with a taxpayer to address issues) keeps dropping, and last year the numbers were at an all-time low. Field audits are done for complex tax situations, and less than 250,000 were done last year.
  • S-corporation or partnership tax returns have a very low audit rate at 0.22%. That’s less than half the overall audit rate of 0.5%
  • If you make more than $1 million a year, your likelihood of audit is higher. 3% of taxpayers making more than $1 million were audited last year, but that’s down from the 12% who were audited in 2011.
  • Criminal investigation cases are down 58% in the last five years. During the same period, the number of revenue agents (field auditors) and criminal investigators has dropped by about 25%. So it’s only natural that prosecutions have gone down too.

As Accounting Today notes, the IRS has always used the fear of audits to get people to voluntarily report all of their income and pay the taxes they owe. With audits down, that fear might not be so great anymore. However, the IRS uses other non-audit tools (such as letters that notify taxpayers of discrepancies and taxes due) which still create fear in taxpayers, and may therefore encourage compliance.

21 Nov

How Does MLM Affect People?

pyramid-selling-scamThe late Jon Taylor, PhD wrote a thorough and excellent book about multi-level marketing (MLM): The Case (For and) Against Multi-Level Marketing: The Complete Guide to Understanding the Flaws – and Proving and Countering the Effects – of Endless Chain “Opportunity” Recruitment, or Product-Based Pyramid Schemes.

He put the book together in 2011 and 2012, but it is still relevant.

If you’re not familiar with MLM, you should acquaint yourself with the horrible statistics.  Basically, the odds of a distributor losing money in multi-level marketing are greater than 99%. Despite the fact that participants are almost guaranteed to lose money in MLM, these scams are marketed as business opportunities with the potential for unlimited earnings. Read More

18 Nov

MLM Income Disclosure Statements

A collection of annual income disclosure statements published by multi-level marketing companies, continuously updated. Last updates done 11/18/19.

Some MLMs release income disclosures or earnings disclosures. These numbers are not required to be disclosed in the United States, but some of the companies do it anyway to appear transparent. The disclosures theoretically provide insight into how much distributors earn in commissions or overrides, but they are generally worthless. They are worthless because of what they do not disclose.

Multilevel marketing companies purposely omit important information that would allow potential distributors or investors to have real insight into these plans. In general, earnings disclosure statements often fail to provide the following information that is critical to understanding the plans and the results: Read More

18 Nov

Lost Profits Calculations in Litigation

In the below video, Tracy Coenen talks about three common methods that are used to calculate lost profits in commercial litigation: the before and after approach, the yardstick approach, and hypothetical profits. In general, these methods are aimed at determining the profits a company would have realized if the incident giving rise to the litigation had not occurred.

14 Nov

Why Roddy Boyd’s Ethics Failure Matters

The long-running Overstock.com fraud story probably isn’t of interest to most of my readers. But when you’ve got a company that manipulates its financials to turn losses into profits and the executives profit handsomely from manipulating the stock and the company’s lunatic CEO harasses and stalks critics, you can see why a fraud investigator might want to tune in.

The Cohodes/Overstock Donation Debacle

Earlier this week I wrote about Roddy Boyd and his Southern Investigative Reporting Foundation (SIRF), and the shenanigans surrounding his receipt of $329k of Overstock.com stock from Marc Cohodes. Marc is a short seller who lost a lawsuit brought by Overstock against his company Rocker Partners for its very public criticism of the company and its CEO, Patrick Byrne.

In 2017, Marc mysteriously made up with Byrne and became a very vocal pumper of Overstock’s stock after taking a substantial long position.

In December 2017, Cohodes offered Roddy 5,000 shares of Overstock.com stock, and Roddy took it and sold it for $329,000.  Marc was buying Roddy’s silence on Overstock, and both of them knew it, whether or not it was explicitly stated between them.

Roddy confirmed that in June 2018: Read More

12 Nov

How NOT to Do Investigative Journalism

A decade ago, I was really into blogging about companies that were perpetrating frauds on consumers and investors. Nobody paid much attention to me, but I enjoyed digging into company financials and exposing the actions of dishonest executives. It fit nicely with my fraud investigation work.

One of the companies that interested me was Overstock.com. The company was prone to cooking the books, and they were headed up by an unbalanced CEO named Patrick Byrne who was fond of conspiracy theories.

There’s only so much you can write about a company repeatedly manipulating its financials and the SEC inquiries that follow. I stopped writing about them in early 2010, until things got interesting again in 2017.

Marc Cohodes, a fairly well-known short seller who had criticized the company massively (and ended up on the losing end of a big lawsuit by Byrne), suddenly switched sides.  Cohodes went long Overstock on May 2017, hyped the company at a Grant’s Interest Rate Observer conference in October 2017, said Byrne was now his friend, and had all the negative information about him wiped from Byrne’s Deep Capture website. Sam Antar did an excellent write-up about how Byrne and Cohodes got so chummy. In fact, they were so chummy that Cohodes was trying to get others (such as Antar) to stop writing negative things about Overstock and Byrne. Read More

11 Nov

Fraud Investigation Myths

It’s fun to talk about myths related to fraud investigations and forensic accounting. People get wrong ideas about what I do for a living, so let’s set the record straight on a few of the myths:

  1. Any accountant can do a fraud investigation. No, the art and science of a fraud investigation is different than traditional CPA services. Experience with fraud methods, investigative techniques, and presenting the results of investigations are necessary. A forensic accounting engagement isn’t the same thing as financial statement audit or preparing a tax return. It takes different skills.
  2. A forensic accountant will help me get my money back. Nope. I find where the money went. An attorney helps get the money back. Sadly, most victims of fraud don’t get their money back. People don’t steal to save. They steal to spend. So when they are caught, there is no pile of money that can be given back to the victim.
  3. This is an “easy” investigation. Even when a project seems straightforward, many details need to be cross-checked and explanations to be ruled out. There is also a certain amount of due diligence that I have to do before I can render an expert opinion. Also, when something is “easy” for me to do, it’s likely because I have more than two decades of experience doing fraud investigations.
  4. Software will do the fraud investigation. Software packages provide a lot of help with my projects. But investigations still require the eyes of a human to direct the work and interpret the results. I don’t simply push a button and end up with valid results. There is  still lots of legwork required, whether that is preparing data for the software, reconciling data that was processed by the software. or working with the data after the software does its thing.
  5. The client can do the fraud investigation and I can just check the work. If a good fraud investigation could be done by anyone, we wouldn’t need experts like me. Oftentimes, checking the work of a civilian takes more time and effort than doing the investigation myself. I can appreciate that clients want to save money, but most of the time there is only limited assistance that a client can provide in a fraud investigation.
  6. All forensic accountants are equal. Nope. Forensic accountants have different approaches to cases, skill levels, methods of investigating, and ways of presenting the results. It is wise for clients to talk to a few experts before making a choice. You want to find something that you think you can work well with. And most likely, after talking to a few fraud investigators, you’ll get a feel for who knows what they are talking about and who doesn’t.
08 Nov

How to Investigate a Cash Business

Closely-held businesses often create problems in divorces, as they need to be valued for the property division and the income needs to be evaluated for support purposes. It can be difficult to examine the income of a business that transacts with its customers primarily in cash. However, there are ways to verify whether the income being reported is reasonable.

Some of the ways that the income of cash businesses can be examined and verified include:

1. Find out the normal mark-up or profitability of the product or service being sold, and see how recently reported figures of the company compare. Read More

06 Nov

Multi-Level Marketing is Not a Legitimate Business Model

One of the common defenses of multi-level marketing is that it is a legitimate business method that has been around for a long time.

I’ve also been told that if it was illegal, it would have been shut down. Some companies that were widely touted as “legal” or “legitimate” MLMs, such as Advocare, HAVE been shut down or prohibited from using the MLM model. Who knows the rhyme or reason to that.

But neither the length of existence nor the lack of law enforcement action means something is legitimate or not a fraud. Remember Enron? Remember Bernie Madoff? These and others have been in business for a long time, and turned out to be complete frauds. Read More