Financial Statement Fraud at Public Companies

How prevalent is financial statement fraud in public companies? In this video, Tracy Coenen talks about the most recent COSO report on fraudulent financial reporting at U.S. public companies. The most common financial statement fraud that companies engaged in was improper revenue recognition, followed by the overstatement of asset or the improper capitalization of expenses. … Read more Financial Statement Fraud at Public Companies

Forensic Accounting Software

The financial part of a complex case can become overwhelming quickly. Particularly in cases involving white collar crime, securities fraud, Ponzi schemes, or other fraud recoveries, the trail of financial documentation is often very long. A forensic accountant needs to examine tens of thousands of transactions and piece together the evidence in a way that attorneys, judges, and juries can understand.

When there are mountains of data, the investigator needs a way to quickly examine the data, assemble it in a format that is usable, find connections between transactions, and quantify results. Traditional forensic accounting techniques are no longer effective in these types of investigations. The volume of data can quickly overwhelm the investigator, and this affects the quality of the results.

Size Matters
Previously, the forensic accountant would use a technique called “scoping” or “sampling” when  the volume of financial documentation exceeded the bandwidth of the staff. For example, he might decide that all transactions under $1,000 are too small and insignificant to the investigation, and will only examine transactions larger than this threshold. Alternatively, the investigator might examine only transactions of a certain type or involving certain parties.

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Staying Independent in Fraud Investigations

I would like to think that most companies are committed to doing business honestly. They try to do the right thing, and when a problem is found, they try to correct it quickly.

Even when a scandal is looming, I hope most companies would want to find the truth as fast as possible and take appropriate action.

Even when a company is committed to fixing problems, however, management does not always do it the right way. This is particularly true when it comes to investigating suspicions of wrongdoing. There are many times when such an investigation must be done by an independent party in order for the company to be in the best possible position following the conclusion of the investigation.

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Searching for Hidden Income

The million dollar question in many litigation disputes, be it family law, a shareholder divorce, or other corporate wrangling, often centers around unreported income. Are there sales that aren’t being recorded on the books? Is the individual receiving cash for work done? Is revenue hidden to shield it from being considered by the court?

It would be lovely to be able to wave a magic wand and have all the “hidden” income magically appear. Unfortunately, that’s just not going to happen in this lifetime. The search for unreported revenue and earnings is a difficult one.

It’s one thing to examine transactions that have been recorded on the books and dig into the details of those transactions. It’s another thing altogether to try to find something that isn’t even recorded on the books. Where does a fraud investigator begin?

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Fraud During the Coronavirus (COVID-19) Crisis

There are so many things to be worried about with the COVID-19 pandemic. First and foremost is the health of our family and friends. But let’s not kid ourselves: The health of our economy is important too. People are already out of work, and many more may be out of work in the weeks to come. There are so many uncertainties.

Since I do fraud investigations for a living, fraud is something I’m thinking about a lot. And the fraud risks during this time of uncertainty and economic distress are great!

There are a few reasons for this:

  1. Many companies have reduced the size of their workforce. The fewer people working, the more difficult things become. There may be increased workloads, which is stressful. There is also often reduced supervision. This creates greater opportunities for fraud to happen, and likely impacts whether or not it will be detected timely.
  2. Working remotely is a great option if it is possible in your company, but it also creates opportunities for fraud. This is again related to reduced supervision of employees.
  3. Employees are facing greater financial pressures. This could lead otherwise honest employees to turn to fraud. They may tell themselves they’re just “borrowing” the money. They may justify a theft because of a dire need.

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Using Facebook in Financial Investigations

I did a divorce investigation a few years ago that I like to call the Instagram Investigation. The husband was accused of marital waste (dissipation), as he was spending lots of money on his new girlfriend while his divorce was pending. The wife needed to quantify how much he was spending on the girlfriend, but it wasn’t clear who was spending money just by looking at the credit card statements. Until you looked at the girlfriend’s Instagram account and saw all the pictures from her shopping trips. It was a matter of comparing 150+ dated photos (also tagged with locations) to credit card charges to determine what was spent on the girlfriend.

Can we use Facebook to assist with financial investigations? Sometimes. I find that Facebook is most useful when researching relationships between people and tracking the activities of a party. It hasn’t proven to be particularly useful in terms of financial analysis, except when an occasional vacation or automobile purchase is documented on Facebook.

Even if the information I find may be limited, I still often check Facebook to see if there is anything I can use. I have found that Instagram accounts are very often public, so they don’t require permission from the user to see what he or she is posting. On the other hand, most people seem to have privacy safeguards in place on their Facebook accounts. That means you’re not going to see much of their activity unless you are FB friends with them.

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Fraud Prevention on the Cheap

One common misconception among small business owners is that fraud prevention is expensive. And like anything else in this world, it can be expensive. A company that strives to eliminate virtually all opportunities for fraud by employees can spend a chunk of money doing so.

But it’s not always necessary to spend lots of money on fraud prevention. And it’s not always possible for a small business owner to spend a lot on fraud prevention. Let’s face it… budgets are tight and big new projects aren’t often possible.

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Disappearing Income and Asset Values in Divorce

We’ve all seen it before: A spouse owns and operates one or more businesses. Divorce is filed, and the “out” spouse is told that the businesses have little or no value. Further, there is no income available to pay support, thanks to the poor financial condition of the businesses.

How can this be when the married couple has lived a good life for years, always having more than enough money to pay for homes, living expenses, and vacations? It’s the case of the disappearing income and asset values, brought on by the divorce.

Fortunately, there are ways to ferret out truth behind the financial picture that is being presented. It likely will not be easy. The “in” spouse controls the money, the information, and the documents. Getting him to turn over financial documents that will prove there is income and value will be difficult.

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Corporate Accountability Reporting and Roddy Boyd’s Hobby

I got a little chuckle this week when Roddy Boyd and his paid hobby, Southern Investigative Reporting Foundation, put out a plea for donations and referred to their “work” as corporate accountability reporting.

You see, a couple of weeks ago, I wrote about Roddy Boyd’s lack of ethics as it relates to a large donation from investor Marc Cohodes that influenced Roddy’s reporting.

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