04 Feb

Evaluating the Income of a Business

It’s not unusual to want to confirm the income of a business in litigation. Whether it’s a divorce, a business breakup, a wage claim, or other matter that involves accurately reporting business income, it may be necessary to attempt to verify that income.

I frequently work withe clients who claim that the reported income of a business is artificially low. For example, a spouse who runs a small business may make the income of the business look lower than reality in order to reduce spousal support payments and/or reduce the value of the business for the division of assets.

In a business divorce, a party may falsely report lower income to reduce the value of the business and therefore the amount necessary to buy out the other owner(s). A wage claim involving commissions and bonuses that relate to sales volumes may need a verification of income if the company is accused of underreporting sales.

How do we do this? Read More

22 Jan

Investigating Investment Frauds and Schemes

Despite the proliferation of information available about phony investment schemes and the dire warnings given regularly by news reporters, consumers continue to become victims of these scams on a regular basis. The perpetrators of investment schemes dream up stories explaining their unusually high rates of return on money, and people with money to invest with them.

These high investment returns typically amount to guarantees in excess of 10% per year. Often they are to the point of ridiculous, offering a 30% or 40% annual return. As a fraud investigator, it is clear to me that these offerings are bogus, because any investment that legitimately generated such returns would not be much of a secret to the rest of the world. But consumers, who are often eager to protect and grow their nest eggs, are all-too-willing to believe that such an investment is the answer to their money problems. Read More

16 Jan

Manual Cash Disbursements and Fraud

Companies typically have a standard way of initiating cash disbursements like payments to vendors or employees. Often this involves entering an invoice into the accounting system, ensuring proper approval for payments, and then generating the electronic transfer or check. Sometimes invoices are entered at scheduled intervals and payments are issued on certain days of the week.

Any disbursement that falls outside of these procedures could be considered a manual disbursement. That is, it is initiated manually and issued under special circumstances.

Probably the most common type of manual disbursement occurs in a company that has an accounts payable process through which all vendor payments should flow. Suppose a vendor drops off materials and needs to be paid immediately for that delivery, and there is not a chance to get the vendor payment through the regular accounts payable process. A check will be cut directly to the vendor, and the accounting system is updated later. This is a classic example of a manual disbursement. Read More

18 Dec

Things I’ve Learned About Fraud

After more than 20 years conducting fraud investigations, I have learned a lot about fraudsters, their methods, and the companies they work for.

Hotlines cut fraud losses in half.
Anonymous reporting mechanisms like fraud hotlines decrease the cost of internal fraud. Employees are excellent watchdogs, and are more likely to report wrongdoing if they have a confidential way to report the information they possess. Research shows that companies with hotlines discover fraud schemes sooner and therefore lose less to internal fraud.

Sarbanes-Oxley mandated anonymous reporting mechanisms like hotlines for public companies. Private companies should do the same, since the hotlines have been proven to be effective. However, companies should not get a false sense of security from a hotline. There are many other fraud-prevention measures that companies should also implement.

Employees are very receptive to anti-fraud training.
As I’ve mentioned, employees are typically very good watchdogs. They don’t like to see someone else on the take while they are putting in honest work. If they know what to look for, employees are likely to report misdeeds to management. Read More

13 Dec

Large Data Sets in Financial Investigations

Complex financial investigations involve large sets of data, numerous accounts, multiple players, and lightning fast movements of money. Being able to accurately document these movements of money is the key to the financial portion of a case, whether it involves embezzlement, bribery, misconduct in office, money laundering, or divorce.

Forensic accountants can quickly become overwhelmed by the sheer volume of data that needs to be analyzed. Even with all of the modern technological tools available, many of the tasks in financial investigations are still done manually. Why? The format of accounting statements and reports varies so much that there is no single solution that can help capture that data. Instead, fraud investigators turn to manual data entry much of the time. Read More

29 Nov

Financial Statement Fraud: Revenue Overstatement

By far the most common way that executives manipulate financial statements is through the overstatement of revenue. The reason is simple: It’s the easiest way to improve the appearance of the company’s financial condition.

Revenue can be inflated by doing things such as:

  • Booking fictitious sales
  • Holding the books open at the end of a period
  • Recognizing legitimate sales early
  • Shipping items not ordered by customers and booking the sales
  • Booking revenue before it has been earned on projects in progress
  • Recording sales for items produced but not yet shipped, or only partially shipped
  • Booking sales but delaying shipment to customers (bill-and-hold schemes)
  • Not properly recording allowances for returned goods

Revenue overstatement is detected by examining revenue patterns and looking for irregularities. Unusual changes in cost of goods sold might signal a problem, as companies that book fictitious revenue do not always book corresponding expenses. Revenue overstatement may also be suspected when a company has consistent cash flow problems, even in light of apparently increasing sales and profits. Read More

13 Nov

Divorce Financials: Lifestyle Analysis in Family Law Cases

This article was originally published in the American Journal of Family Law (Volume 32, Number 2 / Summer 2018)

Determining the income of the parties to a divorce or child custody case is critical, as it affects spousal support and child support. It may also affect the division of assets, particularly if there are income-producing assets to be divided.  In each of these instances, properly determining the income of the party is critical to getting a fair and equitable settlement, maintenance award, or child support award. Until you have accurate numbers, the attorney may find it very difficult to decide what is fair or in the best interest of the client.

It is not unusual for a closely held business to suspiciously suffer from declining revenue and profits once a family law case comes to fruition. The spouse in control of the business may state that the economy is negatively affecting the business, or that other conditions such as competition or changing technology are the cause for a decline in the financial condition of the business. Is it a coincidence that a thriving business just happens to suffer a decline at the precise time that a family law case is initiated? Of course it is no coincidence, and the numbers must be investigated to present a true financial picture to the court. Read More

31 Oct

Finding Hidden Income and Assets

Cases of financial fraud often focus on the core issue of where the money went. Successfully carrying out a fraud scheme involves not only taking the money, but covering up the fraud and hiding the money trail.  But skilled financial investigators know there is always a trail, and while the money may or may not be recovered, it can be located.

Cases involving allegations of security fraud, money laundering, misappropriation of assets, income tax fraud, and Foreign Corrupt Practices Act (FCPA) violations require investigators to follow a money trail. However, sometimes it is difficult to know where to start, or where to continue when you’ve come to an apparent dead end.

Third Party Records

Regardless of the type of case for which there is a need to trace the flow of funds, the most reliable source of information is third party records. The records of an alleged fraudster are always suspect. How are we to know if the accounting records have been manipulated?

In contrast, records from a disinterested third party are much more likely to be authentic and to tell the truth about the money. The most common and reliable sources of third party records are banks, brokerage houses, and credit card companies. Except in rare cases in which a secret relationship facilitates the manipulation of these records, they will tell us exactly where money came from and where it went. Read More

03 Oct

Can Fraud Investigations Reduce Fraud?

When consumers think about investigating fraud, they do not usually think of the investigation as part of an overall plan to reduce fraud in a company. An investigation is typically seen as a reactive process that is only engaged in when a major problem is identified. Fraud investigations are representative of something completely negative, and they should be avoided at all costs, because if we do not have fraud investigations, then we do not have fraud.

The reality is not quite so fatalistic. Fraud investigations can and should be a routine part of a proactive fraud prevention program. Anti-fraud education and proactive fraud prevention procedures are essential to reducing corporate fraud, but fraud investigations are a third and equally important part of the equation.

Even in companies with the most comprehensive fraud prevention policies, procedures, and controls, there will still be some level of fraud. Investigations are needed to thoroughly examine allegations and suspicions of fraud. They also play a deterrent role, as employees are less likely to engage in fraud if they know that periodic checks occur throughout the company.

It would be nice if fraud investigations became completely unnecessary, but that is not realistic. In companies with increasingly better anti-fraud controls, the need for reactive investigations should decrease. But fraud investigations should never be completely eliminated, because even the companies with the most effective fraud prevention programs will still have some instances of fraud to investigate. The hope is that incidents requiring a full-blown investigation will be decreased and that management can focus their best efforts on turning a profit instead of examining cases of fraud.