Typical Red Flags of Ponzi Schemes

Last week the FBI posted an article on its site, A Pyramid of Lies, that told the story of the Gentry Ponzi scheme in rural Tennessee. Ponzi schemes are pretty easy to spot if you know the red flags. Even if you don’t know FOR SURE that an investment “opportunity” is a Ponzi scheme, if you see enough of the red flags, you should be smart enough to walk away. Better to be safe than sorry. Invest your money in something that isn’t showing these signs.

Jeffery Gentry stole more than $10 million with his investment scam. Let’s run through the red flags that popped up in the article:

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Accountants and Family Law Cases

Family law cases involving complex financial issues often require the assistance of a financial expert for the following issues: Preparing a financial disclosure, including creating a marital balance sheet Comparing balance sheets from period-to-period to evaluate changes in assets and liabilities Analyzing financial disclosures or affidavits prepared by the spouses Calculating the historical income of … Read more Accountants and Family Law Cases

Divorce: Grab the Documents

Miles Mason, a Memphis divorce attorney, has a great article on his blog called Grab the Documents: What Spouses Need to Copy for Divorce Lawyers. Divorcing spouses always wonder what documents they need to take, and the list provided by Miles is a great roadmap. Read the article for details and descriptions on each item, but below is the basic list.

Documents are going to include both paper and digital records. If you have access to any bank, credit card, or investment accounts online, it’s advisable to go into the accounts and download all available statements and supporting documentation. Do it right away in case you lose access to that account later.

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Finding Hidden Income in a Cash Business

I love working on divorce cases where one spouse is trying to hide money.

When a business owner has a cash business and is getting divorced, sometimes the income coincidentally (or not so coincidentally!) drops dramatically.

What can we do to investigate that? It’s hard. The business owner knows that cash leaves no paper trail and is difficult to prove.

But all is not lost. There are techniques we can use to find indirect proof of the amount of cash a business should be generating (even if the owner isn’t reporting all of it).

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Why is Financial Statement Fraud Such a Big Deal?

The manipulation of a company’s financial statements does not occur as often as asset misappropriation schemes like payroll fraud, check kiting, or inventory theft. And the losses from financial statement fraud aren’t readily apparent to most people. When money is stolen directly (asset misappropriation), it’s easy to see what the harm is to the company.  Financial statement fraud schemes are much more costly than other types of fraud. Some may wonder what the losses in a financial statement fraud could be. After all, the employees involved are just manipulating numbers on paper, but there is really no harm to anyone, right? Wrong.

Financial statement fraud is so expensive because its effects are far-reaching. Just a few of the many effects of financial statement fraud include:

  • Bank offers a loan that is riskier than it believed.
  • Stock price becomes inflated.
  • Company pays higher bonuses than it should.
  • Executives issued more stock options than they deserve.

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How I Calculate Fixed Fees

How do I come up with a fixed fee for a forensic accounting engagement? I’ve been doing fixed fees for 18 years, so I’ve developed a pretty good formula.

With a fixed fee, a client is paying for a result, rather than buying my time. In most of my cases, the “result” is an expert report.

The following things go into the fee:

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Accounting “Irregularities” Can Suggest Fraud

Numerous signs can point to the possibility of fraud. Literally hundreds of different types of fraud schemes exist, so the number of possible red flags of fraud is huge. Today we’ll talk about one area where you may see some red flags: irregularities in the accounting records and procedures.

Irregularities that point to the possibility of fraud can range from simple things like unreconciled accounts and unusual account balances to more complex problems like “on top entries,” which are made after the books are closed in order to manipulate the numbers ultimately reported on the financial statements.

An auto dealership had a controller who had not reconciled the bank accounts for nearly a year, despite management’s insistence that it be done. Management did not insist enough, and the problem persisted; the accounts remained unreconciled month after month. Unreconciled bank accounts usually signal one of two problems: the accounting staff is incompetent or understaffed, or there is a fraud-in-progress that will likely be exposed through a bank reconciliation. Both of these problems need to be corrected quickly.

In this case, it turned out that the controller simply couldn’t handle all of the responsibilities of her job. She was out of her league and was not doing the reconciliations because she did not have time and was likely afraid that the reconciliations would expose her incompetence. The reconciliations would have shown that she didn’t have a good handle on the company’s finances.

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