Bond Beebe http://www.bbforensic.com Fri, 10 Sep 2010 17:54:59 +0100 FeedCreator 1.7.2 http://www.bbforensic.com/blog/lessons-learned-from-madoff.html In March, 2009, Bernie Madoff pleaded guilty to 11 federal crimes. He admitted that he had been operating a massive Ponzi scheme since the early 1990’s. The scheme was estimated to defraud investors of somewhere between $18 and $45 billion dollars. The investment operation that Bernie was overseeing may never have been legitimate. There are certain lessons that can be learned about the Madoff case. These include: • Returns that seemed too good to be true • Lack of transparency • Know the CPA firm doing the audit • Exclusive nature of the club • Promise of market beating returns • Eggs and tennis balls • Trust but verify In future blogs I will explain each of the lessons learned from the organization relates to fraud and what action can be taken to prevent the fraud from occurring. Mon, 12 Jul 2010 10:12:26 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-14.html Investment Income Disappears if No One Accounts for It Most entities do an excellent job of accounting for their investments. If an investment disappeared from an investment advisor’s monthly statement, the entity would quickly discover the error. If the entity did not get credit for the scheduled interest or dividend payment on the investment would that payment be missed? Probably not. A CPA firm was auditing a pension fund. The pension fund had numerous investments, including a $5 million dollar corporate bond. It was at a time when interest rates were high and the coupon rate on the bond was 9%. The pension fund should have been receiving $225,000 semi-annually in interest on that bond. The CPA discovered that one of the $225,000 had not been received in the past year. Further investigation revealed that a brokerage firm was “holding” the payment. Why? The answer to that question was never resolved. Without the CPA’s discovery, would the payment have been received? Probably not. Someone within the entity should ensure that all investment income has been properly received and accounted for. Thu, 01 Jul 2010 09:38:23 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-13.html The Fraud is not Likely to be Hidden in Miscellaneous Expense The crook knows that the auditor is going to analyze miscellaneous expense looking for any significant or unusual transactions. Therefore, miscellaneous expense is seldom the dumping ground for the fraudulent transaction. The more intelligent crook will try to bury the fraud in an account with numerous transactions. Cost of sales is a significant account in many entities and usually consists of many transactions. Operating personnel familiar with the company’s products and/or services should periodically review what has been charged to cost of sales to determine if items have been erroneously or fraudulently charged. Thu, 24 Jun 2010 10:08:40 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-12.html Cooking the Books isn’t What Julia Child was Doing Cooking the books is fraud used to falsify the company’s financial statements. It is often used to improve the earnings of a company by recording revenues that are either nonexistent or have not been earned by year end. In recent years, several Fortune 500 companies have cooked their books to improve their financial figures. Enron and WorldCom are among those accused of cooking their books. To help prevent this type of fraud, the external auditors of a company should carefully examine significant transactions close to the end of the year to ensure that questionable transactions are not being booked close to the end of the year. Anyone associated with the entity should also ask the question – Do I understand how and why the company is recording its revenue? If that question cannot be answered satisfactorily, there may be someone cooking the books. Fri, 14 May 2010 10:23:19 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-11.html Window Dressing Has Nothing to do With the Drapes in Your House Window dressing refers to any action taken by an individual or individuals to make the financial statements look better than they actually are at the end of an accounting period by manipulating the numbers. Suppose that the accountant for a company hasn’t done a very good job of collecting receivables. As a consequence, the company’s cash balance is very low at year end and its accounts receivable balance is very high. The accountant holds open the cash receipts journal of the company and posts all receipts through January 10, as though they were collected in December. As a consequence, cash and the accounts receivable balance both “look better” at year end. The fix is only temporary, but the manipulating employee believes he will be able to work similar magic when the next set of financial statements are needed. Fri, 07 May 2010 10:36:14 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-10.html Net Pay Does Not Tell the Whole Story A company president took pride in signing the company’s pay checks. He knew that owner-manager controls were important, so he looked carefully at each paycheck as he signed it and he knew what each person’s bet pay should be. He also knew the total amount of net pay for each pay period. The internal accountant for the company knew that the resident only looked at net pay. He inflated his gross salary substantially and increased his federal withholding by the exact same amount. He knew that the company president never looked at gross salaries or at the payroll returns. It was several years before the fraud was discovered. The company president should have been looking at all payroll - gross to net. Someone independent of the internal accountant should have approved the payroll tax returns. Fri, 30 Apr 2010 09:13:42 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-9.html Two Signatures on a Check May Be No Better than One Many entities insist that every check have two signatures. It is an excellent internal control if it works properly. Don’t be fooled into thinking, however, that two signatures are always better than one. Take the following scenario: a bookkeeper realizes that one of the signators on the bank account is going out of town. The individual agrees to sign blank checks because he knows that his co-signer always looks carefully at the supporting documentation before signing. The scheming bookkeeper then catches the second signer in a hurry going out the door. He asks if his co-signer looked at the supporting documentation and the bookkeeper says yes. The checks are signed quickly without looking at anything. Among the checks is one for several hundred thousand made payable to the bookkeeper. Before anyone discovers the theft, the bookkeeper has been in his new foreign locale for several weeks. If you are going to use two signers on a check, make sure that they swear to independently look carefully at the supporting documentation each time checks are signed. Fri, 23 Apr 2010 10:33:45 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-8.html The Petty Thief Always Gets Greedy A person is caught stealing small amounts from a company. The perpetrator confesses and asks for another chance at the same job. The company president feels sorry for the individual and agrees. Is this a smart move? There is a chance that the company president’s decision will work out. The contrite employee may never steal again – but it is not very likely! The person caught stealing is likely to steal again and this time it may be for a far greater amount. If the company president wants to keep the employee, then move him or her to a position in the company where internal controls will prevent that person from stealing. Compassion is fine. Compassion and intelligence is even better. Fri, 09 Apr 2010 09:49:21 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-7.html The Auditor Can’t Find What isn’t on the Books Anytime a fraud occurs, someone is bound to ask “where were the auditors?” Many times the auditor should have suspected or caught the fraud. There are circumstances, however, where it is almost impossible to find the fraudulent conduct. One of those times is when the transaction is never shown on the entity’s books. Assume that a company has a bank account that is no longer useful and the company president tells Joe to close the account. Joe does not close the account, but uses the account to deposit checks made payable to the company. He deposits checks that he does not think the company will miss, such as refund checks or checks for sales of equipment. Since Joe has signature authority on that account, he makes checks payable to himself and no one is the wiser. Always confirm with the bank that accounts which are supposed to be closed are actually closed. Fri, 02 Apr 2010 10:09:32 +0100 http://www.bbforensic.com/blog/where-is-fraud-likely-part-6.html You Can Buy a Receipt Book at a Stationary Store Just because a receipt is attached to a request for reimbursement, it does not necessarily make the receipt valid. An entity hired us to investigate a situation where an employee was being reimbursed for a substantial number of business means on a regular basis. The company policy required the individual to submit credit card receipts for any mean over $25 and a stub from the restaurant for all meals under $25. We observed that the employee received reimbursement for many meals just under the $25 cut off. All of these meals had a stub for the amount. Most of the numbered stubs did not contain the restaurant name. We took the stubs and sorted them by type. We concluded that the individual was buying packs of 100 receipts from the local stationary store. He was then pulling stuns at random and attaching then to his requested reimbursement form. Since he was pulling stubs at random, the sequence numbers were not normal (e.g. receipt number 80678 was used before receipt number 80632) and the fraud was revealed. Fri, 26 Mar 2010 11:13:34 +0100