Wednesday, November 23, 2016

Three steps to prevent fraud this Small Business Saturday

I can hardly believe it. Small Business Saturday is nearly upon us and if you’re a small business, like Acuity Forensics, then I know all the love and hard work you’ve put into your “baby.” Our good friends at Veraison Wine Events are experiencing their first year in their new retail shop, and I can see the worry and excitement on their faces. As the holidays approach, you are likely like them – nervous with anticipation. Will customers walk through the door? Will we make our numbers? What if we get too many orders, can we fulfill them in time? Can we maintain quality and service if we get too busy?

It is an exciting and stressful time of year.

In the hustle and bustle of the season, I want to encourage those of you brave souls who have ventured into small business ownership to be mindful of something else. Something that I know you think could NEVER happen to you.

Employee theft.

Before you stop reading, please know that it is not my intention to scare you. It is my intention to empower you with a few simple tools to keep your assets secure, your employees safe in their jobs, and more money in your stocking this season!

According to the 2016 Association of Certified Fraud Examiners’ Report to the Nations on Occupational Fraud and Abuse, most businesses lose 5 percent to employee theft. Small businesses (those classified as having 100 employees or less) are likely to suffer losses of at least $150,000 before the theft is uncovered. What could your small business do with that kind of cash?

Honestly, I never want you to have cause to retain me or any other forensic accountant to investigate losses in your business. I’d much rather meet you as a retailer selling me something special for my loved ones this holiday season. To ensure that happens, here are a few things I want you to know:

1. Employees you trust the most are more likely to be the culprits.

Would you give your money, or the “keys to your kingdom,” to someone you did not like or trust? No, you would not. If you asked my clients on the day before the fraud was discovered to rank their employees from most trusted to least, the fraudster would be in the top three. This statistic is without fail.
Remember, make sure you implement proper internal controls over all your employees, no matter how much you like or trust them. Trust is not an internal control.
2. Cash receipt thefts are more prevalent in small business.
Small business owners are twice as likely to be victims of theft in cash schemes, meaning money is taken from you before it has the opportunity to be deposited to your bank account. The best way to avoid this is to:
·         Ensure all sales are receipted.
·         Disallow employees with cash register access the ability to initiate a refund or void a sale without management approval.
·         Verify receipts are in sequence and receipt totals match funds being deposited.
·         Implement and enforce a cash over/short policy.
3. Simple oversight is your best defense.
I know you are busy. I know you worry about costs and sometimes let things slide because your plate of responsibility (like my plate of Thanksgiving dinner) is full. But implementing financial oversight measures doesn’t have to cost a lot of money or take a lot of time. Here are the top three things I want you to do:
·         Verify daily sales receipts match bank deposits.
·         Review your monthly bank statement and cancelled check images each month without fail (or have your spouse, your CPA or another employee to do this for you). This will ensure that all funds leaving your bank account are for the benefit of your business and not an unscrupulous employee.
·         Ask questions, even when you know the answer! When employees have the perception that you are watching, they are less likely to choose to steal.

Here’s wishing you a happy and successful Small Business Saturday, and here’s wishing your stockings are stuffed with profits from a very successful holiday season. 

Tiffany Couch is founder and principal of Acuity Forensics, a forensic accounting firm in Vancouver, Washington. Tiffany’s new book, The Thief in Your Company, releases on Amazon in early 2017. You can follow Tiffany on Twitter @AcuityForensic.

Wednesday, November 16, 2016

International Fraud Awareness Week - What do you Need to Know?

The ACFE, in conjunction with an impressive list of supporting organizations, is promoting “International Fraud Awareness Week” this week (November 13th – 19th).

Why, might you say, is this important?

Because fraud is a risk every business faces. In fact, according to the ACFE Report to the Nations, on average, businesses lose 5% of their gross revenues to fraud.

In my upcoming book The Thief In Your Company (look for it in January 2017),I explain that no organization is immune from the risk of fraud. From the smallest of companies to large publicly traded ones, from non-profits to government entities – fraud risk is real.

There are several contributing factors to clients who experience fraud, and they include:

·        An “It Can’t Happen Here” attitude
·        Implicit trust of employees
·        Little to no oversight over financial transactions
·        Lack of timely or accurate financial reporting

Every single one of my clients is shocked when fraud occurs in their organization. They simply cannot believe it to be true. They believe they are immune from this ever happening to them.

Take it from my client, a local hospital foundation. Earlier this year, their long-time Executive Director was sentenced to three years in prison for stealing hundreds of thousands of dollars by misusing the foundation’s credit cards. This woman was a rising star in the community, someone who had contributed to successful fundraising campaigns for the foundation, and who was a beloved mother and friend.

Her fraud was uncovered by accident when a new assistant, who inadvertently intercepted and opened the mail, discovered questionable charges on the foundation’s credit card.

The monetary losses of the organization did not stop when the fraud was uncovered. The foundation has suffered with declining contributions as a result. And we have not begun to discuss the emotional impacts of the crime on the board members, the employees of the hospital and its foundation, and on many members of the local community.

The impacts of fraud go beyond the loss of money.  The heartbreak is palpable.

Whether your organization is large or small, there are simple, yet effective, steps you can take to mitigate your fraud risk.

The ACFE has a great infographic on actionable items to address fraud risk.

A few additional points come to mind:

1.    First, you have to Look

The #1 fraud schemes are fraudulent disbursement schemes. Simply put, your money is in the bank and your employee uses those funds to benefit themselves. The best way to uncover these frauds includes a simple step each month, which I’m finding more and more organizations neglect. Namely, a thorough review of:

                                         i.   Bank statements and cancelled check images

                                        ii.   Credit card statements

                                       iii.   Payroll reports

2.    Pay attention to the numbers…and your gut

My clients often tell me that “something wasn’t quite right”. Or, “I kept getting information that was inaccurate or late”. A doctor client of mine explained to me that he was seeing more patients and thinking about hiring another practitioner, yet he was taking less and less money home. His office manager was stealing hundreds of thousands of dollars from him.

All of my clients had “bad bookkeeping” and/or a “gut feeling”, but they never obtained supporting documentation to figure out the source of the problems.

3.    Leave the door open

There are likely others in your organization who know when something isn’t right. They may even know about a specific scheme or suspect an individual. Whistleblowers must overcome immense internal and external hurdles to find the courage to come forward. Typically, it is because the fraudster is the most well-liked or trusted person in the organization. Or, the fraudster is concerned about backlash or jeopardizing their job. Or, they simply don’t believe they will be believed.

Talk about the importance of whistleblowers in your organization. Celebrate when those people come forward with new ideas or innovations, and follow through when they provide a tip regarding a problem.



In my office, every week is “fraud week” – we have no shortage of fraud cases we’re working on at any given time, and new cases come in quite regularly these days.

It is my hope that International Fraud Awareness Week will be successful in doing what it sets out to do, creating awareness on the topic of fraud and fraud risk. Take a few simple steps today to talk to your board members, colleagues, management, and staff on this topic. Assess controls in key areas. Implement a hotline. Call your bank and get those statements and check images returned to you each month. Ask questions about those financial reports and request the source documents that back up some of those numbers.

Take your newfound awareness and use it to create the change necessary to reduce fraud risk in your organization.

Tiffany Couch, CPA/CFF, CFE is the founder and Principal of Acuity Forensics, a forensic accounting firm located in the Pacific Northwest. She is currently the Chairwoman of the ACFE Board of Regents and is the author of the upcoming book, The Thief in Your Company. 

Friday, September 30, 2016

How a Small Little League Handled a Big Curveball

My client’s former treasurer, a 40 year old woman with a husband and young children at home, was recently sentenced for embezzling funds from the local little league organization. The case resonated with us at Acuity Forensics for many reasons.

First, the victim(s). A small non-profit with volunteers working hard to provide a great experience to the youth of a small rural town in Southwest Washington.  The money missing was to be used to fund better equipment, uniforms, and the registrations for kids whose economic backgrounds could not afford for them to play.

Second, the navigation of the client through the turmoil they were experiencing. Embarrassed, frustrated, and feeling as if they were the only ones dealing with these emotions, clients typically feel all of this and more. A better part of our job here is to provide clients with the reassurance that, in fact, they aren’t alone and their emotions are quite normal in situations such as these. And the situation was a difficult one. A small group of board members wanted to have the issue of missing money looked into. Another group of board members were incensed that anyone would accuse the treasurer of wrong doing. How “dare they” even think it?!  Once the evidence became irrefutable and there was no other explanation for the missing funds, the group had to wrestle with whether or not they should have it investigated.

These politics are quite normal. Emotions in embezzlement cases run high. Why? White collar crimes involve a major breach of trust. In fact, it is the very people organizations like and trust the most who are stealing the money. Instead of accepting this, clients will turn inward, thinking, “What’s wrong with me that I trusted him/her” and/or “What will people think of me if I accuse him/her of stealing?” It is often this mentality that will allow frauds to go on longer or not to be investigated at all.

Lastly, this case was important because the crime was primarily the skimming of concession stand cash. How do you prove how much money came into the concession stand in the first place? There was concern among all parties, this fraud examiner included, that the theft would be hard to prove.

Undaunted, we set out to understand the role of the treasurer. It was her job to attend all registration sign-up events, receipt the funds collected and deposit those funds to the bank. Incredibly, there were receipt books for those events. We calculated the carbon copy receipts and traced the deposit of funds to the bank. Bingo! Only the checks were deposited; none of the cash. We now had irrefutable evidence that a cash skimming scheme was happening with registration fees.

Now to the concession stand. In the months of May and June not one single solitary dollar bill or coin was deposited to the bank. As most of us in America know, May and June are prime little league months and the concession stand is a popular place to be on game day.

This little league had heard us speak on good internal controls over concession stand money and had even implemented a process whereby two people in the concession stand counted the money at the end of each shift and prepared the funds for deposit.

Just one problem. It was the treasurer’s job to pick up the count sheets and the money and take it to the bank. All the count sheets and all the money were missing.

Back to square one.

That’s where the accountant in me kicked in. I had the league’s bank statements spanning many years, even years prior to when the treasurer took her role. I was able to figure out how much money they deposited for concession sales and I was able to compare that figure to the cost of the food they purchased from big-box stores like Costco and Cash N Carry. What did that analysis tell me? For the four years prior to the treasurer’s role, the cost of goods sold for the league was approximately 50% of sales. In other words, for every one dollar of candy or popcorn sold, the cost of the food was $.50 and the league was making money.

The first year that the treasurer took over, the cost of goods sold jumped to 78 percent. One cannot blame an increased cost of food on an increase in cost of goods sold by more than 25 percent in a single year.

The second year the funds were in the treasurer’s hands, the cost of goods sold jumped to 101%. This was the year that the board continued to ask for bank statements and financial reports that never came. Once the board obtained the bank statements, it became immediately apparent that not one regular deposit had been made in the months of May and June (unless those deposits were credit-card related).

Our analysis, along with the evidence on the registration thefts, were provided to the league who then reported the crime to the police.

The rest, as they say, is history, the treasurer plead guilty to the crime just a few months after being charged. She was sentenced yesterday to 45 days in prison for a loss of approximately $20,000. 

Tuesday, September 20, 2016

A Crisis of Culture

In the last week, we have learned that Wells Fargo has fired more than 5,300 employees and will pay $190 million in penalties and fines in the wake of an ongoing and widespread fraud scheme. The fraud involved the opening of more than 2 million accounts, which customers never authorized but were charged for.

The sheer number of accounts, number of employees losing their jobs and the total fines Wells Fargo will pay, are astounding and newsworthy on their own.

Personally, I am more intrigued by the information Acuity Forensics is finding in the follow-up stories coming out this week. It is the information in these stories that could spell real trouble for Wells Fargo. The threat they are facing isn’t the loss of the employees or the loss of money they will pay in fines. The real trouble facing Wells Fargo is what I call a “culture crisis”.

Last week we found this article, stating that Wells Fargo executive Carrie Tolstedt, in charge of the very unit deeply involved in the fraud, will retire early and walk away with more than $95 million in stock.

Wells Fargo has gone so far as to put their CEO John Stumpf on the “campaign trail” with major news media. His message? The fraud was the “responsibility of low level employees.”

The pieces of this puzzle tell an interesting story. A widespread, systemic fraud, involving thousands of employees, and millions of unauthorized accounts, opened for the sole purpose of meeting sales and commission goals. The walking away, with nearly $100 million, by the executive in charge of the unit perpetrating the fraud. And the CEO shaming the position of the very employees who lined his pockets, because surely, these frauds equated to profits. And what do profits generally equate to? Higher pay and higher stock prices.

In our experience, it is not typical for widespread, systemic fraud to be perpetrated in a vacuum or unbeknownst to management. Simply put, 5,300 employees don’t participate in a fraud unless it is known, out in the open, and accepted practice.

And where do 5,300 employees opening more than 2 million accounts understand accepted practice? From the top. From the CEO, to the Executives, to the Managers.

If you’re reading this, you’ve been an employee, a manager, an owner somewhere in your lifetime. In each of those organizations, how much power did the low-level employees have? How much decision-making authority?

None.

Why do 5,300 otherwise honest, hard-working employees participate in a fraud in the first place? Typically, it starts with Pressure. Pressure to perform, meet sales goals, earn commissions. But, pressure goes deeper than monetary pressure.

Pressure includes the pressure to be included in a group of co-workers and not be considered an “outsider”. Pressure includes the pressure to keep one’s job and pay one’s rent and keep one’s medical benefits. Pressure includes the prestige of having a great job at a “great bank” and pressure includes avoiding the stigma of suffering a job loss.

It is my experience that this kind of fraud could not have happened unless Wells Fargo’s management sent the message that money and numbers were more important than anything. The pressure came from the top and trickled down.

Wells Fargo then sent another message. A message to its high-level executives.

It’s okay. You can oversee and facilitate one of the largest and most-systemic frauds in banking history, and not only keep your job, you can walk away on your own terms with an obscene amount of stock options.

When you make crimes okay, when you make the consequences of overseeing and having knowledge about significant frauds equivalent to winning the lottery, there will be a trickle-down effect. More frauds will occur. More harm will be done. And when caught, what will those perpetrators say? Nothing. They won’t need to. They need only to point to Ms. Tolstedt and ask for the same deal she received.

One only need to look at Mark Whitacre, otherwise known as “The Informant” to understand the importance of sanctions when fraud is uncovered. He knew that a former C-suite executive had stolen millions from the organization and when caught? That executive walked away with stock options, a company car, and little more than a pink slip. In several interviews, Mr. Whitacre figured that the worst that could happen to him would be the same deal that the former executive had received.

As we place the pieces of the Wells Fargo puzzle into their proper places, then the picture becomes clear. The picture reveals a set of arrows, pointing in the direction of the C-suite and Mr. Stumpf, himself. The place where messages of “more profits” and “more money” and “it wasn’t me” come from.

With a message such as that, a forensic accountant like me can’t help but be pessimistic about Wells Fargo’s ability to change its corporate culture and find its way back to ethical, responsible, and accountable practices.

Are the investors and their representatives on the Wells Fargo Board of Directors going to stay silent? Accept the message as is?

Or, are they going to take the courageous step to change the message and reset the bank’s ethical tone?

How about starting with “I’m sorry” followed by “We were wrong”?

Over time, with actions that include ethical messaging, integrity in account management, and follow through when employees are charged with unethical or illegal behavior, Wells Fargo’s culture will thrive, and the puzzle picture will instead reveal a bright future.