Monday, February 13, 2017

What Message are you Sending?

We have learned more about Port of Seattle CEO Ted Fick’s recent suspension amidst concerns of an unauthorized wage increase, improper gifts from Port tenants, and a potential conflict of interest involving Fick’s father’s company.

These are only allegations at this time - and last Monday, Fick offered a defense. During last week's meeting in Seattle – the Port Commissioners made one thing certain:  Tone at the Top matters.

I agree with them. Tone at the Top DOES matter. One story in particular stands out as a perfect example of what happens when Tone at the Top isn’t a consideration within an organization.

Many years ago, I assisted in the investigation of a large international parts dealer who was preparing for an initial public offering. There was just one small problem… Corporate Executives at International Headquarters were concerned that their American CEO and his two VPs had been “bending the rules” with expense reimbursements and they asked that we take a look at the problem so that they could “head it off at the pass” with regulators.

So we did. We combed through the CEO’s expense reimbursements finding that he charged everything from his daily fast food breakfast to his personal skybox suites at sports arenas to the company. Between the CEO and his two direct reports, we identified $2 million in fraudulent transactions that spanned a few years.

Given extra time and scope, we were asked to look at the five deputies who reported to the three top executives, and wouldn’t you know? Their expense reimbursements, in earlier years, were meticulously supported by receipts, names of customers and business purposes. By the time we had analyzed those reimbursements through present day, we were looking at items such as kids’ swimming lessons, wives’ spa treatments, and family vacations being run through their reimbursements, too.

The unofficial company motto seemed to be, “If the boss is doing it, then we can, too!”

Tone at the Top has a trickle-down effect. Per the ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse, poor Tone at the Top is cited as one of the primary internal control weaknesses present when fraud occurs.

Because the Port matter has not been adjudicated in a court of law, there is no clear way to classify any of the alleged actions in the case as outright fraudulent behavior or an abuse of power. But in cases such as this, the most important step is for leadership to boldly address any potential fraudulent behavior and take immediate steps to reduce risk of potential fraud in the future. You see, while there is a direct correlation to fraud and poor tone at the top, the opposite is also true: an organization with a healthy tone at the top typically has a lower risk of fraud.

What does a Company with a healthy Tone at the Top look like?

·       Standard of ethical behavior is communicated, displayed by management, and expected of employees at all levels

·       Open-door communication between management and staff

·       Hotlines or other reporting mechanisms are in place and working

·       Support programs are available for employees in need

·       Low turnover of management and staff

In light of potential difficult decisions you may be facing in your own organization, have you considered the following?

1.     What message(s) are your decisions or business practices sending to employees at all levels?

2.     Would the decision indicate that there are different rules for different levels of employees?

3.     If Tone at the Top was a primary consideration, would it change the decision you are about to make?

Don’t underestimate the far-reaching impact of the Tone at the Top of your organization. Is it sending the message you want every employee to hear?

Friday, February 10, 2017

Why Amazon's "Miss"​ Is Really Good News for Investors

We have learned that Amazon’s stock fell 4 percent after missing its fourth quarter revenue projections.

With phrases like “stock pummeled”, “disappointing guidance”, and “revenue misses”, one must surely think this story is nothing but bad news.

I see it differently.

You see, in spite of the Street’s expectations, Amazon has apparently posted the results of its 4th quarter financial operations lower than anyone had planned.

A move that is easier said than done.

Earnings Estimates, Analyst Projections, Wall Street Expectations - heady pressures for any publicly traded company. But when your name is Amazon, well, you have a reputation to uphold.

I can only imagine the hand-wringing and late-nights the accountants and C-Suite executives have contended with as they’ve headed into this recent reporting cycle.

But unlike their counterparts at WorldCom, Enron, and HealthSouth (to name a few), they took the miss on the chin. In spite of what was likely insurmountable pressure, in spite of their “status” as a Wall Street darling, in spite of knowing the significant impact on stock price, they apparently chose to report their reduced revenues accurately.

I see this as leadership. I see this as a bold move. I see this as great news for investors who want to make sure they can rely on the financial reports they’re reading.

When one sees the headlines and fallout from today’s news, one can understand how easy it would have been for Amazon to have cooked the books. To have booked 4th quarter expenses in the new year, to have recorded revenue early. You know, cut a little here, embellish a little there. What are a few more journal entries to post just to make it through the quarter, to make it through the reporting cycle, and hopefully reverse the trend in the new year?

Rationalizations are so easy to come by.

Business, like life, is messy. We have dreams and goals. We hope for the best and prepare for the worst, and we take risks (and if you haven’t watched Amazon’s “risky” and “risqué” Goliath, you should). Sometimes, we are thoroughly disappointed. And other times, our luck takes our breath away. In other words, there is no straight line to success. Why is it then, when a Company like Amazon misses its financial projection in one quarter, the reaction is so deeply negative?

It is these very negative reactions, from the “pummeling” of the stock to the undesirable headlines, that cause so many other companies to more easily arrive at those rationalizations. To make the choice to “just get through the bad times” by painting a picture that isn’t real.

I get it. One need only log into their personal social media to understand this concept. How many of us report that we gained a few unwanted pounds, that someone we loved disappointed us, or that our kids really are imperfect. Heck, no!

So too, it goes, with business.

And so today, I celebrate Amazon. I thank them for restoring a little ounce of confidence in our reliance of big-corporation financial reporting and I am hopeful they will continue to make sound business decisions and take measured risks that will return big payoffs for their investors.  

Monday, January 9, 2017

4 Steps to Outsmart Financial Fraudsters

At the start of a new year, the last thing we want to imagine is bad things happening to nice people. But it happens all the time, every day. It’s even happened to me – a forensic accountant.

A year ago, I received a call from our bank informing us that someone had used our credit card to purchase a flight to Turkey, order items from large online retailers, and even “presented” the card (which was still in my wallet) at a department store on the other side of the country. We were victims of a large, well-known retailer credit card breach and thus, our losses were not necessarily our “fault.” But the time I spent to resolve the situation and the stress it caused inspires me to share a few things you can do to avoid inadvertent theft of your precious financial information.

Here are four tips to outsmart the fraudsters and keep your money safe in 2017:
  •    When in doubt, use cash: Find a cute item from a street vendor or via a local public sales site like Craigslist? In addition to ensuring that you transact your business in a well-populated and safe location – like the parking lot of your local sheriff’s office or police station if they allow it – consider using cash to make the sale, rather than your credit card.
  •  Don’t allow your computer to save your passwords, credit card numbers or other pertinent information: A “handy” feature in many web browsers and telephones is the ability to save your name, address, credit card numbers, and passwords. With the constant pop-up asking whether you’d like to “save this password” for next time is so annoying, it can be tempting to just enter the information and forget it.Just say no. It would take only a simple breach of one of those sites (similar to the Target breach), malware installed on your machine, or worse, a lost device, to wreak havoc on your finances and literally give the keys to your kingdom to an unscrupulous person or ring of criminals.
  •  Review your Bank and Credit Card Statements: A timely review of your bank and credit card statements can quickly identify unauthorized usage of your cards, enabling you to stop payment on those transactions and close your accounts. Most banks and credit card companies provide you a 30-day window from the date the statement is issued to review and dispute charges. Be vigilant about reviewing those charges. Sometimes fraudsters will start with nominal charges. When those aren’t discovered, or disputed, fraudsters can be emboldened to make larger purchases or wipe out the entirety of your account.
  •  Know what’s in your wallet: A lost or stolen wallet is a nightmare to deal with. This unfortunate situation can be more efficiently handled if you have copied the front and back of each of the credit cards in your wallet, enabling you to quickly call your bank and credit card companies informing them of a potential breach.

In the busy and automated world we live in, it’s so important to maintain privacy – especially privacy of our pertinent financial information. These small, simple steps can help you protect yourself and your money. And if you ever see something amiss or get one of those unwelcome calls from your bank or credit card company, you’ll be fully prepared to stop the fraudsters in their tracks.

Thursday, December 15, 2016

The Gift of Knowing

Earlier this week, I met with a new client, who I understand, has spent years concerned that things “aren’t quite right” with his business’ financials. He’s been afraid to ask basic questions, for fear that doing so will “hurt the feelings” of or “offend” his long-time bookkeeper.

Unfortunately, this is not an uncommon story. Just today, I got another call. This case appears to be a significant fraud loss – my client’s losses are at the hands of a woman she implicitly trusted. For the first time in her business’ existence, she was headed to the bank to obtain  statements and cancelled check images she had never thought to look at.

A few years ago, a prominent City Councilor called to get my input on the budget and other financial information being presented to him. He was terrified of asking questions during a council meeting for fear of embarrassing himself, admitting that he often voted with the rest, “hoping he was doing the right thing.”

Why is the “unknowing” business owner or manager or public official a recurring theme in my forensic accounting practice?

I’m no psychologist, but in more than a decade as a forensic accountant I have come to recognize that this theme stems from a few commonly-held fears that many of my clients have revealed when they say things like:
  • “I’m just no good at numbers, I don’t want to ask questions and appear foolish.”
  • “If my trusted accountant or bookkeeper leaves because I offend him or her with my inquiries, what will happen to my business? How will we survive without them?”
  • “What if something IS wrong? Facing something that terrible would make me feel like an idiot that I let it go on. I would rather not know.”
  • “I’m just so busy, I hired my accountant(s) to handle this for me. I don’t have time to worry about it.”

If you find yourself in a similar frame of mind, there is help. Simple steps you can take. During this holiday season, as we think about gifts for our family, friends, and colleagues, give yourself and your organization a gift too - the gift of knowing. Give your business the gift of gaining an understanding about your organization’s financial health.

Here’s how you can get started:

1. Regular Financial Reports

A financially healthy organization is able to produce financial reports with a simple click of a button. One of the biggest red flags of fraud is the lack of timely or accurate financial reports. At the minimum, ask for regular balance sheet, income statement, accounts receivable, accounts payable, and check register reports.

2. Practice Asking Questions and Gaining Access

The perception of detection is often a big deterrent to fraud. This perception starts when you ask questions. But you can’t stop there. Fraudsters are the most believable people I’ve ever met. They have an answer for everything. Questions must be combined with a request for relevant documentation.
Pick a few checks from the check register report and ask for the backup documentation supporting those expenditures. Don’t understand why a loan account balance on the balance sheet is so high? Ask for the supporting loan statement.
When you practice asking questions and requiring documents be provided to support your answers, fears about how others perceive you will dissipate, handing your power back to you, squarely where it belongs.
3. Ask for Help
Do my suggestions still strike terror in your heart? Then, don’t be afraid to ask for help. Inquire about the services of a trusted CPA or forensic accountant who can be your surrogate. This doesn’t have to cost you a lot of money. In a matter of a few hours for most business or nonprofit organizations, these professionals will know what questions to ask, what documents to review, and assess areas of your business where resources can be allocated, if necessary (e.g. increased internal controls, review of source documents to verify income is being deposited and funds aren’t being fraudulent disbursed, mitigation of risks going forward).

We all have to start somewhere, but starting is the key. Giving yourself the gift of knowledge this holiday season will give you a healthier, stronger and more stable organization in the New Year.