Every two years the Association of Certified Fraud Examiners issues its bi-annual study known as the Report to the Nations on Occupational Fraud and Abuse. The study looks into the costs, schemes, perpetrators and victims of occupational fraud. According to the study, occupational fraud is “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets”.
The 2016 study issued earlier this year identified three primary types of occupational fraud: corruption, asset misappropriation and financial statement fraud.
Asset misappropriation is a scheme in which an employee steals or misuses the employing organization’s resources (e.g., theft of company cash, false billing schemes or inflated expense reports). These types of schemes accounted for over 80% of the cases in the 2016 report with median losses of $125,000 per occurrence.
Small organizations (less than 100 employees) suffered nearly 1/3 of the cases and had median losses of $150,000. Most of the small organization victims did not have anti-fraud controls in place. Less than 25% of the small businesses had implemented fraud training for their employees or management.
The size of the loss suffered by the organization was directly correlated with the tenure of the employee committing the fraud. The longer the employee had been with the organization the higher the amount of loss.
Most perpetrators exhibited at least one of six of the most common red flags associated with occupational fraud:
- Living Beyond Ones Means
- Financial Difficulties
- Unusually Close Association with Vendor/Customer
- Wheeler-Dealer Attitude
- Control Issues, Unwillingness to Share Duties
- Divorce/Family Problems
Unfortunately, over half of the organizations in the survey received no recovery of their losses.
Prevention is key! Organizations must be willing to invest now in prevention or risk greater loss from fraud later.
For more information about the Report to the Nations, see the articles here.
By Melissa Loughlin-Sines, CPA, CFE, CVA, CFF, ABVPosted on August 26 2016 by admin
Divorce can be a very emotional event, which is further complicated by the effort to equitably divide the marital assets. The parties often disagree about the value of specific assets; which assets are sole and separate property; and on occasion, may accuse one another of fraud. One particular item that is often in dispute is the value of any closely held businesses.
Unlike publically traded companies, which have a traded per share price and published financial data, closely held businesses are more of a mystery to outsiders. One of the jobs of a valuation expert is to unravel this mystery, using the financial records of the business along with the analytical tools available to the valuator. Three approaches are normally utilized in the valuation of a closely held business:
- Income approach – examines the projected income producing ability of the business.
- Asset approach – examines the assets and liabilities of the business.
- Market approach – compares the business to others in its industry.
Once a value has been determined under each approach, the valuation expert will decide how much weight to assign to each method, if any, and then a final value conclusion is reached. As valuation is both an art and a science, no two valuators will arrive at the same value conclusion. The valuator must also always be cognizant of the possibility that one or more of the parties may be falsifying records in an attempt to protect what they perceive as their asset(s). Another issue that may arise during a divorce is the determination of sole and separate property.
Arizona is a community property state, but there are specific circumstances under which parties may still hold sole and separate property. One example would be a lump sum inheritance received by wife prior to the marriage. The determination of sole and separate in this situation can be complicated, especially if the marriage was long term and the inheritance was stored in an account where it co-mingled with funds of the marital community. This is a situation in which the valuation expert must trace funds to determine if the balance in the account consists of the sole and separate inheritance or if the inheritance was depleted and the remaining funds are actually community property. Poor record keeping in combination with a lengthy look back period can complicate this issue even further. Once again, the valuation expert must always be aware of the possibility of fraud when examining transactions and reviewing records.
In the case of fraud, either party, in a misguided effort to protect assets they perceive as theirs, may engage in the alteration or destruction of financial records. In addition, either party may accuse the other of fraud in relation to both business and personal finances. The valuation expert must be aware of this risk throughout the valuation engagement, and may be engaged specifically to perform forensic accounting procedures in response to a fraud claim.
One of the desired outcomes in a divorce is the equitable distribution of assets. In order to determine an equitable distribution, the value of those assets must be known. In addition, the parties must resolve issues regarding sole and separate property, as well as possible fraud claims.
By Shyla A. Ingram, MSAPosted on August 16 2016 by admin
Over the years I have been asked to be an expert regarding many marital dissolution cases. Most of my cases deal with valuing business interests held by the divorcing parties and income determination in connection with spousal maintenance and child support issues. Many of my cases have gone amicably between the divorcing parties. Some were quite acrimonious.
I once valued a business owned by a divorcing couple where I had to determine the value of Wife’s 50% interest in the business – a heating, ventilation and air conditioning sales and repair operation. The divorce came about because Wife found out that Husband had a girlfriend. Wife was pretty ticked about it. Actually, she was more than pretty ticked.
I discovered that Husband had received substantial amounts of income that he was not reporting on a Schedule C of the couple’s 1040 tax return. Wife knew it when she signed the tax return. In my interview of Wife, I told her that if the couple’s tax returns had been fraudulently prepared, and the judge who would be presiding over their dissolution proceedings became aware of this fact, the judge could very well report the couple to the Internal Revenue Service. I added that both she and Husband could wind up in jail. Wife looked me square in the eye and said, “I don’t care if I go to jail. I just want to get the dirty rotten #!*!%#!!!.”
That was a pretty resentful comment from Wife. But, it doesn’t compare with how another divorcing husband wanted to make his soon to be ex-spouse suffer. He decided he would have her killed.
Arizona Attorney magazine publishes monthly abbreviated summaries of important trials that have settled around the state. In the February 2016 issue one of the case summaries under the caption, Conspiracy to Commit Murder,” had this to say in part: “Spouse allegedly hired contract killer during divorce; plaintiff awarded $22.8 million.” The case was tried in Maricopa County Superior Court.
To be more precise, that was a verdict of $22,807,000 in favor of Wife. I went online to the Maricopa County Arizona Superior Court website to find out more on the case. I did not find out much about the particulars of the conspiracy, but I did get some additional information of what made up the $22.8 million awarded to Wife. The jury verdicts were stated as follows:
“We, the Jury, duly empaneled and sworn in the above-entitled action, upon our oaths, do find in favor of Plaintiff, ……… on her claim for compensatory damages, and award compensatory damages in the amount of $4,822,000.00.”
The second verdict was stated: “We, the Jury, duly empaneled and sworn in the above-entitled action, upon our oaths, do find in favor of Plaintiff,…….. on her claim for punitive damages, and award punitive damages in the amount of $17,985,000.00.”
I could find no information on what basis the damage amounts were made.
Hiring someone to erase one’s spouse? Now that’s what I call being really ticked off.
By Don Bays CPA, ABV, CVA, CFFPosted on August 9 2016 by admin
On August 2 Mark Mazur, the U.S. Treasury’s assistant secretary, announced that the IRS will implement new regulations that will effectively eliminate valuation discounts.
In an effort to diminish perceived abuses related to valuation discounts associated with transfers of interests in family entities, the IRS enacted Section 2704 of the Internal Revenue Code (the “Code”) in 1990 as part of new Code Chapter 14. Code Section 2704(b) stipulated that if an interest in a family controlled entity is transferred to a family member, an “applicable restriction” should be disregarded by the appraiser when valuing the transferred interest. Code Section 2704(b) defines “applicable restriction” as a constraint that restricts the ability of an entity to liquidate if, after the transfer, such restriction lapses on its own or can be removed by the transferor or any member of the transferor’s family, acting alone or collectively. 2704(b) included other provisions that addressed restrictions related to qualified personal residence trusts, grantor retained annuity trusts and other family entities or family related documents such as buy-sell agreements.
Subsequent to the enactment of Section 2704, the tax courts have consistently ruled that the aforementioned restrictions should be ignored by the tax payer and appraiser and that discounts may be applied to the transferred interest in the context of gift tax or estate tax reporting purposes.
Essentially, the proposed regulations pertain to the application of a discount for lack of control (DLOC) and discount for lack of marketability (DLOM) to noncontrolling, nonmarketable limited partnership and membership interests in FLPs and FLLCs. Depending on the composition of the asset portfolio of the entity and the prerogatives of control vested in the holder of the transferred fractional interest, the blended DLOC and DLOM typically is in the range of 25 percent to 45 percent.
What is the time line for the approval or rejection of the proposed regulations?
The regulations must first go through a 90-day public-comment period. A public hearing is scheduled for December 1, 2016. Comments and outlines of topics to be discussed at the hearing must be submitted by October 31, 2016. We expect a strong negative response from estate attorneys, financial planners, accountants and other professional groups during the public-comment period and IRS hearing.
Should you or your clients make a gift or transact a sale prior to the public comment period and hearing?
The vast majority of commentators believe the new regulations, if approved, likely will apply to gift and sale transactions after the effective date. Furthermore, they opine that any “grandfathering” rule will not be applied to a fractional interest in a limited partnership or LLC formed prior to the effective date of the regulations.
It is likely that many estate planners who represent affluent clients will encourage them to make gifts prior to the public hearing.
We will continue to follow this important story and stay in touch with you.
By Gary Ringel, CGREA
According to an August 2, 2016 Wall Street Journal article authored by Richard Rubin, “Estate and gift taxes apply at a top rate of 40% above the $5.45 million per-person exclusion, which means the estate tax affects about 0.2% of those who die each year.
Republican presidential candidate Donald Trump wants to eliminate the estate tax. Democratic presidential candidate Hillary Clinton says she would make the estate tax apply to about twice as many people. She proposes returning to the law in effect in 2009, when there was an estate-tax exclusion of $3.5 million per person, a $1 million per-person gift-tax exemption and a 45% tax rate.
In fiscal 2016, the U.S. is projected to collect $20 billion in estate and gift taxes, less than 1% of federal revenue, according to the Congressional Budget Office.”Posted on July 26 2016 by admin
How can a macro-economic event, such as when the United Kingdom voted to exit the European Union, impact everyday people and corporations and help them emerge from bankruptcy protection in the United States? When the UK voted to exit the EU, this caused a significant panic in the investment community, particularly investments in foreign stocks. When there are such uncertain times, investors have a tendency to liquidate their equity holdings, including riskier foreign stocks, and invest their money in less risky investments, such as U.S. Treasuries. As these large numbers of investors buy U.S. Treasuries, the prices increase and the rates of return decline. As the yields on the U.S. Treasuries decline, so do other interest rates.
One of the key issues for debtors trying to emerge from bankruptcy protection is how to restructure their secured debt; and, a key component is what a reasonable rate of return should be for the secured lenders. As market interest rates decline due to the declining U.S. Treasury rates, this can significantly lower the required monthly payments on the restructured debt and make the Debtor’s Plan of Reorganization more feasible. Thus, they have a better chance to emerge from bankruptcy protection.
By Ted Burr, CTP, CIRAPosted on July 21 2016 by admin
A handful of questions to begin – Are you thinking of selling your small and medium-sized entity (“SME”)? Is your largest asset in your estate your business? Are you the CEO, CFO, general manager and sales force of your SME? Do you fear going on a two week vacation because of the number of phone calls you will receive from employees asking questions regarding operations? If you answered ‘yes’ to more than one of the questions above, these tips could help you add value to your SME before you sell your interest.
- Begin by documenting your daily responsibilities and put them each in a logical category. Next, begin to identify current activities for which you are responsible and can be delegated to other employees. Take time to train the employee and trust them to perform the work. Don’t forget to increase compensation in situations that warrant an increase.
- Begin to identify key personnel that if lost, revenue and earnings would be impacted. Once identified, begin to develop procedures or processes that introduce other employees into the process in order to reduce the impact if the key employee left your firm.
- Begin to maximize earnings instead of minimizing taxable income. Of course buyers can add back discretionary, non-operating expenses to the earnings stream when they analyze your business, but too many adjustments intuitively add risk to the SME and therefore, decrease the potential purchase price of the business.
- Start to develop new markets and/or new revenue streams in order to show growth in revenue. Buyers are looking for high growth companies to purchase or SME’s that outperform their peers regarding growth. All things being equal, higher growth companies receive higher purchase prices.
- Begin to forecast the next four quarters of revenue and expenses. Identify key performance indicators that will assist you in developing your revenue forecast. Maybe your industry correlates well with another industry. In that case, research both industries in order to gain an understanding of what the future holds for each industry. Be sure to compare actual results to forecasted results in order to improve your forecasting process. Many business owners have no vision of their future. At a minimum, creating a forecast will begin the thought process of how to improve marketing or operations to achieve the forecasted earnings.
Use these tips to your advantage.
By Michael R. Metzler, CPA/ABV, CMA, CGMA, ASAPosted on July 12 2016 by admin
$16,764,128.95 – let’s think about that for a minute. Almost $17 million gone over a 9 year period – a mere $1.86 million per year. Would you notice?
That’s how much the former controller for the Collin Street Bakery in Corsicana, Texas embezzled from the business. He used his ill-gotten gains to finance a lavish lifestyle of new cars, furs, frequent travel on private jets and a collection of watches and jewelry estimated to be worth over $3 million.
Sandy Jenkins started as a payroll and accounts payable clerk at the bakery in 1998. Collin Street Bakery was known for making ”the Cadillac of fruitcakes” and was owned by one of the wealthiest families in Corsicana. By 2000 he had been promoted to controller. Sandy had always admired the finer things in life but struggled to obtain them on his $50,000 salary. He and his wife were contributing members of the community and had raised a daughter. But it was never quite enough for Sandy. He always dreamed of having more.
In December 2003, as Sandy sat in his office at the bakery, he started thinking about how he worked so hard for the bakery. But was he really fairly compensated for all his hard work? He started by taking a little petty cash. Not a lot but definitely enough that someone might notice. He was a little nervous at first but then nobody seemed to care. And the little bit of petty cash wasn’t enough.
Sandy began writing checks to pay his credit cards from the bakery checking account. He would write the check which was electronically signed by the system, print the check and then void the check in the system. He mailed the first check to his credit card company and then wrote a check to a bakery vendor for the same amount as the first check. The second check was never mailed. He was careful to time his big payments to coincide with typical periods of heavy purchases.
The Company owners and executives couldn’t figure out why they weren’t more profitable. They seemed to chalk it up to their expansion and the economy. They had performed audited inventories of their ingredients and audited payroll. They looked at their expenses, although apparently not too closely.
Nobody at the business or in the small town seemed to question how Mr. and Mrs. Jenkins could suddenly afford new cars and expensive jewelry. They did not hide their spending; in fact, some might argue that they flaunted it. Sandy would tell his boss that his cousin let him use his private jet or that a friend gave him a new watch for helping him out. But no amount of family or generous friends really explained the sudden wealth of the Jenkins.
Sandy Jenkins’ scheme was discovered by accident by a fairly new accounting clerk who happened to notice a check written to Capital One. She knew the bakery didn’t have any dealings with Capital One. When she asked Sandy about the check he replied that he would “fix it”. She was suspicious and did a little more digging. She found over $400,000 in checks written to vendors not used by the bakery in a relatively short period of time. Sandy Jenkins was fired the next day. He is currently serving a 10 year prison sentence. The contents of his home were auctioned off to help pay restitution. His wife was sentenced to 5 years of probation.
Sandy was a long term trusted employee who obviously knew no one was checking up on him. There were no checks and balances in place to catch his scheme. But there was also no awareness or thought of the possibility of fraud amongst the employees. If any were suspicious of his lifestyle, they never spoke up, including management. He had been living a lavish lifestyle on the bakery’s dime for almost nine years before he was caught. Don’t you think somebody should have said something?
By Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABVPosted on June 30 2016 by admin
When valuing a controlling or non-controlling interest in a C corporation that owns only marketable securities, a common method to apply is the net asset value method under the asset approach. Under this method, the fair market value of liabilities is subtracted from the fair market value of assets. Included in the liabilities is a dollar-for-dollar reduction on the date of valuation for the built-in capital gains (BICGs) tax.
The 5th and 11th Circuits have accepted a dollar-for-dollar reduction in value for the BICG tax for both a controlling interest and a non-controlling interest (See Dunn v. Commissioner, U.S. Court of Appeals 5th Circuit, No. 00-60614, and Estate of Frazier Jelke, III v. Commissioner 11th Circuit U.S. Court of Appeals, No. 05-15549). However, in the tax court case heard in the 3rd Circuit, Estate of Helen P. Richmond, Deceased, Amanda Zerbey, Executrix, Petitioner v. Commissioner of Internal Revenue, Respondent, T.C. Memo 2014-26 (Richmond Case), this approach was not applied.
In the Richmond Case, the subject interest was a 23.44% non-controlling common stock interest in Pearson Holding Company, a family owned C corporation that held primarily marketable securities with significant built-in capital gains. The court record established that 87.50% of the $52 million market value of assets represented appreciation that, if triggered by a sale, would result in capital gains tax of approximately $18 million.
The estate’s expert relied on the income approach, whereas the IRS expert relied on the asset approach. Mr. Thompson, the IRS expert, quantified the BICG tax exposure by increasing the marketability discount by 15% based on his analysis of closed-end funds. Interestingly, the tax court criticized Mr. Thompson for his tax methodology and analysis but accepted his conclusion of the tax amount, which was approximately $7.8 million. This is about 43% of the full $18.1 million tax had the portfolio been liquidated, or had the dollar-for-dollar reduction in value been applied.
The court justified its $7.8 million reduction in value by performing a present value calculation of the full capital gain tax assuming it would be incurred ratably over a 20-year and 30-year period. They used this as a proxy for the portfolio turnover rate. They calculated a range of present values for the BICG tax, from $7.5 million to $9.5 million using discount rates ranging from 7.0% to 10.27%, and concluded that $7.8 million was “reasonable in this case”.
This is a disappointing ruling given the 5th and 11th Circuits’ dollar-for-dollar reduction in value rulings in other BICG tax cases using the net asset value method. The expectation is for consistency in the tax court that results in logical and reasonable conclusions. This decision, however, just muddies the waters.
By Cindy Andresen, ASA
Source: Business Valuation Review, Volume 34, Issue 3, Fall 2015, “Thoughts on Estate of Richmond Tax Court Case” by John M. Byrne, CPA/ABVPosted on June 15 2016 by admin
The number of Arizona real estate appraisers could decrease at a rate of 3% per year over the next decade.
According to the Appraisal Institute, the pool of real estate appraisers in the United States is shrinking and aging. Sixty-two percent of appraisers are 51 and older while 24% are between 36 and 50. Only 13% are 35 and younger. The Appraisal Institute believes the number of appraisers could fall 3% per year over the next decade
Below is information and statistics which will give insight into the real estate appraisal industry and some of the factors causing the number of appraisers to decrease.
Are there different types of real estate appraisers?
Certified Residential Appraiser
The State of Arizona permits Certified Residential Appraisers to appraise one to four residential units (single family residence, duplex, threeplex or fourplex) without regard to value or complexity of the appraisal, but does not allow them to appraise residential subdivisions.
Certified General Real Estate Appraiser
The State of Arizona permits Certified General Real Estate Appraisers to appraise all types of real property.
Licensed Residential Real Estate Appraiser
The State of Arizona permits Licensed Residential Real Estate Appraisers to appraise non-complex one to four residential units having a transaction value of less than $1,000,000 but does not allow them to appraise residential subdivisions.
What requirements must be fulfilled in order to become a certified or licensed real estate appraiser?
What is the education level of real estate appraisers in the United States?
How many real estate appraisers are there in the United States?
How many real estate appraisers are there in Arizona? (4)
What is the gender of U.S. real estate appraisers?
What is the annual income of U.S. real estate appraisers?
What factors are causing the number of real estate appraisers to shrink?
According to industry experts, the following dynamics are contributing to the decreased number of appraisers:
- Appraisal fees are decreasing or stagnant. Since many appraisers are employees and split commissions with their employers, they are apprehensive about the ability to increase their earnings in the future.
- Prior to 1991, when Arizona state licensing began, anyone could hold themselves out to be a qualified real estate appraiser. The licensing process is considered by some to be too rigorous and time consuming.
- Entry level employees are sometimes reluctant to pursue a career in an industry that requires 2,000 to 3,000 training hours.
- Owners of real estate appraisal firms are sometimes reluctant to hire new employees because the training process mitigates their productivity.
If you have any questions about the profession of real estate appraisal, please contact Gary Ringel, Certified General Real Estate Appraiser and Director of Henry & Horne’s Real Estate Appraisal & Consulting Group at (480) 624-2961.
By Gary Ringel, CGREA
(1) Thirty semester hours of college-level education from an accredited college, junior college, community college or an Associate’s degree or higher (in any field).
(2) 1,500 of the 3,000 hours must be nonresidential appraisals.
(3) According to the Department of Financial Institutions Real Estate Appraisal Division (formerly the Arizona Board of Appraisal), the length of the state examinations may change sometime in 2016.
(4) Source is https://boa.az.gov/sites/default/files/documents/files/APPRAISER%20LIST%205-9-16.pdf. Numbers are as of May 9, 2016.
www.apppraisal institute.orgPosted on May 31 2016 by admin
Most information in organizations is now created, managed, and stored electronically, which has caused an increase in the rate of computer-related criminal activity. There are four situations in which a computer device may be involved in a crime: when the computer is (1) the target of the crime, (2) the medium through which the crime is committed, (3) incidental to the commission of the crime, or (4) a combination of the previous three
Even law enforcement organizations are not immune to computer security issues, as evidenced by a recent breach within a U.S. Metropolitan Police Department . A civilian employee of the department, we will call her Martha, recently pled guilty to two counts of obtaining information from a protected computer for a fraudulent purpose. Martha used her position as a community service officer to access databases, including the National Crime Information Center (NCIC) computerized index, which contained the personally identifiable information (PII) of millions of individuals. Martha obtained PII on at least ten occasions between 2009 and 2014, then provided that information to a friend, whom we will call Sally. Sally used the PII to file fraudulent federal income tax returns and erroneously claim tax refunds. Once Sally received the refunds, she and Martha shared the proceeds. Sally pled guilty in a separate case, and was sentenced to twelve years in federal prison. Martha was recently sentenced to two years in prison and she must pay restitution of $166,026.
This breach event is an example of an employee using her authorized access to obtain protected data for personal use. This type of computer fraud can be difficult to detect because the employee accesses the protected information in the normal course of their job. One way to detect this type of misuse is to review logs of the employee’s computer activity. Some red flags to look for are: (1) is information accessed during a time the employee should not be working (i.e. before/after hours), (2) is information being printed, emailed, or saved to a flash drive (i.e. becoming portable), or (3) is information accessed excessively related to other employees in the same position?
Because most information in organizations is created, managed, and stored electronically, companies are more vulnerable to cyber-crime and may require a reevaluation of internal controls around electronic data. Security breaches can be very costly to an organization, not only in lost data but also to a company’s goodwill. In addition, securing data is not just a matter of taking measures within the IT system such as encryption. It also includes physical security, proper screening of potential employees, adequate training and supervision of current staff, and development of preventative, detective, and corrective measures. Security must be an organization wide priority, so it is vital that management is involved in every step of the process.
By Shyla A. Ingram, MSA-- Older Entries »
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