Occupational fraud is a huge risk to companies, and it unfortunately continues to grow.  By its nature, fraud is hard to find and is most likely committed and hidden by the very employees you deem to be “trustworthy”.  Those employees are the ones responsible for keeping the business running, have access to assets, information, and the ability to cover up fraud. In the most recent report to the nations published by the Association of Certified Fraud Examiners, the average company loses 3% to 5% of revenues to fraud annually with smaller companies being disproportionately at more risk than larger companies.  Business owners, CEOs, CFOs, and other top executives should not be fooled in believing that their company is the exception to the average.  Instead of taking the gamble when it comes to fraud risk, they need to be proactive and implement fraud-prevention measures to manage the risk. 

The majority of frauds and their perpetrators are uncovered by simple preventative controls such as an internal tip or a message from a hotline, which subsequently triggers an investigation.  Fraud investigations are crucial to uncovering fraud, but also send a message to employees that management is serious about detecting and preventing fraud.  In addition, an investigation can benefit a company by identifying its weaknesses that allow for dishonest employees to commit the frauds we continue to hear about every day.  Performing a fraud risk assessment will also identify a company’s weak spots, and if done early enough can effectively prevent the fraud before it happens.  By performing a fraud risk assessment, a company can implement fraud preventative policies and procedures more accurately to the areas that need them the most.

The idea of implementing fraud prevention methods sounds great, right?  So good, that it’s hard to believe that every company hasn’t already designed and implemented their own fraud procedures and policies.  The problem is that most companies are already hit with higher costs from having to implement new regulations, not to mention higher business expenses such as increasing healthcare and a stagnant economy that has done little to stimulate growth.  It’s no surprise that operating budgets show no room for fraud-fighting measures.  The damages from fraud aren’t visibly tangible until the fraud has been detected making the cost of implementing preventative measures even harder to swallow.  So is it worth it?

Let’s say your company grosses $10 million in sales each year, with net profit of 5% of revenue, or $500,000.  If your company is like the average company, then it is losing $300,000 to $500,000 each year to fraud.  If by implementing preventative procedures, the company can reduce its fraud risk by 10% that would mean savings of $30,000 to $50,000, which goes straight to the bottom line.  The cost and pain of implementing effective fraud controls may seem high, but in the end will produce a return on investment that would be foolish to ignore.  Relying on external audits and regulations such as Sarbanes-Oxley to detect and prevent fraud is no longer sufficient.  It’s time to attack fraud.  Sometimes, the best defense is a good offense.

Uncovering employee deception is not as hard as you might think.  People are naturally good at manipulating language to fit a specific situation, so how do we know if they’re lying?  Usually, people want to tell you what they’ve done.  They want to confess to you.  All you have to do is listen.  Professional lie-spotters are trained to know that while each person has a unique way of expressing themselves, there are consistent ways in which liars reveal themselves when they speak.  Knowing just a few of these techniques can help you sort through the lies and deceit. A fabricated story can often be revealed by listening for lack of self-references.  Truthful people will retell a story in the first person point of view.  Consider the following story told by a truthful person.  “I left my office at 5:00.  Before I left, I checked that the safe door was locked.  I shut the lights off and I headed home.  When I arrived the next morning, I noticed the safe door was open and the money was missing.”  Notice how the person used “I” seven times in four sentences.  Deceptive people on the other hand will avoid the use of self-reference by speaking in a passive voice, making statements such as:

• “The safe was left unlocked” instead of “I left the safe unlocked.”
• “The payment was approved” instead of “I approved the payment.”

Alternatively a deceptive person will replace the pronoun “I” with “you”.  Consider this scenario:

Question:  “Can you tell me why this invoice was approved?”

Answer:  “You know, you try to review the details on each invoice, but sometimes when you’re too busy you just sign off and authorize them for payment.” 

Lying is hard work.  Liars have to fabricate a reasonable story without contradicting themselves.  In addition, they have to make sure the details of their lies are consistent with everything an investigator knows or can find out.  To prevent the risk of detection, liars generally prefer not to lie.  Instead of answering a question with a lie, a deceptive person will answer a question with another question.  When asking questions, be alert to responses such as:

• Why would I steal from the company?
• Do I seem like the type of person who would do that?
• Are you asking everybody in the department about this?

Deceptive people put a lot of effort into making what they say sound true.  To help with this, they often use expressions such as: “I swear”, “on my honor”, “as God is my witness”, “cross my heart” to strengthen their lie.  Truthful people feel less need to use such expressions since they are confident that the facts will prove their statements. 

Obviously not every statement is a lie.  Likewise not every lie is intended to deceive.  However having a more keen awareness of whether or not your employees are truthful, will surely put you in a better position to identify the red flags that could lead to uncovering the ever elusive fraud.

Valuation Engagement – Conclusion / Opinion of Value

• All three valuation approaches (asset, income, and market) must be considered.
• Requires a significant amount of detail in terms of documentation and reporting.  Reports can be upwards of 90 pages or more. 
• A conclusion of value is the required type of report for any determination of value that is being submitted to the IRS.  The most common of these circumstances relate to estate and gift tax filings.
• This is the only type of report in which a valuation analyst provides his/her opinion of value.  As a result, a conclusion of value is generally required if the findings are used in a courtroom setting (divorce, shareholder disputes, other litigation not in the settlement process).

Calculation Engagement – Calculation of Value – No Opinion of Value

• Valuation approach, methods and extent of procedures used are determined based on discussion and agreement between the valuation analyst and the client.
• Less detail is required related to documentation and reporting.
• No opinion of value is presented.  Rather, the report results in a calculated value based on the agreed upon approach, method, and procedures.
• The cost of a calculation report is generally much less than that of a report that results in a conclusion of value.

 Who can benefit from a calculation report?

Clearly, calculation engagements are not the answer in all circumstances.  If you are involved with litigation or the IRS or will be providing the report to a third party, you will want a valuation report, which will give you an opinion of value.  However, calculation reports can be a highly valuable tool for business owners involved in:

•  General Business Planning
• Estate Planning – Preliminary Discussions
• Legal Strategies or Settlement Evaluation
• Exit Strategy Planning
• Planning Stages of Buying/Selling a Business
• Creating or Updating a Buy-Sell Agreement

When speaking with a valuation expert, be sure that you are comfortable with the fact that the level of service being offered is in accordance with your needs.

Cloud computing has given small businesses the opportunity to access the analytics and trusted advice of the CPA by outsourcing the transactional processing or write-up work to the CPA.  This is possible by the more efficient process of transactional processing on Software as a Service (SaaS) product that can be accessed by the CPA and the small business owner from anywhere there is Internet access.  Banking information can be downloaded through the SaaS to help the process be more current, more accurate and provide quicker turnaround to the small business.  This allows faster delivery to the client of pertinent information needed to make critical decisions about their strategic plan.  Now the client can feel they have the resource of a controller available to them that has access to their data at anytime.  A side benefit to the cloud is less maintenance by the small business owner of technology such as servers on which the programs would normally reside; IT personnel to maintain servers and software; and fewer software updates, as the online versions are always kept up-to-date.

This process has not been efficient enough in the past for many larger CPA firms because of the manual work involved.  SaaS provides the opportunity to gather, process and deliver financial data efficiently so the client and the CPA can collaborate on decisions regarding the small business.  The issue regarding much of SaaS is security.  This is something to check into when looking at service providers and a topic for another time, but security has come a long way.  SaaS companies know they are only as viable as the security of their client’s data.

What this means if your bank routing number starts with a zero and you e-filed in that time frame:

• If you indicated Direct Deposit:You may end up getting a check in the mail rather than direct deposit.  Check “Where’s my refund?” on the MN DOR website if you are waiting for a refund.   www.taxes.state.mn.us
• If you indicated Electronic Withdrawal: The payment may not be taken out

  and this means you won’t have paid your balance due on time.  MN DOR is planning to send a letter in the next week or two to those taxpayers who were affected by this with instructions on what to do.  If you think this applies to you and you do not receive a letter you should contact the Minnesota Department of Revenue at 651-296-3781.

The MN DOR said about 400 taxpayers have been affected by this glitch and they are  attempting to contact each affected taxpayer to resolve the problem.

TAX LAW BACKGROUND

Currently taxpayers can deduct home mortgage interest consisting of two categories:

1. interest paid on acquisition indebtedness,  or
2. interest paid on home equity indebtedness.

Acquisition indebtedness is indebtedness to acquire, construct, or substantially improve a residence, but the amount treated as acquisition indebtedness cannot exceed $1 million. Home equity indebtedness is indebtedness other than acquisition indebtedness, but the amount treated as home equity indebtedness cannot exceed $100,000.  Taxpayers are allowed to include up to two residences (Principal residence and second residence (i.e. cabin) in conjunction with these limitations.

COURT CASE SUMMARY

In this case there were two (unmarried) taxpayers who co-owned two properties (their principal residence along with a second residence) in which the acquisition indebtedness and home equity indebtedness totaled approximately $2,800,000. The taxpayers took the position that they could each claim mortgage interest expense up to the $1,100,000 indebtedness limitation.

The IRS disagreed stating that the limitations are properly applied on a per-residence basis, regardless of the number of residence owners and whether the co-owners are married to each other. Under its interpretation, co-owners should collectively be limited to a deduction for interest paid on a maximum of $1.1 million of acquisition and home equity indebtedness.

Upon review of Congressional intent, definitions of Internal Revenue Code 163(h)(3), and review of the married filing separate limitations the Tax Court agreed with the IRS stating that acquisition and home equity indebtedness limitations apply on per-residence basis.

Circular 230 Notice: IRS regulations require us to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, by any taxpayer for the purpose of avoiding tax-related penalties imposed under the U.S. Internal Revenue Code or any other applicable state or local tax law provision; furthermore, this communication was not intended or written to support the promoting, marketing or recommending of any of the transactions or matters it addresses.

If you have questions about your financial situation, remember that we can help.  Our firm is made up of highly qualified and educated professionals who work with clients like you all year long, serving as trusted business advisors.  So whether you are concerned about budgeting; saving for college, retirement or another goal; understanding your investments; cutting your tax bite; starting a business; or managing your debt, you can turn to us for objective answers to all your tax and financial questions.

Here are some of the subject lines that you should watch for:

• Internal Revenue service notification
• Your tax appeal is declined
• Your tax appeal motion is rejected

If you open the emails (and I don’t recommend doing so!) you will find that they all contain a link for you to click on for more information.  This is, of course, what you must never do!  If you simply hover your mouse over the link, you can quickly see that the destination of the link is not the IRS, but some server in another country like Russia or Hungary, which are well known spamming havens. 

Here are five things the IRS wants you to know about phishing scams:

1. The IRS doesn’t ask for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.
2. The IRS does not initiate taxpayer communications through e-mail and won’t send a message about your tax account. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site:
   • Do not reply to the message.
   • Do not open any attachments. Attachments may contain malicious code that will infect your computer.
   • Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, visit the IRS website and enter the search term ‘identity theft’ for more information and resources to help.
3. The address of the official IRS website is http://www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site and report it to the IRS.
4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence.
5. You can help shut down these schemes and prevent others from being victimized. Details on how to report specific types of scams and what to do if you’ve been victimized are available at http://www.irs.gov, keyword “phishing.”

Taxpayers are not the only ones being targeted.  Similar phishing emails are being sent out to accountants stating that their accountant status is being revoked due to income tax fraud accusations.    These emails appear to be coming from the AICPA, which is the national professional organization for CPAs in the United States.  In this case the email subject lines read:

• Your return fraud notification
• Your accountant CPA license termination

The good news here is that these emails seem to have been identified by the spam filter services.  This should minimize their damage.  However, not all of them will be caught and people should continue to be leery of any type of authentic looking email that makes a suspicious claim and asks you to either click on a link, or provide any type of personal information via email.

The best course of action is to simply delete the email.

After weeks of uncertainty over whether an agreement could be reached, last Friday the House and Senate passed the Act which provided an extension of the 4.2% Social Security tax rate for employees through the end of 2012.

The provision that stated a 2% additional income tax would apply to wages over $18,350 in the first 2 months of 2012 has been repealed; there is no additional tax for wages over $18,350 up to $110,100 paid prior to March.