Category Archives: The Nitty Gritty

Two Hours… And Counting

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Oh man! I may need treatment to recover from working out my health care expenses. For several years now, my shoulder has hurt. I have had it looked at by a doctor and I went through physical therapy until I had used up all that I was allowed to use, and treatment didn’t really work. My shoulder still hurt a lot. I then got sidetracked by all kinds of other things going on in my life and so I pretty much lived with the pain (eased a bit by massage, ibuprofen and Salonpas). Finally, I decided that enough was enough and that life should not be lived in pain, so I went to see the doctor who helped me out when I fractured my knee. I love his guy. He is absolutely awesome. And it is a great and special thing when you establish and relationship where you are treated like an adult with a brain and all your questions are answered and things are good. You feel great, until you start to talk money. Then you feel all kinds of unwell again.

I am a person with health insurance and I believe it is pretty good insurance because it is pretty widely accepted and my co-payments are decent. I understand that choosing an out of network doctor is bound to be very pricey. However, several years ago, I had some pretty terrible experiences when I went with in-network doctors that were recommended to me by my insurance website and not by a fellow medical profession. Now, when I find someone who treats me with respect and seems to have a vested interest in my being healthy and fully recovered, I tend to stick with that person. I understand that this can come with a premium; I just wanted to know what this premium might be. So, there I was, discussing a treatment plan and then payment plans. The treatment plan ended up being the easier part of things to understand. Let me tell my tale…

Looking at a schedule of my health insurance benefits is like solving a complex math problem, where suddenly I need my calculator and a whole lot of patience. I have to factor in a deductible and then calculate the split between what insurance will then cover and what I have as an out-of-pocket expense. I sat down with the office manager at my doctor’s office and he went through the various costs of my treatment and then he pulled up the Fair Health Consumer website. The office manager then explained to me that, because my doctor was out of network, we should go over what the treatment could, potentially, cost me. He explained to me that even though my insurance would cover a percentage of my “eligible expenses”, what that meant could make a huge difference to my wallet. I found out, this week, that things can get very complicated and expensive.

First of all, the health insurance company will determine the reasonable and customary cost of a procedure. This is the average fee charged in a particular geographic area. Then, for out of network providers, regardless of what the provider charges, the health insurance company will cover costs based on the reasonable and customary cost. However, a health insurance plan may determine what they will cover, based on a published rate allowed by Medicare. This rate has nothing to do with the average cost of a procedure in the part of the country where your treatment occurs. This rate can be wildly different from the reasonable and customary rate and this can result in a big difference in how your wallet looks at the end of the day. For example, you could have a procedure that has a reasonable and customary cost of $10,000. If your health insurance covers 60% of this rate, your out-of-pocket expense will be $4,000 or 40% (I am, for the sake of simplicity, assuming that there is no deductible). Now, if your health insurance uses the Medicare based rate, they could reimburse you only about $300 (this is a comparison that I actually did on the Fair Health Consumer website, and not something that I made up, as extreme as the difference is). That means here, your out-of-pocket expense will be $9,700. That is a significant difference. So it is very important to have an idea of what you are going to pay beforehand, Otherwise the doctor’s bill may give you a heart attack, in addition to all your other issues. The health insurance companies say that they have switched to the Medicare rate in order to push out of network doctors to become in network doctors in order to get better reimbursement rates from them, but what I have read of how this rate came about does not appear to support that claim. However, it seems to me that the patients are the ones who are suffering, being that they are the ones who then get the gigantic bills from the provider that they have chosen to use. And this could be because they have looked at their explanation of benefits and calculated their out-of-pocket based a reasonable cost. Imagine that.

With this in mind, the office manager gave me a list of information, including the codes for the treatment and suggested that, beyond visiting my insurer’s website and reading their explanation of benefits, I actually call and have conversations about what exactly the explanations mean. So began my adventures in telephone conversations regarding my health insurance benefits. I made my first call, thinking I would be on the phone for a few minutes but I didn’t hang up until over an hour later and I was still clueless. The man I spoke to was very friendly and polite and he took my information but then as we got into what I should expect my out-of-pocket expense to be, things became very murky and confusing. It appeared that he could not access out of network information for what my cost would be and, he was not clear on what rate my out-of-pocket expenses would be based. After an hour of us hanging out on the phone, trying to figure things out, he found a form that I could submit in order to get a quote from the health insurer but he seemed to not know how to get it to me. So he said he would call me back or email me before the end of the day. He did neither.

The next morning I called again and, even though this particular insurance company representative seemed to have access to a little more information, she too was very vague and kept telling me that she could not tell me how much things might cost me or what would be reimbursed. That is a bit scary since I was calling to make sure that I would have as few surprises as possible. About an hour into a very frustrating and circular conversation, I mentioned that the day before, the representative had mentioned a form and a client advocate. She claimed she had never heard of such a thing but she put me on hold as she went to investigate. She came back on the line and said she had found this form but she could only either fax it to me or send it via snail mail (I could go into a whole rant about why, in 2016, people can’t email you something and, instead, you have to figure out how to get your hands on a fax machine).

So, now I am at a point where I have sent information in to the insurance company and I am now waiting (for 2-3 business days, per the form) for a response on the eligible expense for my treatment – the first step in calculating out-of-pocket expenses. I am hoping that my future does not hold more protracted conversations where things end up even more confusing than they were going in. I would feel dumb, but the health insurance representatives seemed to know about as much as I did about what my insurance policy does and does not cover. I hope that I can get to a point where I can make an informed decision about what to do next. And my lesson, almost, learnt that I am sharing here – don’t take the website blurb at face value; don’t take the information booklet at face value; don’t assume you know what is going on. Keep asking questions, even if you get so frustrated that you want to throw your phone across the room. If what you are being told about your insurance doesn’t make sense, ask to speak to someone else. I could tell you what I think about all of this, but I am going to stick with telling you to ask the questions until you get clarity (even if it is very expensive clarity). Insurance is a very murky space and those dark spots could turn out to be a lot of money coming out of your pocket.

 

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That’s Not How It Goes

canine_side-eyeI am a huge sports fan. Huge. It is just about the only time that I tend to watch live television. The drawback, in my opinion, is that I have to watch all the ads on television, even the ones that get on my nerves. It is a sacrifice I am willing to make in order to get my game in real-time but, sometimes, I wonder. We are in the midst of basketball and tax seasons and the two have, apparently, come together to try to give me an aneurism or, at the very least, high blood pressure. You see, there are a variety of tax preparation related ads, declaring that it is time to get the mountains of money due to you and how easy it is to just do it all yourself, while you’re at it. I just hold my head and mutter, “no, no, no, no!”

Ad after ad trumpets that the product advertised will get you the largest tax refund around. So, what happens when you file your taxes and you don’t get a big refund; maybe you don’t get a refund at all? Do you get upset? Do you feel that your tax preparation software or professional has done wrong by you? But a refund is the government paying you back money that you overpaid them in the first place. Getting a large refund doesn’t mean that you lucked out and won the government lottery; it means that, over the year, you sent the government too much money and now the money is sending that money back to you, interest free.

Refund tales aside, there is the matter of how complicated the tax code is, something that even the Internal Revenue Service (IRS) writes about. The 2014 Tax Guide, a publication that the IRS puts out to help guide individuals who are filing their taxes is a daunting 288 pages long and that’s before the references in the guide for further information on the subjects covered. So, I am sure you can begin to understand my frustration when I see ads that imply that preparing a tax return is as simple as baking a cake. It is unclear how long the tax code is currently, but what we do know is that it gets longer and more complicated by the year.

Computer software is incredibly helpful, when it comes to tax preparation. However, it is paramount to keep in mind that the software is a tool and it will not automatically make you an expert, knowledgeable of the ins and outs of the tax code. If your tax return is straightforward, the chances are that you will be okay filing your own return. Say, however, that you have a business; do you know which of your expenses are deductible and which are not? If you are married, and you decide to file separately, instead of jointly with your spouse, do you know what the differences are between the two? What about if you have spent the year speculating, buying and selling assets, or if you gambled a lot and have significant winnings or losses? The software can only work with what you give it and what if the software doesn’t ask you the right questions in order to get as much information needed in order to have as accurate a tax return as possible?

At the end of the day, the IRS holds you responsible for errors in your tax return and the amount of taxes you pay (and what you claim as a refund). The last thing you want is to be hit with a notice telling you that you owe the IRS a bunch of money because, when they do that, they tend to also charge you interest and penalties. Some tax preparers will tell you that they will cover only penalties and interest due to errors on a tax return, but what about the erroneous tax refund that you have already spent? Yup, only you have to deal with that. It seems like the punishment is a lot worse than just messing up a cake recipe, right? So, I’m thinking that getting a qualified professional, such as a CPA, to prepare your taxes might be worth your investment. Don’t go with someone who promises you the largest refund; go with someone who has studied the law and takes continuing education to stay up to date on the intricacies of the tax code and not only how you will be affected federally but also on a state and local level. Yeah, state and local – I didn’t even go into all that. Find someone who knows what they are doing and who can tell you what is going on and why. Or, you could try to tackle the bigger than the bible tax code and do it all yourself. You’ve got time, right?

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Oh Yes, She Did!

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In previous posts, when talking about the importance of controls in a system to help prevent fraud, I discussed the case of Amy Wilson. These posts were specifically about how trust is not a control. Regardless of how nice a person seems to be (or is) or how long someone has worked for you, you should never decide that you can trust them enough to forgo system controls. It really cannot be said enough, trust is not a control. It does not matter how good a person is or how long they have worked without ever considering defrauding their employer, there may come a time when they face great pressure to commit fraud. It is important that, should this time arise, there are controls that deter them from giving in to temptation.

In my first post about Amy Wilson, I discussed how many controls I come across when I run a race compared to how few controls I have seen in many businesses. I continue to be amazed by this; people will put so much into making sure folk aren’t fabricating their running times, yet they are willing to trust those very same folk with their money and assets. The second time I wrote about Amy Wilson, I had watched her enlightening interview on the Attestation Update website. Here and in the articles she has authored, Amy Wilson speaks very clearly about what she did and how she could either have been caught or have never had the opportunity to perpetrate the fraud.

Well, fast forward to today. I received notification, this morning, that Amy Wilson had visited my website and left me a comment. She was very complimentary (whew!). I am glad because Ms. Wilson does have great lessons to impart and I appreciate that she does not take issue with how I have shared her story and lessons. To have real life examples of where the weaknesses in a system were, how they were exploited and the ultimate consequences of all of this is absolutely priceless. When it comes to designing and instituting controls in a financial system, it is imperative that this is performed effectively and consistently. In order to make sure that this process is correctly implemented, the stories must be told clearly, correctly and honestly. It is fantastic that Ms. Wilson is unflinching when she talks about what she did; that kind of thing does not happen often. This kind of honesty helps forensic accountants get better at what they do and, hopefully, businesses get better at deterring, preventing and detecting fraud. Finally, feedback like Amy Wilson’s helps me feel happier about what I do.

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Stuff It

Back in the early days of my time as an auditor, I went on many inventory counts. Because companies would have to close their businesses while the inventory count was going on, they tended to happen over the weekend. I am yet to meet anyone who likes to spend their weekends at work and it is even worse when all of your friends are going to be sleeping in or doing something fun while you are at work. I could complain (and I am sure I did) but it was a necessary part of the work that I did and so I spent several weekends at a client, observing their inventory counts and carrying out audit tests. One particular assignment sticks in my head. I went to a company that had a very large inventory of bags of cement. I cannot, for the life of me, remember what the company did – whether it was construction or the manufacture and sale of cement. Either way, there was a huge warehouse, filled with stacks of these bags. I don’t know how much you know about cement but, what I found out that day is that cement is very powdery and the small particles are very good at escaping the bags that they are put into. You could see the air in the warehouse; it looked a little like the inside of a snow globe, except for the fact that no one would ever make a snow globe of mountains of brown bags. One of my tests involved test counting areas of inventory to see if my numbers tied up with the numbers counted by the client. I walked around sections of the warehouse and counted stacks of bags – the length, breadth and height – and multiplied numbers to come up with totals. I was not done though. I had to make sure that the mountains were made up of cement bags all the way through and not, say, hollow in the middle. So, I climbed up the dusty stacks of bags, fighting my fear of heights in the name of my mission, and checked to make sure that the stacks were not hollow. I then also had some of the staff at the company move some bags around to make sure that the stacks were made up of only cement bags and not bags of some other filler. I went home that day coated in a film of cement dust. I know my neighbors were wondering how an auditor could get so dirty at work – didn’t I just work with a calculator and pen? Ink stains were expected, but not cement. For all the complaining that I did about spending my Saturdays on inventory counts, I found a lot of the assignments, like this one, to be a lot of fun and rather exciting. I got to be queen of the cement mountains and bound about, on high, in the name of thoroughness.

If you have a company that sells or makes any kind of stuff, you will have inventory, which is also called stock. In accounting lingo, inventory is considered to be an asset because it is something that is expected to make you money in the future. For the very reason that inventory is expected to make you money in the future, it is important, for the health of your company, to safeguard your inventory, so that someone else doesn’t make off with it and, thus, your future money. I have spoken many times about many ways to prevent fraud and error with financial statements, but a lot of these steps can be translated into making sure that you hold on to your stuff.

In the world of inventory, your stuff disappearing is referred to as shrinkage. It makes it sound like you didn’t follow the instructions for laundering clothing, but it basically means that someone is stealing from you and, I don’t know about you, but I don’t like it when people steal my stuff. Any advice I can take to keep that from happening is good advice to me. The first step, in order to protect your inventory, is to keep it locked up. I have told you before about the steps my husband took to install physical barriers to access to his belongings in his studio. These are the types of steps that you should take in physically safeguarding your inventory, your stuff. Depending on what you have and what your needs are, the physical safeguarding may be locks, cameras, doors with security codes or even those fancy retina scanners that we see on crime shows. You should not only keep your inventory under lock and key but also limit access to the inventory to a few authorized parties. Only people with a reason to get to the inventory should have access. This makes it easier to trace the movements of inventory and it also serves as a deterrent to those who might think about pilfering inventory. If the list of suspects is a short one, those people might think twice about stealing.

The segregation of duties is also vital with inventory. The cycle of inventory begins with its purchase. Inventory is then stored until it is needed for manufacture or sale. Sometimes inventory is damaged, expires or is otherwise no longer of value to you and your company. When this happens, the inventory is either destroyed or sold, at a loss, to someone else who still finds it useful. Now, if one person has control over this process, from purchase to sale or destruction, there are many opportunities for fraud. For example, a person may take inventory, sell it for a profit and then write off that inventory as obsolete, pocketing the money made from the sale. Another example of fraud is ordering and receiving, say, ten items, but claiming that only nine were received. This person can then take the tenth item for personal use or profit.

Another very useful and important control is the use of preprinted, prenumbered documentation. These documents range from order forms, to receiving reports and shipping reports. All movement of inventory coming in and going out must be documented and those documents must be prenumbered. Gaps in the document numbering, or repeated numbers, will raise red flags that should be investigated. Missing documents should also raise red flags that should be investigated.

Inventory is your company’s stuff and it is important to seek out the advice and guidance of qualified CPAs to best protect it. Doing so dissuades potential criminals from trying to take it and also will make it easier to track it down, should someone take it. Taking the time to adequately plan and incorporate these controls into your inventory system can protect you from loss. I know I get worked up about people messing with my stuff and I am pretty sure you feel the same about the stuff that helps your business run.

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It’s A Good Hurt

This morning, after my run, I pulled out my yoga mat and foam roller and embarked on my post-run stretches. I am yet to come across a runner who looks forward to the stretching – most of us confess to not stretching enough. And as much as we deplore the stretching we tend to do that more often than the foam rolling. This is because, despite the benign name, the foam roller is an instrument of torture. When I have taken yoga classes, teachers have asked me if I am a runner. They ask this, not because my yoga skills are impressive, but because my leg muscles are so tight that touching my toes is a feat; it’s not a good look. These tight leg muscles are what I target with the foam roller. I am terrible at stretching because stretching after a run is mind-numbing tedium. I am atrocious at using my foam roller after a run because trying to loosen up my tight muscles after a run hurts like hell. However, if I don’t loosen up these muscles, I am setting myself up for injuries and pain that will keep me from running for a lot longer than it takes to suffer through the rolling.

The same is true of many aspects of an entity’s financial system. There are many controls that are recommended by accountants and auditors that may seem like overkill or painfully tedious. However, as I have explained in some of my posts regarding aspects of control systems, such as segregation of duties and double entry accounting, being proactive about creating and maintaining a robust financial control system goes a long way to keeping things from going horribly wrong in the future. I will be the first person to tell you that there are many parts of an accounting system that are not fun. For example, it would be so much easier to have checks come into a company and be dumped on an accountant’s desk and have that one accountant deal with recording the check in the books, depositing the check in the bank and then reconciling the bank statement at the end of the month. Way too many companies opt for the easier path and find many ways to justify their decisions – the accountant has been with them for years, the accountant is such a nice person and totally trustworthy and wouldn’t act in an unethical manner. It’s an easy path until the money is stolen and, more often than not, not recovered. Too many stories of beloved staff members who have turned out to be fraudsters and thieves should show people that a great personality is not an acceptable control measure. Way too many times, we discover that the friendly coworkers are able to perpetuate their crime for a long time because they just seem too good to be crooks.

Record-keeping can seem like such a drag. I mean, what fun is there is debits and credits and keep track of income statements and balance sheets. Oh, and don’t get me started on the headaches that a balance sheet that doesn’t balance can bring. Why would anyone want to keep track of order forms, receipts and other elements of an audit trail? When making an adjustment to the ledger, you know that you will totally remember why you processed the change, even ten years from now. You don’t need to provide backup or keep a record of why you made the change. You wouldn’t believe how often I hear this kind of talk from accountants. Six months later, practically none of them can explain a journal entry that doesn’t have backup and this is for the accountants that have not decided to move on to another company, leaving the person who has taken over their position completely in the dark. Especially since we live in an age when people are not married to one job for life, it is essential that anyone looking at a transaction can find out just about everything there is to know about the transaction without having to employ the services of a forensic accountant.

There are times when I start nodding off just at the thought of the some of the processes I need to go through. Sometimes I think – I don’t really need to check this; the accountant has done this a hundred times, so it is probably okay. But then I think about what might happen if I am incorrect. The thought of how much more I will have to do if I don’t perform the check and then have to clean up the mess afterward pushes me to suck it up and do things correctly the first time. When, on occasion, I find an error, I know that it’s good that I decided to do the right thing. Also, the fact that those in the finance department know that work is being reviewed and being given a look-over by others is a great deterrent to those tempted to engage in nefarious behavior. I also remind myself of this when my own work is being reviewed and my ego has to be reminded that even I can make mistakes and that, in the name of outputting a superior product, the checks on work are not only good but necessary.

Running a business is not all fun, games and glamour. There are times when the physically and mentally painful work must be done in order for the business to succeed and minimize errors and fraud. I groan in pain and have to will myself to remain diligent and not cheat on the foam rolling. The neighbors may wonder what is going on but I know that this is how I can minimize injuries and keep on running happy and healthy. Likewise, though I make less noise (at least, I think I make less noise) about some of the work that I have to do, I know that this is what must be done to keep the company happy and healthy. So, do what hurts – it’s good for you.

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Easy Going Down

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I am big on Ethics and I am glad when they are spelled out in a straightforward way. So, I am excited to see that the AICPA’s revised Code of Professional Conduct has made the subject of ethics easy to access and clearer. This is where the standards that CPAs are held up to are put into words and the easier those words are for everyone to understand, the better it is for all of us. It’s not just “trust me, I know what I’m doing”, it’s “look here and see what I am supposed to be doing. There is a code that I abide by and here it is in plain English.”

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‘Tis The Season

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A recent typhoon ripped through parts of the Philippines, causing unimaginable damage. People lost their homes, they lost their livelihoods and some even lost their lives. This tragedy has inspired many around the world to do what they can to help those affected by this typhoon. This tragedy has also inspired those with less noble intentions to do what they can to exploit the moment for financial gain. It is very important, therefore, when giving to give not only generously, but also smartly. As we are in the midst of the holiday season, which is also the time of the year when most charitable giving occurs, a lot of these pointers will apply to any giving that you do. I am sure that you would not want to find out that what you thought was a charitable gift was actually going to fund an ignoble stranger’s lavish lifestyle.

First, it is vital to know to whom your donation is going. At a time like this, you are very likely to be inundated with pleas from organizations. The pleas will be very good at laying out how dire things are right now; that is because things are dire. And because things are so dire, it is all the more important to know that any donation you are sending is actually going to help. Not all charities are created or managed equally. And, depending on the cause, not all charities will spend funds in the way that you would like them to. For example, some charities have funds that are dedicated to helping those affected by Typhoon Haiyan, while others may solicit funds using the typhoon as a draw, but not actually spend the money on that. Also, some charities spend a greater portion on their nonprofit work than others do. Fortunately for you, there are several resources that you can use in order to research charities so that you can make an informed decision about where you want to send your money. Examples are Charity Navigator, CharityWatch and GuideStar. Here, you can find tax return information, ratings in various categories and find out more about the leadership of the nonprofit.

Make sure your money is going where you think it is going. Recently, it came to light that many calls that appeared to be coming from a charity were actually coming from a for-profit telemarketer hired by the charity. What makes this a less than ideal manner in which to give to a cause is the fact that the telemarketing companies charge very high fees and, at times, the charity ends up handing over just about all the funds raised by the phone call campaigns and very little, if any, of the donations solicited are used for charitable causes. With this in mind, it makes more sense to cut out the middleman on the phone and donate directly to the charity, either via their website, by sending them a check directly or by calling them and making your donation. In this way, you will know that the majority of the money that you give will be used for good. And when you do give, be sure, also, that you are giving to the charity that you think you are giving to. Sometimes fraudsters will use a name that sounds similar to a legitimate charity and even so far as to create fake websites. Again researching the charity can go a long way to not getting scammed. It would be tragic to find out that you gave your money to The Rad Cross, not the Red Cross. Just be sure you know exactly who is getting your money, not kinda sorta.

When your donation is in response to a tragedy or disaster, find out what the most effective way to give is. Most of the time, with time being of the essence and the needs of those affected being so diverse, sending cash to a charity that is providing relief is the smartest option. There will be news reports of how people have lost everything and need food and clothing, among other things. If you pack a box of food and clothing, it may create logistical issues and delays. Sending clothing means that the charity will have to sort through the clothing, separating it by gender and size. They may have to clean this clothing and then determine how to get the clothing to people who it will actually fit. All this takes up a lot of time and money to do. Nothing is more mobile than money and this money can then be used to get exactly what is needed. Food has similar challenges, including navigating food safety issues. Of course, there is a time and a place where food and clothing donations are appropriate – around the holidays there are often coat and food drives. With these, it is helpful to know that a lot of clothing donation bins that you may see actually belong to for profit entities that then sell your donations for their personal gain. Be aware of this as you give and check to make sure that the bin belongs to a non-for-profit organization.

There are causes and issues that will greatly benefit from your gifts and donations this holiday. It may feel tedious that you need to research the causes that you wish to give to but that is because we live in a world where we need to be on the lookout for greedy scam artists. If you can give, give with your heart but don’t forget to consult with your head first.

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Break It Up!

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I often write about internal control systems and how important good internal controls are when it comes to preventing and detecting fraud and error. A big part of this is the separation of duties. I refer to this often but it struck me the other day that I have perhaps not been terribly clear about what exactly the concept of separation of duties is all about. How does one figure out how to separate duties effectively and what purpose does this separation serve?

In a business, if there is one person responsible for a financial process from beginning to end, there is a great risk of both fraud and error. Without another party to check, review or authorize a person’s work, any errors or fraudulent activity could very easily go undetected. Recently, I heard of a woman who worked at a not-for-profit, receiving and depositing donations. A donor called the not-for-profit to inquire about a check donation that she had sent in. The check, she said, had not yet been presented for payment. Upon investigation, it turned out that the employee at the not-for-profit had been feeling so overwhelmed by her duties that, instead of processing and depositing donations, she had been taking these donations home. Checks were found piled in her home. Had the not-for-profit instituted proper separation of duties, where another party was aware and had a record of checks that had been received at the not-for-profit, it would have become apparently, very quickly, that checks were not being deposited. In such circumstances, for example, one party would record checks as they arrived at the not-for-profit, pass a copy of the check on to one person who would record the received funds in the books and then give the original check to another person who would make the deposit. Now there would be three people who knew that funds had come into the entity and the person responsible for making the deposit would not be the person recording the deposit in the financial records.

When only one person is involved in a financial process, only that one person has to be convinced to commit fraud. However, if two or more people are involved in that process, the parties then have to agree to collude to commit a crime. Those two will have to be sure that one will not sell the other out, should something go wrong. That becomes risky as, with more than one person involved in a process, there is always another person who can speak up about errors or possible unscrupulous activity. The majority of frauds are reported by a whistleblower; the proper separation of duties can go a long way towards creating potential whistleblowers.

When thinking about separation of duties in an internal control system, you should think about splitting every transaction into three functions and assigning a different person to each function. These three functions are:

  1. Authorization, which is the approval process
  2. Execution which is the accounting and reconciling of the transaction
  3. Custody of the asset involved in the transaction.

For example, in the case of Rita Crundwell, she AUTHORIZED payments and transfers made by the city of Dixon. She also EXECUTED the transactions recording them in the books and reconciling the bank statements. She also had CUSTODY of the bank accounts, holding the checks, and making the transfers out of city bank accounts and into her own personal accounts. No one else was involved in these processes so no one else could ask questions about what was going on and why.

It is vital, when setting up an internal control system with the proper separation of duties, that this system is set up by a qualified accountant who has knowledge of processes, their weaknesses and where, in those processes, the authorization, execution and custody functions lie. The accountant should be able to explain how and why duties should be assigned to different people. The accountant should be able to work with a company’s complexities and staff restrictions to come up with the best ways to safeguard the assets of that company.

It may seem tedious and overly cautious but it is far smarter to have a finance system that discourages potential fraud, than to scramble around trying to recover assets after they have been stolen. Separation of duties goes a long way toward reducing the opportunities for fraud and creating greater possibilities that fraud and error will be detected. You want a system where an employee, under pressure to commit fraud, sees that others are checking on the process and that there is a well-organized system. You want that person to decide that trying to exploit the system and steal from the entity is too complicated. You want a system where, should someone actually decide to steal, they will be discovered through the various checks and balances built into the system. So, break it up!

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What’s The Problem?

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As my training long runs have become longer, so too has my preparation time for these runs. Yesterday, it took me about an hour to get ready for my 20 mile run. I had various things I needed to do before I could head out:

  • I have an atrocious sense of direction yet, especially when clocking many miles, I like to avoid boredom by running new and different routes on my long runs. So, usually the night before a run, I pull up a run-tracking website and search for routes that others close by have run. I then make notes, with street names and turns, on a small piece of paper. I make the notes in pencil so that, even if the paper gets damp during the run, the notes will not smudge. I map a route that is shorter than the distance I needed to run, giving myself at least a mile in which to get lost, because I get lost very often.
  • I have a banana and a packet of energy gel and wash it all down with some water. It has taken a lot of trial end error (still a work in progress) to figure out what, and when, I can and cannot consume during long runs. I also take some packets of energy gel with me, to take regularly during my run.
  • I cover my body with a fancy version of Vaseline in order to reduce the chances of getting chafed.  I have found that, just when I think I have all my bases covered, a new part of my body is chafed, usually by a new piece of clothing or wet weather. When I first started running, I only needed to treat a small part of my body and it took just a few seconds. Now I am at an almost head-to-toe process.
  • My running gear choices are made based on what protects my body and inspires me. So my clothing serves the dual purpose of being comfortable and cheering me on.
  • I apply sunscreen and check the weather to see whether or not I am going to need a cap to keep the sun out of my eyes.
  • I strap a water bottle to my arm. I also try to map my run so that I run through areas with water fountains so that I can refill my bottle, should I need to.
  • I use my asthma inhaler, put on my headphones and I’m good to go.

One should pay at least this much attention to protecting your financial control systems, and the check ups and improvements should be an ever-evolving process. Part of the process is ascertaining the flaws in the systems and correcting them. There are general rules that serve as guidance, but each entity has its own peculiarities, strengths and weaknesses. For example, though both should have a policy of separation of duties, a company of six people and a finance department of two will determine how they do this very differently from a huge multinational corporation with 500 employees. Though both will have an audit trail, a manufacturer will have documents that look quite different from a consulting firm. Setting up a financial system starts with general rules, such as:

  • The double entry accounting system, of course. The double entry accounting system helps detect errors and fraud in the books. Of course, it is not foolproof, but it is a powerful tool.
  • A written procedure manual is essential. This can be used as a reference so that employees have a checklist for the work they do. It is also helpful to have this manual so that management knows what is currently being done and can review this manual to come up with improvements and revisions to the system. This manual does not have to be a complicated tome that rivals the bible in heft and verbiage. It should be straightforward, unambiguous and easy to understand. The goal is to minimize errors and misstatements in the ledger, not to confuse the users with complex language and instructions.
  • Authorization controls are very important. An example is a requirement that checks over a certain value be signed by more than one account signatory. The reasoning here is that it becomes more difficult for collusion to happen, the more people there are involved in a transaction.
  • Variance analysis of the income statement and review of the balance sheet. Regular analysis of the numbers in the books, how they relate to other accounts in the books and how they trend over time helps highlight anomalies and, at times, spot places where errors are happening or someone is trying to hide fraud.
  • The aforementioned separation of duties. No one person should be in charge of an entire accounting process. The person taking checks to deposit in the bank account, should not be the same person recording the income in the books – that would give the opportunity for checks to disappear without anyone knowing they are missing. The person with physical custody of inventory must not be able to adjust the inventory numbers in the books.
  • Regular audits of the books, both internal and external, should be performed.  A review of the financial information by parties other than those who prepare the information is an important way to check for misstatements and errors. It is a great way to get objective points of view about the character and content of transactions and whether or not they have been properly recorded.

Armed with the general rules, it is then vital to adapt these rules to the entity. A small company does not have the staff or budget for an internal audit department. However, management can decide to occasionally have auditors in to conduct audits of their records and control systems, especially if they have concerns about vulnerabilities or fraudulent activity. A company that decides to go paperless must carefully plan and closely review their new system to ensure a proper audit and authorization trail remains. They should also think about proper data backup plans. It should take more than a small fire in the server room to destroy a company’s records. Even with a small company, separation of duties is possible. A company can be creative with this having, for instance, the receptionist keep a log of checks that are received before they go to the accountant for recording in the ledger.

In the same way that it is with my running, managing and controlling financial systems is an eternal work in progress. As situations, technology and company profile change, so too do the challenges, weaknesses and strengths of the entity’s financial systems. Determining what the issues are is key to finding solutions to resolve them. There may be changes in local, state and federal laws that will require special reports or a different method of recognizing income and expenses. Staffing at a company may grow or shrink and, therefore, the assignment of duties in the company may need to change. This change may be to prevent one person taking over an entire process, which would lead to a lack of review of their work and an increase in the opportunity for fraud. This change may also be to improve a system because a larger staff can lead to more effective separation of duties. There may be software innovations that improve efficiency and staff will need to be trained in how to use this improved software.

It is important to remember that the evolution of a financial system is ongoing and that rules and procedures are not set in stone. To quote Tom Hood, “In a period of rapid change and increasing complexity, the winners are going to be the organizations and people who can learn faster than the rate of change and faster than their competition.” This includes learning how to improve and strengthen the financial systems and their controls. The goal is to always get stronger, more efficient and to prevent injury or disaster, be you running a marathon or running an entity.

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All Over This One

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In the United States, bribery of a public official is illegal. Public officials, on a state, local or national level, tend to hold a lot of power. It would not be right to allow those among us with deep pockets to use the contents of said pockets to get unfair benefits, such as no-bid contracts, tax breaks and “get out of jail free” passes. In 1977, the Foreign Corrupt Practices Act (FCPA) made it illegal for U.S. persons, companies and their subsidiaries to bribe foreign government officials. The FCPA was further amended in 1998 to apply to foreign people and companies whose payments pass through the United States. The FCPA also applies if a foreign party authorizes a bribe via an email that is stored on a server in the United States. It is a far-reaching law with two main provisions – an anti-bribery provision that is generally enforced by the U.S. Department of Justice (DOJ) and accounting and record-keeping provision that is generally enforced by the Securities and Exchange Commission (SEC).

A huge incentive to not violate the FCPA is the severity of the punishment. The criminal and civil fines for violating the FCPA apply to companies and individuals alike. Companies can be fined up to a maximum of twice the benefits sought by the bribe. For individuals, fines can be up to $5 million and 20 years in jail. Fines and jail time can apply for either the corrupt payment or violation of the books and records provision. In addition to the fines, companies may also receive sanctions such as the loss of export licenses and disqualification from U.S. government contracting. For example, in 2008, Siemens was fined more than $1.3 billion by the DOJ, the SEC and German regulators and, more recently, Walmart is under investigation for bribery of officials in Mexico, China and elsewhere.

To avoid the fines and jail time, individuals and firms must comply with both provisions of the FCPA. The first, bribery, seems straightforward but I shall go over it so we are clear.

  1. Do not make payments to public officials in order to get special favors. An officer at state-owned entity is also considered a public official. It is safest, and ethical, to not pay bribes to anyone. However, be mindful of the fact that bribes of public officials will get you into the most trouble.
  2. If you invite public officials on a trip to show off your business or to a conference, do not throw in extras, such as a trip to Disneyland for their family. Keep it all above-board and about business.
  3. “Gifts” such as watches that costs thousands of dollars or a suitcase of cash are taboo.
  4. Payments related to the political campaigns of foreign governments are also not allowed.

The accounting provisions are where the forensic accountant is very active, working for both the companies and for the DOJ and SEC. Corporations covered by the FCPA are required to make and maintain books and records that accurately and fairly reflect their transactions and to devise and keep a sufficient system of internal controls. This is so that government agencies inspecting the books and records of the corporation will be able to easily see that the corporation is in compliance with the anti-bribery laws. The controls are so that the employees of the corporation do have the opportunity to commit fraud or bribery. When companies and individuals are paying bribes to public officials, it is highly likely that they will try to hide these transactions in their ledgers so they are not immediately identifiable as illegal transactions.

Companies with international operations will often have a department that review the books and internal control systems to ensure that they are complying with FCPA provisions. From time to time, the company may call in a forensic accountant to perform an internal investigation. This may happen either because the company suspects that untoward behavior has occurred or as a periodic review of their books and systems.

The DOJ and SEC will also employ the services of forensic accountants when they investigate companies and individuals that they suspect of violating the FCPA. When cases like this happen, there will be forensic accountants working for both the government agencies and the entity being investigated. In addition to discovering whether or not bribery has occurred, the company and the government agencies seek to determine the extent of the violations and determine the value of the gains realized and, therefore, the fines and other penalties to be levied by the government and avoided by the corporation. These investigations can be very extensive and span several continents, depending on the size and reach of the corporation. Financial forensic experts are instrumental and very involved in these investigations, tracing payments and working diligently to find what the corporation has tried to hide both on and off its books.

Often, an element of a FCPA settlement is the appointment of a multi-year monitor. This happens after the investigation and is an area where forensic accountants can use their expertise to examine the company’s control environment and record-keeping and assess the progress the company has made toward compliance with the law.

In recent years, the DOJ and the SEC have become very aggressive about enforcing the FCPA. In addition to this, other nations have enacted their own anti-bribery laws; the U.K. Bribery Act of 2010 has been in force since July 2011 and criminalizes bribe payments to private individuals as well as government officials. Also, there is more and more international cooperation in the investigation and enforcement of this law. Through it all, the work and expertise of financial forensic experts are extensive and vital. A lot of big firm lawyers think of the FCPA when they think of forensic accountants. It is indeed one of the many places you will find the financial forensic expert.

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