Fraud Considerations When Making Business Acquisitions

The COVID-19 pandemic has often made the due diligence process for business acquisitions more complex and time-consuming. But if you’re buying a company, it’s critical to dedicate your full attention to this part of the M&A process — not only to confirm that the selling business is as valuable as you believe it to be, but to protect against fraud. Plan early to engage a fraud expert to review financial statements and other documents for signs that you could be dealing with a dishonest seller. Subtle warning signs When reviewing a seller’s financial statements, forensic experts look for subtle warning signs of fraud. These include excess inventory, a large number of write-offs, an unusually high number of voided discounts for returns, insufficient documentation of sales and increased...

Fraud Potential When Factoring Receivables

If your business struggles to generate steady cash flow from operations, factoring is a possible solution. With factoring, a business sells the right to collect on customer invoices to a factoring company in exchange for an immediate payment. If you have slow-paying customers, factoring accelerates the collections process. But some companies abuse factoring and use it to commit fraud.  The basics There are two forms of invoice factoring. With recourse factoring, the business selling invoices agrees to repay the factor the advance it received (a percentage of the invoice’s face value, minus a fee) if a customer doesn’t pay the full amount. Non-recourse factoring is less common because it involves more risk for the factor. The business doesn’t have to repay the factor if a customer becomes insolvent during...

How to Reduce Receivables Fraud Risk

One of the most common routes for occupational fraud perpetrators runs through the accounts receivable department. Unless you’re aware of these schemes and take steps to prevent them, your business could face serious financial losses. Creative misappropriation Receivables fraud occurs when dishonest employees divert customer payments for their personal use. The most popular method is known as “lapping.” It involves the application of receipts from one account to cover misappropriations from another. For example, rather than credit Customer A’s account for its payment, a dishonest employee pockets the funds and later posts a payment from Customer B to A’s account, Customer C’s payment to B’s account and so on. Dishonest employees also often abuse discounts and write-offs. Instead of crediting a payment to the customer’s account, fraudsters might...

Avoiding Fraudulent Estate Transfers

If you have an estate plan and also have creditors, you could be a fraud perpetrator — without knowing it or intending to defraud anyone. In some circumstances, creditors can challenge gifts, trusts and other strategies for leaving assets to heirs as fraudulent transfers. Here’s how to keep your estate plan from running into trouble. 2 types Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). The law allows creditors to challenge transfers involving two types of fraud: Actual fraud. This means making a transfer or incurring an obligation “with actual intent to hinder, delay or defraud any creditor,” including current creditors and probable future creditors. Constructive fraud. This is a more significant threat for most people because it doesn’t involve intent to defraud. Under UFTA,...

Put Employees to Work Fighting Fraud

You may have the best internal controls in the business world, but if your employees don’t follow them, your company is at serious risk for fraud. The same is true if workers aren’t aware of your company’s risks and can’t recognize red flags. The solution? Educate them. Training is critical A forensic accountant can conduct on-site, broad-based training for employees in the form of live or virtual presentations. This expert might use role-playing to help staff understand the various forms fraud can take, as well as how perpetrators think and identify their victims’ vulnerabilities and weaknesses. Enlisting the help of external experts is particularly important for smaller businesses. Not only are they more vulnerable to fraud, but they’re less likely to have in-house fraud expertise. Small-business training can...

Startup Investments That May Be Too Good To Be True

Many startup companies require access to large sums of investment capital to take on well-established competitors. The need to raise such funding may encourage a startup’s founder to paint an overly optimistic picture of the business and exaggerate its ability to succeed. In some extreme circumstances, founders may resort to deception to convince investors to back their ventures. That’s fraud. Silicon Valley warning A medical testing startup provides a cautionary tale of what can happen when an aggressive entrepreneur plays fast and loose with the truth. Based on the extravagant claims of the Silicon Valley company’s founder, the startup raised more than $700 million and secured a $10 billion valuation. When evidence emerged that it couldn’t conduct extensive medical tests on tiny amounts of blood as it...

Make Your Fraud Contingency Plan a Blueprint for Swift Action

Over the past year, most businesses have been forced to contend with multiple crises, including COVID-19, social unrest and financial challenges. The last thing you need right now is a fraud incident. But if your company is defrauded, make your fraud contingency plan one that can help mitigate the damage. Identifying likely scenarios No contingency plan can cover every possibility, but yours should be as wide-ranging as possible. Work with your senior management team and financial advisors to devise as many fraud scenarios as you can dream up. Consider how your internal controls could be breached — whether the perpetrator is a relatively new hire, an experienced department manager, a high-ranking executive or an outside party. Next, decide which scenarios are most likely to occur given such factors...

New Fraud to Watch Out for in 2021

Whew, you made it through 2020! But don’t rest easy yet as there's new fraud to watch out for in 2021. The fraud perpetrators enjoyed a profitable year in 2020, and there are signs they may continue to feed off Americans as long as the pandemic is active. Here are several new scams. PPP fraud Struggling small-business owners have welcomed last month’s 11th hour extension of the Paycheck Protection Program (PPP). They aren’t alone: Fraudsters skilled at falsifying loan applications are also likely rubbing their hands in anticipation. The Justice Department has brought charges against at least 80 individuals for stealing $127 million from the first PPP. Law enforcement expects to charge more (likely many more) con artists as evidence is uncovered. Indeed, the House Select Subcommittee on...

Prevent and Detect Insider Cyberattacks

In one recent cybercrime scheme, a mortgage company employee accessed his employer’s records without authorization, then used stolen customer lists to start his own mortgage business. The perpetrator hacked the protected records by sending an email containing malware to a coworker. This particular dishonest worker was caught. But your company may not be so lucky. One of your employees’ cybercrime schemes could end in financial losses or competitive disadvantages due to corporate espionage.  Best practices Why would trusted employees steal from the hand that feeds them? They could be working for a competitor or seeking revenge for perceived wrongs. Sometimes coercion by a third party or the need to pay gambling or addiction-related debts comes into play. Although there are no guarantees that you’ll be able to foil every...

4 Tips for Preparing a Fraud Case for Law Enforcement

If you’ve caught an employee stealing from your company, you may think that turning the person over to the police will result in prosecution. That’s not necessarily true. Law enforcement officials pursue and reject cases for many reasons. So if you’re determined to request prosecution of an occupational fraud perpetrator, take the following steps to help in preparing a fraud case. 1. Make it easy to follow In the rush to submit a case to law enforcement, it’s easy to forget that the police and prosecutors won’t necessarily understand your industry’s jargon or understand your business’s accounting records. Make it easier for everyone to understand what the perpetrator might have done and why it deserves their attention. Preparing a document that defines acronyms and common terms used...