financial

Fraud Awareness and the Small Business 2016

By Frank Stover, CPA/CFF/CGMA, CFE

Audit Manager at Atchley & Associates, LLP

The Association of Certified Fraud Examiners has released the biennial Report To The Nations on Occupational Fraud and Abuse, a 2016 Global Fraud Study.

For small business the fraud that owners will most often see committed against them or their company is “occupational fraud”.  The Association of Certified Fraud Examiners defines occupational fraud “as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”  Occupational fraud can manifest itself in many ways.  Nor is it limited by gender.

Based upon the statistics and information contained in the “Report to the Nations on Occupational Fraud and Abuse”, 2016 Global Fraud Study, approximately two thirds of the reported cases targeted privately and publicly held companies.  Private companies suffered median losses of $180,000. The median losses suffered by small organizations (those with less than 100 employees) was the same as those of the largest organizations, but the impact upon smaller organizations would be much greater.  The total losses caused by the cases studied exceeded $6.3 billion. It is estimated that fraud costs organizations 5% of revenues each year, applying this percentage to the Gross World Product of $74.16 trillion results in a potential total fraud loss worldwide of $3.7 trillion.  Constant vigilance to prevent fraudulent activity is something that small business owners must practice every day.

Generally, occupational fraud categorized as financial statement fraud, misappropriation of assets, or corruption.  Asset misappropriation was the most common form of fraud reported in more than 83% of the cases studied.  Financial statement fraud will typically involve falsification of an organization’s financial statements or some form of regulatory or financial report. Examples include overstating assets and revenues, or understating liabilities or expenses to achieve personal gain.  Misappropriation of assets is the theft or misuse of an organization’s assets, such as skimming revenues, stealing inventory or committing payroll fraud.  Corruption involves fraudsters wrongfully use their influence in a business transaction to procure some benefit for themselves or another person(s), contradicting their duty to their employer or the rights of another, for instance by accepting kickbacks or engaging in conflicts of interest.

94.5% of the cases studied involved the perpetrator making efforts to conceal their fraud by creating or altering physical documentation.

For Small businesses cash, inventory, payroll and misuse of organization assets are the most common areas of fraud occurrence.  Cash is the most often pilfered from small business but because of its nature and importance to small businesses it is usually discovered within one month.  Inventory fraud is usually not discovered until later because small organizations will be more focused on operation measures (for example, revenues run rates, billing cycle  and accounts receivable information) in the short term and inventory will not be counted or reconciled against purchases and jobs in progress until quarter or year end.  Payroll fraud is usually committed by persons who have some form of operational control and authorization such that they can add phantom employees to the payroll or in collusion with others falsified time records submitted to the payroll department, this type of fraud is most usually discovered when there is turnover in personnel, a “falling out” between conspirators, or some form of periodic management review and reconciliation of historical project costs against approved budgets.  Misuse of organization assets many times occurs when a service company employee uses their employer’s assets on the weekend and holidays to run another business on the side, discovery of this type of fraud will usually occur when a disgruntled customer of the employee’s side business complains regarding defective work or makes a warranty claim, control of physical access to company operating assets during no business hours and mileage logs reconciliations are several ways to prevent or detect such abuse.

The most common detection methods in the cases studied were tips (39.1%).  Organizations that had reporting hotlines were much more likely to detect fraud through tips.

There are fraud policies and controls which can assist small businesses in deterring bad behavior.  Some of these include having a clearly written and communicated fraud policy which describes how and who handles fraud matters and investigations within the organization, what actions the organization considers to constitute fraud, reporting procedures (anonymous tip lines, a designated official, etc.), and what consequences the organization will take for such activity and the dedication to follow through with those stated consequences.

Atchley & Associates, LLP is a group of dedicated professionals, which include Certified Fraud Examiners, who can review, assess and make recommendations regarding small business systems of internal controls to decrease the likelihood of fraud being committed.

New lease accounting standards are on the way

by Tyler Mosley, CPA, CFE

Audit Manager at Atchley & Associates, LLP

 

On February 25, 2016, the Financial Accounting Standards Board (FASB) released accounting standards update No. 2016-02 which amended the Accounting Standards Codification Topic 842, Leases.  The previous accounting model for leases in generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) did not require lessees to recognize the assets and liabilities arising from operating leases but it did require lessees to recognize assets and liabilities arising from capital leases.  Some users of the financial statements complained that the financial statements of two similar entities could read differently based on whether or not they accounted for their leases as operating leases or capital leases.

FASB decided to address those criticisms by modifying the lessee accounting model in GAAP to require a lessee to recognize assets and liabilities for the rights and obligations created by leases. The new guidance requires a lessee to recognize the lease assets and lease liabilities for all leases with a lease term of more than 12 months. FASB’s goal is to provide a more faithful representation of a lessee’s assets and liabilities and enhance disclosures about a lessee’s financial leverage and its leasing activities.

The proposed standard does not provide for the “grandfathering” of existing leases and would require the new guidance to be applied to all existing lease agreements.  Entities with significant lease exposure should reach out to their leasing entity to discuss the impact of having to report all leases with a term greater than 12 months on their balance sheets.  Entities with loans with financial institutions should also consider discussing the impact of the new standard on any loan covenant ratios that could affect compliance with debt obligations.

The new lease accounting standards are effective for fiscal years beginning after December 15, 2018 for the following entities:

  1. A public business entity
  2. A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market
  3. An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC)

For all other entities, the standard is effective for fiscal years beginning after December 15, 2019.

Accounting Systems and Chart of Accounts – Foundations for Financial Success

by Jeremy Myers

Audit Supervisor at Atchley & Associates, LLP

Accounting systems come in many shapes and sizes, from the simplest forms of QuickBooks to the more complex and robust forms of SAP and Oracle. The main objective of any accounting system is that it can store and produce meaningful accounting information for its users while being in line with your organizations’ vision, strategies, and needs. The correct accounting system can make the lives of its users better by minimizing the tasks needed to operate the books of any organization.

First your organization must identify the complexities of its operations to discover how the financial information will be used, i.e. provided to owners of the organization, lenders, donors, fundraisers, grantors, department heads, boards or those charged with governance, etc… Once it is determined who and how the financials of your organization will be used the second step is to select a system that fits those needs with potential room to grow or customize to best fit your needs.

Once the proper accounting system is selected, the next step to help achieve the goals of the accounting system is to set up a chart of accounts that is again useful to the users of the information. Setting up a consistent chart of accounting and using consistent numbering and naming convention is key. For example, if all cash accounting have the same starting numbers 1000, 1001, 1002 and the banks name, when it comes time to reconcile the bank accounts, it will be very easy to tell which cash account goes to which bank reconciliation and bank account. If all salary accounts are in the 5000s and all revenue for a certain product or funding source is 4100s then pulling information and grouping in a way that is useful to your organization will be faster. Always remember to use spacing between accounts as you never know when your organization will develop a new product or obtain a new funding source, this will allow you to keep the account numbering consistent, unique, and identifiable.

If your organization has multiple lines of business, be it funding sources, products, or services, setting up a fund code as a part of the account number will help track the performance, restricted assets, debt, revenues, and expenses related to each line of business. By simply adding a few digits to each of the account numbers, 01-1000 – “Bank Name” – maybe related to unrestricted activities, 02-1000 – “Bank Name” – maybe related to restricted activities, and 15-5000 – “Salaries” – would be related to specific program’s salaries.

Once your accounting system has been selected and chart of accounts setup and both are in line with the organization’s vision, strategies, and needs pulling out the revenue and expenses related to new products or projects or to see how division 15 is performing will only be a few keystrokes away. Leveraging your accounting system and chart of accounts to work for your organization is setting up a solid foundation for financial success, no matter how large or small your organization may be.