Southbourne Tax Group Review: How to reduce your tax-time burden as a property investor

Submitting your tax returns properly and correctly is crucial as a property investor. Southbourne Tax Group, as a company committed to giving help to people with their taxes, prepared the following simple tax tips to provide property investors some guidance in handling their taxes.

Having completed and appropriate returns are really important because when submitting tax returns, landlords usually come under inspection. One of the things that Southbourne Tax Group needs you to do is to consult your accountant to identify what can and cannot be claimed as a tax-deductible expense. This way, you can make sure that all claims are legitimate and the tax return amount is maximized.

Getting the professional service and advice from a tax specialist will make your taxes easier as well. Southbourne Tax Group suggests continuing reading to learn more tax tips.

First, in order to reduce the tax payable, offsetting the net loss generated by negative gearing against other income is suggested. As a landlord, you can claim the interest if a property is available for rent, but you can’t claim the interest for the full 12 months if that is lived for half a year and then leased as a holiday rental for the other half.

Second, it is important to ensure having the right coverage in checking your insurance policy. Experts also said that landlords won’t be covered for certain risks included in property investing with a standard home and contents insurance policy.

Third, do not forget to claim the costs that you are rightfully entitled to, said Southbourne Tax Group. As said earlier, it is really important to discuss and confirm with your accountant first on what can and cannot be claimed before submitting your claim.

Fourth, you can claim the costs of working from home if you are one of those self-managing landlords. However, not all costs can be claimed such as buying a computer and the monthly internet bills, but a fair amount of this can be deductible.

Lastly, hiring a property manager and the costs involved in it can be a deductible expense too, plus they can be very helpful to you. Hiring a property manager can help you save time because they can create a potential tax benefit while also assisting with the organization at the same time.

Getting the services of a trusted property manager can help reduce your burden during tax time since they can take good care of the administrative responsibilities involved in an investment property, along with compiling and completing important paperwork.

Reducing your tax-time burden could include different factors and some of which were discussed in this post. Southbourne Tax Group can provide a helping hand if you need more tips or advice, just give them a call today and witness their professional tax service.

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The Southbourne Tax Group: Tips to maximize your tax refund

The 2017 tax season began this month and local tax accountant, Jennifer Eubanks with Mcneel CPA is offering some tips for people who haven’t filed for their refund yet.

“A lot of people that are self-employed don’t look at taking the self-employed health insurance,” says Eubanks, “With health insurance being so high you can take a deduction.”

Another deduction Eubanks says people often miss out is their health savings account where you put money into the account but only use it to foot medical bills.

“You also get to take a deduction on your tax return for putting money into a health savings account,” says Eubanks. “It’s kind of like a retirement account except it is for medical expenses.”

Meaning just like a 401k, the more you put in the less taxable income you have, increasing your refund.

Another tip is for parents that have kids in college, American opportunity tax credit is available.

“Anything that relates to school like books, tuition,” says Eubanks. “Any kind of qualifying expenses for that, they can take that deduction so they need keep up with all the expenses they have while they’re in school.”

Eubanks says the IRS is cracking down on fraud this year delaying the release of earned income credit and additional child tax credit until mid Feb.

“Claiming children that are not supposed to be on their tax return so the IRS is looking into more of those earned income credit trying to eliminate a lot of fraud,” says Eubanks.

When filing your taxes Eubanks says to keep all your receipts and expenses organized to make the filing process easier.

Employers have until Jan. 31 to send W-2 forms and tax returns have to be filed by April 18.

The Southbourne Tax Group: 3 Tips to Avoid Charity Tax Deduction Scams

Groups and individuals pretending to be charitable organizations are especially active around tax season, as they try to attract donations from Americans looking for a tax deduction. Unfortunately, its one of the “Dirty Dozen” Tax Scams for the 2017 filing season, according to the IRS.

“Fake charities set up by scam artists to steal your money or personal information are a recurring problem,” said IRS Commissioner John Koskinen. “Taxpayers should take the time to research organizations before giving their hard-earned money.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their returns or hire someone to prepare their taxes.

Perpetrators of illegal scams can face significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

The IRS offers these basic tips to taxpayers making charitable donations:

  1. Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity’s EIN.
  2. Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers. Confirm that those soliciting a donation are calling from a legitimate charity.
  3. Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

Fraudsters may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.

To help disaster victims, the IRS encourages taxpayers to donate to recognized charities. Disaster victims can call the IRS toll-free disaster assistance telephone number (866-562-5227). Phone assistors will answer questions about tax relief or disaster-related tax issues.

Find legitimate and qualified charities with the Select Check search tool on IRS.gov. (EINs are frequently called federal tax identification numbers, which is the same as an EIN).

 

The Southbourne Tax Group: Six Strategies For Fraud Prevention In Your Business

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Employee fraud is a significant problem faced by organizations of all types, sizes, locations and industries. While we would all like to believe our employees are loyal and working for the benefit of the organization (and most of them probably are), there are still many reasons why your employees may commit fraud and several ways in which they might do it. According to the 2014 Report to the Nation on Occupational Fraud and Abuse (copyright 2014 by the Association of Certified Fraud Examiners, Inc.), research shows that the typical organization loses 5% of its annual revenue each year due to employee fraud. Prevention and detection are crucial to reducing this loss. Every organization should have a plan in place as preventing fraud is much easier than recovering your losses after a fraud has been committed.

Types of Fraud

Fraud comes in many forms but can be broken down into three categories: asset misappropriation, corruption and financial statement fraud. Asset misappropriation, although least costly, made up 90% of all fraud cases studied. These are schemes in which an employee steals or exploits its organization’s resources. Examples of asset misappropriation are stealing cash before or after it’s been recorded, making a fictitious expense reimbursement claim and/or stealing non-cash assets of the organization.

Financial statement fraud comprised less than five percent of cases but caused the most median loss. These are schemes that involve omitting or intentionally misstating information in the company’s financial reports. This can be in the form of fictitious revenues, hidden liabilities or inflated assets.

Corruption fell in the middle and made up less than one-third of cases. Corruption schemes happen when employees use their influence in business transactions for their own benefit while violating their duty to the employer. Examples of corruption are bribery, extortion and conflict of interest.

Fraud Prevention

It is vital to an organization, large or small, to have a fraud prevention plan in place. The fraud cases studied in the ACFE 2014 Report revealed that the fraudulent activities studied lasted an average of 18 months before being detected. Imagine the type of loss your company could suffer with an employee committing fraud for a year and a half. Luckily, there are ways you can minimize fraud occurrences by implementing different procedures and controls.

  1. Know Your Employees

Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. Observing and listening to employees can help you identify potential fraud risk. It is important for management to be involved with their employees and take time to get to know them. Often, an attitude change can clue you in to a risk. This can also reveal internal issues that need to be addressed. For example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this could lead him or her to commit fraud as a way of revenge. Any attitude change should cause you to pay close attention to that employee. This may not only minimize a loss from fraud, but can make the organization a better, more efficient place with happier employees. Listening to employees may also reveal other clues. Consider an employee who has worked for your company for 15 years that is now working 65 hours a week instead of 40 because two co-workers were laid off. A discussion with the employee reveals that in addition to his new, heavier workload, his brother lost his job and his family has moved into the employee’s house. This could be a signal of a potential fraud risk. Very often and unfortunately, it’s the employee you least expect that commits the crime. It is imperative to know your employees and engage them in conversation.

  1. Make Employees Aware/Set Up Reporting System

Awareness affects all employees. Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this. Honest employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or theft. These employees are assets in the fight against fraud. According to the ACFE 2014 Report, most occupational fraud (over 40%) is detected because of a tip. While most tips come from employees of the organization, other important sources of tips are customers, vendors, competitors and acquaintances of the fraudster. Since many employees are hesitant to report incidents to their employers, consider setting up an anonymous reporting system. Employees can report fraudulent activity through a website keeping their identity safe or by using a tip hotline.

  1. Implement Internal Controls

Internal controls are the plans and/or programs implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce the risk of fraud from occurring. For example, a retail store has one cash register employee, one salesperson, and one manager. The cash and check register receipts should be tallied by one employee while another prepares the deposit slip and the third brings the deposit to the bank. This can help reveal any discrepancies in the collections.

Documentation is another internal control that can help reduce fraud. Consider the example above; if sales receipts and preparation of the bank deposit are documented in the books, the business owner can look at the documentation daily or weekly to verify that the receipts were deposited into the bank. In addition, make sure all checks, purchase orders and invoices are numbered consecutively. Use “for deposit only” stamps on all incoming checks, require two signatures on checks above a specified dollar amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers setup and make payments to fictitious vendors, usually mailed to a P.O. Box.

Internal control programs should be monitored and revised on a consistent basis to ensure they are effective and current with technological and other advances. If you do not have an internal control process or fraud prevention program in place, then you should hire a professional with experience in this area. An expert will analyze the company’s policies and procedures, recommend appropriate programs and assist with implementation.

  1. Monitor Vacation Balances

You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for a period of time. It is also a good idea to rotate employees to various jobs within a company. This may also reveal fraudulent activity as it allows a second employee to review the activities of the first.

  1. Hire Experts

Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) can help you in establishing antifraud policies and procedures. These professionals can provide a wide range of services from complete internal control audits and forensic analysis to general and basic consultations.

  1. Live the Corporate Culture

A positive work environment can prevent employee fraud and theft. There should be a clear organizational structure, written policies and procedures and fair employment practices. An open-door policy can also provide a great fraud prevention system as it gives employees open lines of communication with management. Business owners and senior management should lead by example and hold every employee accountable for their actions, regardless of position.

Fraud Detection

In addition to prevention strategies, you should also have detection methods in place and make them visible to the employees. According to Managing the Business Risk of Fraud: A Practical Guide, published by Association of Certified Fraud Examiners (ACFE), the visibility of these controls acts as one of the best deterrents to fraudulent behavior. It is important to continuously monitor and update your fraud detection strategies to ensure they are effective. Detection plans usually occur during the regularly scheduled business day. These plans take external information into consideration to link with internal data. The results of your fraud detection plans should enhance your prevention controls. It is important to document your fraud detection strategies including the individuals or teams responsible for each task. Once the final fraud detection plan has been finalized, all employees should be made aware of the plan and how it will be implemented. Communicating this to employees is a prevention method in itself. Knowing the company is watching and will take disciplinary action can hinder employees’ plans to commit fraud.

Conclusion

Those who are willing to commit fraud do not discriminate. It can happen in large or small companies across various industries and geographic locations. Occupational fraud can result in huge financial loss, legal costs, and ruined reputations that can ultimately lead to the downfall of an organization. Having the proper plans in place can significantly reduce fraudulent activities from occurring or cut losses if a fraud already occurred. Making the company policy known to employees is one of the best ways to deter fraudulent behavior. Following through with the policy and enforcing the noted steps and consequences when someone is caught is crucial to preventing fraud. The cost of trying to prevent fraud is less expensive to a business than the cost of the fraud that gets committed.

The Southbourne Tax Group: 10 Ways to Identify Accounts Payable Fraud

When Sarbanes-Oxley was passed in 2002, many companies were forced to take an in-depth look at internal Accounts Payable controls. Implementing internal controls takes time, but may prove to be a very cost-effective measure if any fraud or leakages are found. Here are a few approaches you can try to tighten up your A/P audit. They require some degree of data mining and programming capability but are fairly straightforward to implement.

1) Duplicate Payments

Duplicate payments in most cases may not be fraud-related, but continue to be a significant A/P leakage that is both preventable and recoverable. Mark Van Holsbeck, Director of Enterprise Network Security for Avery-Dennison, estimates that corporations make duplicate payments at the rate of 2%. Two percent may not sound like much, but if your company’s A/P invoices total $75 million, duplicate payments may account for $1.5 million. Take a look at the statistics:

Medicare – The Dept of Health & Human Services’ Inspector General estimated that Medicare made $89 million of duplicate payments in 1998.

Cingular – We have once again discovered that payments made online as an Electronic funds payment for TDMA accounts, have been deducted twice from the customer’s checking account.

Medicaid – We identified at least $9.7 million in such duplicate payments during our two-year audit period, and estimated that as much as $31.1 million in additional duplicate payments may have been made.”

In a rush to find the overpayments, many companies have emerged: A/P Recap, Automated Auditors, AP Recovery, ACL, Cost Recovery Solutions, and more. That these companies are thriving is a testament to the fact that duplicate payments still occur at an alarming rate.

Many software packages have some controls over duplicate invoices but it usually takes some in-depth querying to find them all. For example, many accounting packages do a duplicate invoice check and prevent you from keying in a duplicate invoice number for the same vendor. But just add an “A” to the invoice number or change a penny and you are on your way to a duplicate payment. Another common mistake is found in vendor files; duplicate vendor numbers for the same vendor is the number one cause of duplicate payments.

Here is what we recommend for developing an accurate and comprehensive dupe payment report:

1) Implement the 5 basic dupe searches if you haven’t already.  These are:

script

A programmer in your IT department will be able to help you with the SQL code for these joins.  The SQL code will look something like this to create the first report “EEEE”:

CREATE TABLE DUPES_EEEE AS

SELECT A.*

FROM   INVOICES A, INVOICES B

WHERE  A.VENDORID=B.VENDORID AND

A.INVOICENUM=B.INVOICENUM AND

A.INVOICEDATE=B.INVOICEDATE AND

A.INVOICEAMT=B.INVOICEAMT AND

A.ID <> B.ID

The ID field should be a unique record identifier to distinguish one record from another.  In Microsoft Access, these fields are usually created by using the data type “AutoNumber”.  In open code, a field such as this can be easily created using a counter and incrementing it by 1 for every record (COUNTER = COUNTER + 1).

2)         Implement some fuzzy-matching

Implementing “similar” fuzzy-matching instead of exact matching is what makes this approach more accurate and powerful than many.  We define “similar” to mean the following:

Invoice numbers are considered similar if they are exact after stripping out any

zeros and any alphabetic characters as well as punctuation characters.

Invoice dates are considered similar if the difference between the dates is less than a designated amount such as 7 days.  For example, if you entered “7” days for the date tolerance, then all invoices with a date different of 7 or less would be considered similar.  We generally set the date tolerance to 21 days to catch duplicate payments made 3 weeks apart; this often eliminates catching legitimate rent payments.

Amounts are considered similar if they meet one of three criteria:

  1. the amounts are 5% +/- the other amount
  2. one amount is exactly twice as much as the other, i.e. $220.15 and $440.30
  3. the amounts start with the same first 4 digits, i.e. $123.45 and $1,234.55

Try using similar matching on the invoice number, date, and amount fields when you conduct your next duplicate payment audit – your reports will be shorter and more accurate!

2) Benford’s Law

What is it?

Benford’s Law (which was first mentioned in 1881 by the astronomer Simon Newcomb) states that if we randomly select a number from a table of physical constants or statistical data, the probability that the first digit will be a “1” is about 0.301, rather than 0.1 as we might expect if all digits were equally likely. In general, the “law” says that the probability of the first digit being a “d” is

Where ln refers to the natural log (base e).  This numerical phenomenon was published by Newcomb in a paper entitled “Note on the Frequency of Use of the Different Digits in Natural Numbers”, which appeared in The American Journal of Mathematics (1881) 4, 39-40. It was re-discovered by Benford in 1938, and he published an article called “The Law of Anomalous Numbers” in Proc. Amer. Phil. Soc 78, pp 551-72. [1]

You can actually re-create this function in Excel quite easily.  In one column, type 1, 2, 3, through 9, making 9 rows in cells A1 through A9.  In the second column, cell B1, type the function “=ln(1 + 1/A1) / ln(10)” and copy this function for cells B2 through B9 and it will create the probabilities.

How is it used to identify fraud?

If we know the normal frequency of digits, then we can identify digit frequencies that violate that normal behavior.  For example, Benford concluded that, out of a group of numbers, the first digit will be “1” about 30% of the time.  Similarly, using the same function, we can expect the first digit to be “8” about 5.1% of the time.  Expected frequencies for each first-digit of the invoice amount are shown in the graph below:

graph

If we review Accounts Payable invoices and determine the first digit of the invoices is “8” 50% of the time, then we may have either many legitimate payments that start with “8”; or we may have fictitious invoice amounts.  Fraudsters will often create an amount that starts with a higher number, like 8 or 9, not knowing that auditors are now equipped to identify these abnormal payments.

3) Rounded-Amount Invoices

People who commit fraud often create invoices with rounded amounts, which are invoices without pennies.  Yes, you would think the fraudster would have “cents” enough to do otherwise.  An easy way to identify rounded-amount invoices is to use the MOD function in Excel.  Suppose your invoice amount is $150.17; then MOD(150.17,1) gives you the remainder of dividing 150.17 by 1, which is .17.  So, using the MOD function with a divisor of 1 on a no-pennies amount would leave us a remainder of 0.  Additionally, try to rank your vendors by those with a high percentage of rounded-amount invoices.  To do this, just calculate each vendors’ number of rounded-amount invoices and divide it by the total number of invoices for that vendor, obtaining the percentage.  Then rank by descending percentage to review the most suspicious vendors first.

4) Invoices Just Below Approval Amounts

People who commit fraud are not always the “sharpest knife in the drawer.”  Suppose an A/P clerk knows the different dollar thresholds for management approval.  For example, a supervisor may only be allowed to approve invoices of $3,000 or less, while a manager may be allowed to approve invoices of $10,000 or less, and so on.  Suppose this A/P clerk and a manager decide to skim off some extra dollars together.  What is the easiest way to get the most money?  Create an invoice just below the approval level of that manager:  $9,998 when the approval level is $10,000; or $2,978 when the approval level is $3,000.

To identify these potentially fraudulent invoices, try this:  identify invoices that are 3% (or less) LESS THAN the approval amount.  For example, if your approval amount is $3,000, then any invoice that is between $2,910 and $2,999 would be flagged as suspicious.

5) Check Theft Search

Most Accounts Payable departments conduct a reconciliation of Accounts Payable with the monthly Bank Statement to identify any discrepancies between the two.  This process can also be instrumental in identifying check fraud.  One simple way to spot potential check fraud is to identify missing check numbers or gaps in reconciled checks numbers.  This is usually indicated on the bank statement with a ‘*” or ‘#’ to indicate the check number is not sequential.

Another more advanced way is to conduct a reverse Positive Pay electronically.  By merging your check register, A/P file, and bank statements together, you have the power to identify stolen checks.  Better yet, if your bank has OCR (Optical Character Recognition) abilities, then you can identify the actual payee on the check.

Speaking in technological terms, you have 3 different data bases describing 1 activity.  Use the 3 data sources to find any discrepancies in the 1 payment.  If your check numbers are unique, try merging all 3 data sources by the check number and compare each of the following fields:

-payee

-check amount

-check date

Using SQL code or another programming language, identify all of the checks that are in one data base and not the other.  In addition, identify all of the checks that are in all 3 data sources but have different payee names or different amounts and dates.

Figure 1:  Bank Reconciliation Process

bank-1

6) Abnormal Invoice Volume Activity

Monitoring vendor invoice volume is one way to alert you to abnormal behavior.  Rapid invoice volume increases may indicate a legitimate increase in business, but also may indicate that a fraudster has become more confident in stealing money.  Either way, the increase may warrant further investigation.  Suppose a vendor has 2 invoices one month and 70 the next – you may want to know why even if the reason is not a fraudulent one.

To calculate the percent increase in invoice volume from month to next month, find the difference in number of invoices and then divide by the number of invoices in the first month.  In our example, going from 2 invoices to 70, the difference (68) divided by the number of invoices in the first month (2) represents a 3,400% increase.  Setting the threshold percentage is the key here; when doing audits, we like to set the threshold percentage at 300% or higher.  Setting the threshold at 300% will catch increases from 3 to 13, which may not be interesting, so you may also want to set a minimum number of records that you are interested in, such as 50 as your second month’s number of invoices.  Setting the threshold at 300% will also catch more interesting increases, such as 50 to 220.

7) Vendors with Cancelled or Returned Checks

Cancelled and returned checks do occur in the course of a normal Accounts Payable month.  What is more uncommon is a vendor with many cancelled checks or a regular pattern of cancelled checks.  Cancelled checks are usually legitimate transactions; however, a cancelled check can be returned to the wrong hands and re-written to the fraudster.  Below is a true story of how a clerk turned a returned check into a fraudulent one:

“An uncashed disbursement check was returned to an accounts payable clerk for disposition because she originated the invoice entry. The clerk put the check in her desk and forgot about it for several months. Upon cleaning her desk, she discovered the returned check. When she checked the paid history, she realized the supplier had returned the check when it was determined to be a duplicate payment of an invoice. She also noticed that the payee name had been printed slightly below “Payee” on the check. With a bit of effort she managed to align the check and insert her name above the original payee in a print similar to the original, along with an “or” designation following her name. The fraud was caught by an accounts payable auditor searching for duplicate payments and who was asked by the supplier to furnish proof of duplicate payments by providing copies of both cancelled checks. “

This algorithm is easy to implement.  Calculate the number of cancelled or returned checks for each vendor and divide by the total number of checks for that vendor.  Then, sort this list by descending percent so that your most suspicious vendors are at the top of the report

8) Above Average Payments per Vendor

This algorithm identifies invoices that are way above average for a particular vendor.  Suppose a vendor normally has invoices ranging from $1,000 to $3,000; suddenly an invoice shows up for $25,000.  You may want to investigate this abnormality and can do so using this alert pattern.

This algorithm is also easy to implement:  For each vendor, calculate the average and standard deviation of the invoice amount.  Then, calculate a z-score for each invoice amount

z-score  = (invoice amount – average amount) / standard deviation

Then, flag all vendors with a z-score above 2.5, indicating the payment is more than 2.5 standard deviations above the mean.  If your report is still too large, try increasing the z-score threshold to 3.0 or higher.

Using this algorithm alone, we were able to catch employee fraud occurring in a mid-size health manufacturing company.  The fraudulent employee was receiving a paycheck every other week in the amount of $500 to $1,000 when, all of the sudden, 3 invoices for $40,000 each appeared.  Because $40,000 was significantly greater than this employee’s average payment, the payments were flagged for further research.  What made the invoices even more suspect was that they occurred on or near the same date and had no invoice number.  After alerting the new controller of the suspect payments, the new controller was aware that an employee had left in a legal “scuffle” but was not aware of the $40,000 checks that were stolen.

9) Vendor / Employee Cross-Check

“Trust but verify”.  Most employees are generally trustworthy!  But it does not hurt to conduct some data mining to make sure they are.  Here is a simple approach to cross-check your vendor and employee files to see if perhaps an employee has set up a fictitious vendor.

Try merging your vendor file and employee file by the following variables:

Address

Tax ID Number

Phone Number

Bank Routing Number

If you have a good programmer, try doing some fuzzy-matching on these fields as well.  For address, try extracting JUST THE NUMBERS in the street plus the zip code, and then compare these numbers.  This eliminates matching on noise words such as “Drive” and “Suite”.

Also, try doing some fuzzy-matching on tax ID number as well, just in case there was a typo in the data entry.  If you specify that the tax IDs are equal if they are even 1 digit off, you may catch a vendor/employee ring!

This algorithm made it possible to detect a real employee (“Kathy”) whose SSN was the same as a company EIN (tax ID number).  The company name, which we will call “ABC Inc”, happened to be on the same street, city, and state as a person with the same last name as the employee (presumably her spouse).  Without this pattern, the employee fraud may have gone undetected.

10) Vendors with a Mail Drop as an Address

This algorithm compares vendor addresses with mail-box drop address such as “Mail Boxes, Etc”.  Some fraudsters will use mail drops as their address instead of a P.O. Box, to hide their fraudulent activity.  Not all of the vendors appearing on this list will be fraudulent, because a vendor may in fact be right next to a Mail Boxes, Etc.  However, the list provides a unique approach to reviewing vendors who also may show up on another alert list.

(To obtain a copy of the mail-drop table, contact the author of this document).  Or, if you have time, you can also search for Mail Boxes, Etc. on http://www.411.com and put the addresses in a database and then conduct your address matching accordingly.

Summary

Occupational fraud is a growing problem.  In fact, the Association of Certified Fraud Examiners (ACFE) estimates that 5% of all revenue is lost to occupational fraud every year.  Fraud is not 100%preventable but there ARE steps you can take to both prevent and detect fraud on an ongoing basis.  At a minimum, scan for duplicate payments every 6 months, and perform an annual cross-check between your vendor file and employee file.  With these two steps alone, you may be able to pinpoint leakages that otherwise may go unnoticed.

About the Author

Christine L. Warner is the President of Automated Auditors, LLC, and has over 20 years of experience in data mining, fraud detection, statistical analysis, and complex customized programming. She has authored several articles on using data mining to detect fraud, such as “Death Fraud: This Identity Theft is Alive and Kicking”, co-authored with Cheryl Hyder, for which they received the Hubbard award in 2011 for most influential article published in Fraud Magazine (ACFE). Christine has served as the Deputy Project Director of a Medicaid Integrity Contractor audit for the entire Northeast region of the U.S., and has personally developed over 50 healthcare fraud algorithms, as well as an entire suite of Accounts Payable fraud algorithms.

 

 

 

 

 

 

The Southbourne Tax Group: 20 Ways You Can Detect Fraud

fraud

Here is a list of items to help you detect fraud in your company or a client’s company.

  1. Unusual Behavior

The perpetrator will often display unusual behavior, that when taken as a whole is a strong indicator of fraud. The fraudster may not ever take a vacation or call in sick in fear of being caught. He or she may not assign out work even when overloaded. Other symptoms may be changes in behavior such as increased drinking, smoking, defensiveness, and unusual irritability and suspiciousness.

  1. Complaints

Frequently tips or complaints will be received which indicate that a fraudulent action is going on. Complaints have been known to be some of the best sources of fraud and should be taken seriously. Although all too often, the motives of the complainant may be suspect, the allegations usually have merit that warrant further investigation.

  1. Stale Items in Reconciliations

In bank reconciliations, deposits or checks not included in the reconciliation could be indicative of theft. Missing deposits could mean the perpetrator absconded with the funds; missing checks could indicate one made out to a bogus payee.

  1. Excessive Voids

Voided sales slips could mean that the sale was rung up, the payment diverted to the use of the perpetrator, and the sales slip subsequently voided to cover the theft.

  1. Missing Documents

Documents which are unable to be located can be a red flag for fraud. Although it is expected that some documents will be misplaced, the auditor should look for explanations as to why the documents are missing, and what steps were taken to locate the requested items. All too often, the auditors will select an alternate item or allow the auditee to select an alternate without determining whether or not a problem exists.

  1. Excessive Credit Memos

Similar to excessive voids, this technique can be used to cover the theft of cash. A credit memo to a phony customer is written out, and the cash is taken to make total cash balance.

  1. Common Names and Addresses for Refunds

Sales employees frequently make bogus refunds to customers for merchandise. The address shown for the refund is then made to the employee’s address, or to the address of a friend or co-worker.

  1. Increasing Reconciling Items

Stolen deposits, or bogus checks written, are frequently not removed, or covered, from the reconciliation. Hence, over a period of time, the reconciling items tend to increase.

  1. General Ledger Out-of-Balance

When funds, merchandise, or assets are stolen and not covered by a fictitious entry, the general ledger will be out of balance. An inventory of the merchandise or cash is needed to confirm the existence of the missing assets.

  1. Adjustments to Receivables or Payables

In cases where customer payments are misappropriated, adjustments to receivables can be made to cover the shortage. Where payables are adjusted, the perpetrator can use a phony billing scheme to convert cash to his or her own use.

  1. Excess Purchases
  • Excess purchases can be used to cover fraud in two ways:
  • Fictitious payees are used to convert funds.
  • Excessive purchases may indicate a possible payoff of purchasing agent.
  1. Duplicate Payments

Duplicate payments are sometimes converted to the use of an employee. The employee may notice the duplicate payment, then he or she may prepare a phony endorsement of the check.

  1. Ghost Employees

Ghost employee schemes are frequently uncovered when an auditor, fraud examiner, or other individual distributes paychecks to employees. Missing or otherwise unaccounted for employees could indicate the existence of a ghost employee scheme.

  1. Employee Expense Accounts

Employees frequently conceal fraud in their individual expense account reimbursements. These reimbursements should be scrutinized for reasonableness and trends, especially in the area of cash transactions on the expense account.

  1. Inventory Shortages

Normal shrinkage over a period of time can be computed through historical analysis. Excessive shrinkage could explain a host of fraudulent activity, from embezzlement to theft of inventory.

  1. Increased Scrap

In the manufacturing process, an increased amount of scrap could indicate a scheme to steal and resell this material. Scrap is a favorite target of embezzlers because it is usually subject to less scrutiny than regular inventory.

  1. Large Payments to Individuals

Excessively large payments to individuals may indicate instances of fraudulent disbursements.

  1. Employee Overtime

Employees being paid for overtime hours not worked by altering time sheets before or after management approval.

  1. Write-off of Accounts Receivable

Comparing the write-off of receivables by customers may lead to information indicating that the employee has absconded with customer payments.

  1. Post Office Boxes as Shipping Addresses

In instances where merchandise is shipped to a post office box, this may indicate that an employee is shipping to a bogus purchaser.

 

 

The Southbourne Tax Group: Services

Business Services

Small Business Accounting

As an owner of a small business, have many other valuable needs other than maintaining your accounting books. Our firm takes care of your bookkeeping to allow you to focus on running your company and producing income.

Every month or every quarter, as called upon, we can perform the following tasks for you:

Reconciling your bank account

Generate a balance sheet

Generate an income statement

Reconstitute your general ledger

Offer continuous consultations

We provide these services as the financial backbone of your small business accounting structure. You may design the mix of services you want to avail of by including tax planning, payroll, tax preparation or other services you may have in mind.

Bank Reconciliation

The Southbourne Tax Group can reconcile your business checking account for you every month to maintain an updated bank account, accounting schedule and tax status.

As such, you can then:

Determine if you have lost checks, missing deposits and unofficial wire transmittals.

Identify and avoid excess/unjustifiable bank fees and assures you of correctly-posted bank transactions.

Pinpoint and stop mismanagement of funds within your firm.

Want to find out the financial health of your business? You will never really achieve such information until all accounts are cleaned up and carefully reconciled and reflected on an accurate financial statement.

Take proper and efficient control of your cash usage. Wise funds management more than saves you money; it creates income, too.

Get protection for your business and yourself. By promptly reconciling and objecting to your bank regarding any unofficial, fraudulent or fake checks presented to your bank and encashed at that bank, you can avoid the responsibility for any shortfall and allow the bank to resolve the issue instead. You will unburden yourself of that trouble – one good reason for having the protection. And we know that illegal activities abound.

Get peace of mind. You can rest and be at peace at night if you know your bank accounts are reconciled and balanced and that all escrow funds, checks, accounts and disbursed funds are duly accounted for.

Balance Sheet

A balance sheet provides a quick view of your business’ financial status at a specific point of interest.

Namely, a balance sheet can give the following benefits:

Get a quick outlook on your business’ financial capabilities and strength.

Pinpoint and evaluate patterns, especially in the area of payables and receivables. For instance, if you are taking longer time to complete your receivables, you may need to collect them more aggressively.

Evaluate if your business can readily manage the regular financial ebbs and flows of expenses and revenues.

Find out if your business can have the capability to expand.

Evaluate if your business is experiencing a slowdown in terms of your payables to prevent an unavoidable shortage of funds.

Assess if you have to take drastic measures to strengthen cash reserves.

Together with income statements, balance sheets provide the most essential elements in financial reporting to prospective lenders such as investors, banks and vendors who evaluate how much credit to offer you.

Income Statement

An income statement, also referred to as a profit-and-loss statement, essentially sums up a detailed list of all your revenues and subtracts another detailed list of all your expenses to provide a profit or loss statement for any period.

An income statement makes you do the following tasks:

Monitor revenues and expenses in order to determine the operating condition of your business.

Pinpoint which areas your business are above-budget or below-budget.

Monitor drastic rise in the frequency of your product returns or the cost of goods sold as a percentage of your sales.

Determine particular items produce unexpected expenses, such as phone, fax, mail, or supply inventory disbursements.

Determine your income-tax level.

Keeping a Neat General Ledger

The general ledger is the heart of your firm’s financial records. It constitutes the principal “books” of your accounting and financial systems. Since each transaction passes through the general ledger, any issue with your general ledger affects all your books.

Allowing us to evaluate your general ledger system every month makes us figure out any errors, such as double billings or any unaccounted disbursements. From there, we can remedy the discrepancies in order that your books will remain accurate and in proper order.