Forensic Accounting Today

Small Company Controller's To Do List

Until each of these ten items are successfully resolved by a small company controller, they should remain on his or her To Do list. Here they are, in no particular order:

1. Get financial statements up-to-date...and accurate.
2. Prepare operating and capital budgets for next 12 months.
3. Generate weekly and monthly cash flow forecasts.
4. Identify, track, and analyze Key Performance Indicators (KPI) for the business.
5. Work together with company executives and outside accountant to design and implement appropriate internal controls.
6. Document and improve accounting policies and procedures.
7. Establish and maintain a well-organized system of files and records.
8. Implement a staff training and development program...then delegate more work.
9. Enroll in TMU (Teach Myself University) and adhere to a multi-faceted and ongoing self-improvement progam.
10. Get the job done...while maintaining overall balance in life.

Discourage Stealing by Your Employees

A good defense against employee fraud starts with a proactive antifraud mindset by top management. This should result in company polices and procedures...and employees...that all work together to prevent and deter wrongdoing in the organization. Tracy Coenen, a CPA and nationally recognized expert on fraud investigation, recently posted the following in her FRAUDfiles Blog:

Top Ten Ways to Prevent Employee Theft

1. Education. If employees are aware of fraud and how it happens, they will be your best on-the-job sleuths.

2. Surprise Audits. When employees are aware that there will be random checks of their areas, they are more likely to be honest. They also will not feel singled out when it is their turn for an audit.

3. Hotlines. A mechanism for anonymous reporting of fraud encourages employees to look out for the best interests of the company, without fear of reprisal.

4. Assessment of Internal Controls. Companies need to take an honest look at what fraud prevention controls they have in place. They also need to be honest about whether or not those procedures and policies are being followed and whether or not they really work.

5. Background Checks. Having the right employees is the first step toward fraud prevention. Avoid employees with criminal backgrounds or dishonest job applications.

6. Open Door Policy. Make employees feel that it is okay to discuss concerns with management. And then when they do discuss their concerns, act accordingly. Ask lots of questions, but be supportive.

7. Perception of Fairness. Pay your employees fairly and try not to show favoritism. When employees feel cheated or devalued, they are more likely to justify stealing in their minds.

8. Employee Empowerment. Give employees the authority and confidence to make decisions and take action. The more involved and empowered employees feel, the more likely they are to look out for the best interests of the business.

9. Continuous Improvement. Management should be constantly looking for ways to improve policies and procedures. Fraud prevention is an ongoing, dynamic process that requires continuous evaluation and improvement.

10. Employee Involvement. Your employees are the people who are most aware of areas vulnerable to fraud. Talk to them and ask for their help in securing the company.s assets. Fraud prevention applies to everyone, from the top down.

Teamwork: Project Success Depends On It

Working together. Whether on the field, or in a business turnaround, fraud investigation, or other critical matter, teamwork is a critical success factor.

As a forensic accountant and business consultant, one of the first steps I take on an engagement is to identify all the key players that will participate in the assignment. This begins the process of building a teamwork approach to seeing the engagement to its ultimate successful completion.

Early discussions with client management and their attorneys, external and internal auditors, and others such as computer forensics specialists and private investigators, allow for timely clarification of individual roles and responsibilities and engagement issues, strategies, and timetables. Project leaders emerge from this effort, and under their direction the team is hopefully brought together to form a united group...with each team member working toward common objectives and motivated to carryout his or her individual role.

Teamwork is critical not only at project kickoff, but also throughout each phase of the engagement. As new facts are surfaced and unexpected circumstances develop, strategies and timetables must be modified. If team members are not sufficiently communicating and working together, conflict and confusion will arise and this always results in negative results. The team must continually assess all that is going on and frequently regroup whenever appropriate.

Think about members of a well-coached football team. Certainly they begin the game with a common desire to work together in executing a creative game plan. Before each down, the coach calls the play he thinks will work best at that point in the game. Then, the quarterback might see the opposing team lined up in a troublesome defense so he calls an audible to change the play. As the game progresses, timeouts are called for the players to regroup, and then halftime is used for a more intense assessment and re-strategizing session. Hopefully, the team continues to work together as the game progresses and victory is the result.

On most every business project I've ever worked, the quality of the teamwork that existed during the engagement was a determining factor of the degree of success that resulted. This is true whether the team was made up of many persons or just a few. I'm determined to do my part to be a good team member, and team coach/leader whenever appropriate. To help, I turned to some fairly good weblog material on the subject. Here is one you may find useful:

Twelve Tips for Team Building: How to Build Sucessful Work Teams (by Susan M. Heathfield)

Atlanta-Area Bookkeeper Allegedly Embezzles $500,000

See this link for a classic example of how a small business with weak internal controls can be victimized by a trusted employee. If you own or manage a business, take a lesson from this article and make sure you have fundamental controls in place to help prevent or detect fraud in your organization.

Are You Billing All Your Revenue?

Don’t let hard earned income slip through the cracks!

You’ve worked hard for a long time to build your business. Strong customer relationships and smooth-running operations are now yielding revenue streams from the various business segments you’ve strategically established, along with the many provisions you’ve negotiated into the related sales contracts. Things are going very well. Or are they? Here’s the question: Are you sure your organization is in fact billing for all the product or services you’re delivering?

Think about this scenario: A service company has long-term contracts with ten different clients. These agreements vary greatly in design and each of them provides for revenues of at least $2 million per year, via monthly fees to be earned from 6-to-8 different services at 1% to 5% of estimated amounts of related cost figures, to be trued-up once the actual costs are known. In addition, at various milestone points, the contracts provides for large one-time billable amounts.

It would be easy for this hypothetical company to superbly deliver on every operational aspect of each contract, but still fail to bill for all of its hard-earned revenue. How could this happen? Your CFO or controller could be “asleep at the wheel.” Hopefully that’s not the case. To be sure, I suggest you hold a series of discussions with your key financial, sales, and operations managers to answer the following questions:

• What customers, projects, product lines, etc. make up the majority of our annual revenues?
• How much variability is there in how and when our various revenue streams are calculated?
• What are the significant processes and sub-processes that drive each facet of our revenue cycle…for each of our key income streams?
• What significant risks exist (i.e., what could go wrong?) within each identified process that might allow for inaccurate, incomplete, or untimely billings?
• What controls do we have in place to mitigate these risks? Are they designed effectively? Are they operating effectively?
• What changes do we need to make in our revenue-cycle internal controls? Who will be responsible for the remediation effort? When will these changes be made?

SOX 404: Build a Niche Practice

If you've not yet jumped on the Sarbanes-Oxley Section 404 bandwagon, now may be the time. Non-accelerated filers, those publicly-held companies with less than $75 million of market capitalization, will be working overtime between now and 2007, the year by which they must be SOX-compliant. Accelerated filers are now in their second year of their SOX requirements. Due to already-stretched internal staffing situations, internal control consultants will be in high demand. There's such a great deal of opportunity for freelance accountants and consultants in these arenas, a full-time niche practice could be a good growth strategy for enterprising practitioners.

In addition to pursuing SOX assignments in publicly-held companies, I believe it will be productive to go after many of the mid-sized and larger private businesses (and not-for-profit organizations) for internal control assignments. Owners and managers of these entities should be receptive to scaled-down, "SOX-like" initiatives to help them identify and remediate control deficiencies and related risks in their operations. For example, well-designed and executed $10,000 to $50,000 consulting engagements could pay big dividends for your clients. Your assistance will likely help to reduce fraud, financial reporting, and other risks. This can benefit clients by increasing comfort level (and in turn, overall business value!) of their lenders, investors, M&A partners, auditors, and other interested parties.

News Alert:  COSO just last week finally released its long-awaited financial reporting guidance for smaller public companies. This is a must read for those involved in SOX consulting.

Four Effective Internal Controls

Many small businesses suffer from weak internal accounting controls. This is mostly due to the lack of segregation-of-duties in these companies, especially those relying on a single bookkeeper or controller to handle all accounting tasks. Such firms are especially vulnerable to employee theft, false financial reporting, and other business threats. Here are four controls I often recommend to help mitigate the control voids found in these situations:

1. Require dual signatures on all checks above a specified dollar amount.
2. Have the owner receive monthly bank statements unopened, and then review all contents for unusual items.
3. Enlist someone other than the bookkeeper to reconcile bank statements.
4. Insist on timely-prepared monthly financial statements and subject them to a simple “inquiry and analytical review” process to be conducted either by the owner (if he/she is adept in accounting matters) or an experienced, independent accountant.

Embezzlement: When? Who? Why?

It's not uncommon to hear business owners say something like, "My controller (or bookkeeper) would never steal from us. I trust her completely." Entrepreneurs are generally not aware of just how vulnerable they are to various forms of employee fraud. Here are sample answers to the "When, Who, Why" questions:

When: When there's little chance of detection...due to weak controls.

Who: An otherwise "honest" person, experiencing serious financial problems.

Why: They rationalize by saying, "It's not that much; I'll pay it back," or a discontent employee might say, "The company owes it to me."