In The Black

Leslie Wilks, CPA, CFE

The Association of Certified Fraud Examiners recently released its Report to the Nations on Occupational Fraud and Abuse – 2012 Global Fraud Study. The Report to the Nations is issued every two years by the ACFE, and the data presented is compiled from actual fraud cases that were investigated by Certified Fraud Examiners. To help the reader put the information into perspective, the ACFE reports the data in comparative format, with the 2010 and 2008 data alongside 2012. This enables the reader to easily see the trends in fraud over multiple years. The following are a few highlights of the trends noted in the report:

• Asset misappropriation continued to be the most frequent, yet least costly, type of occupational fraud with a median loss of $120,000, while financial statement fraud remained the least frequent, yet most costly, with a median loss of $1,000,000.
• The most frequent method of detection continued to be by tip, which occurred in 43.3% of the cases in the study. The report noted that this trend in initial detection has been consistent since the ACFE first began tracking the data in 2002. An interesting statistic in the report related to the source of tips, is that for entities that had fraud hotlines, the likelihood that the fraud would be detected by tip was 50.1% whereas entities without a fraud hotline, that likelihood decreased to 35%.
• Overall, the median duration that a fraud is perpetrated prior to being detected remained consistent with the previous study, at 18 months. However, the trend in fraud related to payroll schemes showed a significant increase in the duration of the fraud prior to detection, increasing from 24 months in the 2010 study to 36 months in the 2012 study.
• The top 2 most common behavioral red flags displayed by perpetrators of fraud continued to be living beyond one’s means and financial difficulties. The report further studies the behavioral red flags, breaking them down by perpetrator’s position, by scheme type, and by department.

The report offers a wealth of information that is useful to entities of all types – private companies, public companies, governmental and not-for-profit entities. As a CFE who has seen firsthand the devastating impact that fraud can have on an organization, I find that one of the most useful pieces of information in the report is located in the “Victim Organizations” section. This section breaks down the data by industry, and offers information specific to each type of entity, such as health care, education, construction, oil and gas, etc. More importantly, this section also discusses the frequency and impact of common internal controls that were present to prevent and detect fraud in each of these cases. As noted in the report’s summary, “The presence of anti-fraud controls is notably correlated with significant decreases in the cost and duration of occupational fraud schemes. Victim organizations that had implemented any of 16 common anti-fraud controls experienced considerably lower losses and time-to-detection than organizations lacking these controls.”

As I have noted in previous blog posts, if a person wants to commit fraud, he or she will find a way to do so. There is no possible way to ensure that fraud will never occur in an organization. However, there are numerous ways to minimize the impact of fraud, including the amount of the loss and amount of time until detection. There is a lesson to be learned from the information available in the Report to the Nations. Any organization, regardless of industry or size, can become a victim organization. Being proactive in the prevention, detection, and deterrence of fraud is well worth the cost of doing so.

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Celina Miller, CPA

Although the annual compliance supplement is usually effective in March, its release usually occurs sometime in the summer. The Office of Management and Budget (OMB) has announced that the release of the 2012 compliance supplement has been delayed to the end of May. In the meantime, auditors and auditees should continue to use the 2011 compliance supplement. Upon release of the 2012 compliance supplement, auditees and auditors alike will need to evaluate the procedures performed under both supplements to ensure full compliance.

The AICPA has also submitted its comment letter to the OMB regarding its Advance Notice. All comments were due on April 30, 2012. The AICPA has described several concerns that affect both auditees and auditors alike. The OMB will continue to review these comments during the next four to five months. The proposed regulatory changes may be released for comment before the end of 2012. Currently, there are no plans to amend the Single Audit Act of 1996.

Also, if you haven’t already, be sure to sign up for the AICPA National Governmental Auditing and Accounting Conference East (Washington, D.C)/ West (Las Vegas, NV). See you there!

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Brian Sims, OCA

From part one and two I examined how to set up the organizational and development structures of a Continuous Auditing department. Now let’s get into some of the interesting tests that can be performed and how to automate them. This is an area where I encourage auditors to get real creative and really brainstorm about what can be done. For the most part the specific risks in the risk assessment become the criteria that is scripted within your testing procedure.

One of my favorite tests to do as a CAATT is to do an employee roll forward which looks at all of the employees paid on the last payroll run and compares this to the current pay run. This method will highlight who was hired, who left and which pay rates changed during between payments. This type of testing takes about 15 minutes to highlight the changes and then follow up procedures are needed to verify the changes were authorized.

Another test, in the case of a school district, would be taking payroll information and identifying high school teachers who are coded to a grant that is only for elementary schools. Again the initial test does not take more than a few minutes to execute. However, we want things to be more automated. Therefore we need to leverage scripting and scheduling technologies in combination with our audit software. Most contain their own scripting languages with MS Access using Visual Basic for Applications as well as macros with a builder, IDEA using IDEA Scripting language and/or Visual Basic, and ACL using its own proprietary scripting language. The great thing about the macro builders and the logging functions is that usually you can convert either the macro or audit log/history files into scripts, which is also a great way to learn these languages.

Again, however, you have to be present to run the script or programmed tests. This is where the Task Scheduler comes to the rescue. You can create a macro in MS Access, drag it out to the desktop as a shortcut then schedule the windows task scheduler to run the macro at any time you wish, without having to be present. This is incredibly powerful in that you can schedule tests to run in the middle of the night, so that when you get into the office in the morning there is a new report of exceptions from the tests sitting on your printer. Or, for more ambitious auditors, have them sent as an attachment to your staff’s email for follow up procedures. You can also have “Event Driven” tests which are run when a specific action in the accounting system, database, or network occurs which could then send alert emails to a predefined email listing. How’s that for leveraging information technologies to your advantage?

Please note the combined use of multiple software solutions makes the audit environment more complex meaning that auditors have to maintain controls over these systems as well. For example, there should be good controls over the changes made to the scheduling and events definition software that runs the tests. There should be controls over the development and changes to scripts for the tests and there should be integrity controls over the exception reports that are generated resulting from the procedures. In addition, the scripts themselves should have error handling and reporting in case something unexpected happens. This will make sure the audit management will is made aware when a particular script fails to run allowing them to pull that procedure from the audit schedule and send it back to development for debugging.

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Leslie Wilks, CPA, CFE

I recently heard a speaker who was educating a group about auto crimes, and he gave helpful tips about how to minimize becoming a victim.  He pointed out the fact that often times this type of crime is considered victim-assisted, since many of us have a bad habit of leaving electronic devices in plain view (I admit guilt on this one), leaving doors unlocked , windows down, or worse, running into the convenience store with the keys left in the ignition.  Obviously, nobody wants to have their possessions stolen from their car or to have their car stolen, but there are simple precautions that we often fail to take in order to protect our vehicles from the hands of thieves.  When I heard the term “victim-assisted” (simply defined as easily preventable) I could not help but think about the numerous times I have seen organizations fall victim to fraud when there were simple precautions that management could have taken to prevent it.  We see it all too often in organizations after they realize that fraud has occurred – conflicting duties, incompatible user rights, few or no internal controls, and an overall lack of fraud awareness among management and employees.  Organizations obviously don’t set out to be defrauded, but they often fail to take the simple precautions to prevent it.  Management is responsible for establishing internal controls in order to prevent, detect, and deter fraud. Unfortunately, it can be hard to see the value in doing so until it is too late. It doesn’t take being an expert in white-collar crime, but simply being aware of a few basic facts about fraud that can go a long way in prevention and early detection, and ultimately in savings (monetary and reputation) to your organization.

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Chuck Bucek, CPA, CVA

Before you sign and mail (or electronically transmit ) your tax return to the Internal Revenue Service, consider making a contribution to a retirement plan if your current cash flow situation will allow you to do so. The contribution might be deductible from your taxable income, which will lower your tax liability, and will allow you to put some money into your retirement fund. I say “might” be deductible because retirement plan contributions are subject to limitations based on other plan coverage and income level.

The traditional Individual Retirement Account (IRA) is an often used type of plan. The contribution limit is $5,000 ($6,000 if age 50 or older at the end of 2011). The individual must have earned income and be under age 70 ½ as of December 31, 2011. The deadline for making an IRA contribution is the due date of the income tax return without extension. That date is April 17, 2012 for contributions attributable to 2011.

Another plan available to persons who are self employed is the Simplified Employee Pension (SEP). Larger contributions made by the employer are allowed to this type of plan compared to contributions to the traditional IRA by an individual. The self employed person is the employer in this instance. The contribution limit is 25% of net self employment (SE) earnings reduced by the plan contribution and the self employment tax deduction. In essence, the limit is 20% of net SE earnings less the SE tax deduction. The maximum contribution is limited to $49,000 ($54,500 if age 50 or older at the end of 2011). Unlike the traditional IRA deadline, the due date for making a contribution into the SEP plan is the return due date inclusive of the extension period. So to get the deduction on your 2011 tax return, the contribution has to be made by October 15, 2012.

As stated earlier, there are restrictions in place that limit the applicability of a retirement plan contribution deduction. But if allowed and done properly, the contribution might be a favorable tax technique to implement into your overall tax plan. And you might double your pleasure.

The above information is intended to be general in nature. Please let us know if you have questions regarding income tax return or quarterly income tax filing requirements or any other tax matters.

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Celina Miller, CPA

If you remember, last summer the Department of Education released a letter stating that current year spending would be evaluated against expenditures in the “immediate prior year.” So if your district did not meet Maintenance of Effort (MOE )in 2011, in 2012 it would only have to evaluate MOE compliance using 2011 expenditures.
Yesterday, April 4th Education Week, reported that the letter has been retracted. Per Alexa Posny, assistant secretary for the office of special education, and Melody Musgrove, director of the office of special education programs “…the level of effort that a [school district] must meet in the year after it fails to maintain effort is the level of effort that it should have met in the prior year, and not the [districts] actual expenditures. We are therefore withdrawing the letter.” Districts will only be allowed to reduce spending for the existing exceptions (highly paid teachers retire or special education students leave the district).
What does this mean? In 2012, school districts will have to spend as much as it should have spent in 2011 had it maintained effort (i.e. the same amount it spent in fiscal year 2010). It will take much collaboration at the school district level to ensure that districts are in compliance. Not an easy task by any means.

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Each user can change the look of the Desktop to suit their needs/preferences, and won’t affect the other users. Log in to Quickbooks, click on View/Customize Icon Bar and then Add, Delete or Edit.

Also, if you put the curser on the DATE field, you can press + or – to change the date by 1 day up or down. Then you do not have to retype the date.

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Amanda Eaves CPA

Managers can bring the most intelligent, creative people to their departments, but if the employees aren’t able to work as a team, the department’s productivity will suffer. If your team isn’t firing on all cylinders, it’s important to identify the reasons why … and what you can do to overcome the dysfunction.
The 5 Big Causes
Many teams don’t work well for one reason: “Because they are made up of human beings with varied interests and frailties,” says Patrick Lencioni, author of The Five Dysfunctions of a Team. “When you put them together and leave them to their own devices, even the most well-intentioned people will usually deviate towards dysfunctional, unproductive behavior.” As a result, small problems left untreated can spiral into ugliness.
Here are the five major causes of team dysfunction that managers must routinely contend with, according to Lencioni, and the strategies to successfully overcome each one:

Dysfunction #1: Absence of trust
This occurs when team members are reluctant to be vulnerable with one another and are unwilling to admit their mistakes or need for help. Without a certain comfort level among team members, trust is impossible.

Manager’s role: Be vulnerable.
• Identify and discuss your strengths and weaknesses. Openly accept that a team member might be more skilled in a particular area than you.
• Spend considerable time in face-to-face meetings and working sessions. The goal is to get team members to open themselves up.

Dysfunction #2: Fear of conflict
Teams that lack trust are incapable of engaging in unfiltered, passionate debate about key issues. This causes situations in which team conflict can easily result in veiled discussions and back channel comments. In a setting where team members don’t openly air their opinions, inferior decisions are the result.

Manager’s role: Demand debate.
• Acknowledge that conflict is required for productive meetings. Stress that conflict must be up front instead of underlying and underground.
• Establish common ground rules for engaging in conflict.
• Understand individual team member’s natural conflict styles.

Dysfunction #3: Lack of commitment
Without conflict, it is difficult for team members to commit to decisions. This creates an environment where ambiguity prevails. Lack of direction and commitment can make employees, particularly star employees, disgruntled.
Manager’s role: Force clarity and closure.
• Review commitments at the end of each meeting to ensure all team members are aligned.
• Adopt a “disagree and commit” mentality—make sure all team members are committed, regardless of initial disagreements.

Dysfunction #4: Avoidance of accountability
When teams don’t commit to a clear plan of action, even the most focused and driven individuals hesitate to call their peers on actions and behaviors that may seem counterproductive to the overall good of the team.

Manager’s role: Confront difficult issues.
• Explicitly communicate goals and standards of behavior.
• Regularly discuss performance versus goals and standards.

Dysfunction #5: Inattention to results
Team members naturally tend to put their own needs (ego, career development, recognition, etc.) ahead of the collective team goals when individuals aren’t held accountable. If a team has lost sight of the need for achievement, the business ultimately suffers.

Manager’s role: Focus on collective outcomes.
• Keep the team focused on tangible group goals.
• Reward individuals based on team goals and collective success.
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Teamwork traps: Groupthink and deadlocks
Groupthink occurs when everyone is always on the same page. It may feel comfortable, but in such a predictable, low-demand atmosphere, there’s no creativity and nothing challenging the team’s assumptions.

To help break your team out of this rut:
• Solicit ideas and opinions in reverse order of rank/seniority during meetings. Asking rookies first frees them up from the pressure to automatically side with the senior members.
• Occasionally invite employees from other parts of the organization to team meetings to share perspectives.
• Send team members out into the field to collect feedback and seek new ideas from customers.

At the opposite end of the spectrum is when team members refuse to agree on anything, resulting in deadlocks.
What to do: Have each side debate from the other side’s point of view. They might end up being more sympathetic with the opposing side’s view after they’ve researched and argued its merits for themselves. Next, point out common ground (there’s always something!), and then look for a possible alternative.
” This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/29865/team-dysfunction-why-it-happens-and-how-to-fix-it “

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Chuck Bucek, CPA, CVA

 March 15th is the filing deadline for corporate taxpayers to file their income tax returns for the 2011 calendar year reporting period.  The filing deadline for individuals, partnerships, trusts and estates for the same reporting period is April 17th.  Failure to timely file either a tax return or an extension results in a late filing penalty being assessed from the original due date of the tax return until the date the return is filed.

If unable to file a complete and accurate income tax return, individual taxpayers should complete and timely submit Form 4868  in order to get a six-month extension of time to file.  Form 7004 is the applicable extension form to file for corporations (resulting in a six-month extension) and for partnerships, trusts and estates (resulting in a five-month extension).

Please make sure to note that the above mentioned forms are used to request an extension of time to file the necessary income tax return.  This process does not extend the time for payment of income tax that is owed.  Payment of tax due must be made by the original filing deadline.  Because of this, a tax projection should be calculated to estimate the outstanding income tax liability pertaining to that taxpayer.  The estimated amount of tax should be remitted either with the extension form or electronically.  A failure to pay tax penalty will be assessed on any tax balance owed that is not remitted by the original filing deadline.  The penalty accrues from the original due date of the tax return until the date payment is finally made.

The above information is intended to be general in nature.  Please let us know if you have questions regarding income tax return or quarterly income tax filing requirements or any other tax matters.

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Celina Miller, CPA

Currently, if an entity spends $500,000 or more, it is subject to the Single Audit Act. Depending on the type of entity (i.e. Not-for-Profit, Local Government, or Higher Education) each entity spending federal funds follows specific cost principles such as OMB Circular A-122, A-87, or A-21. Auditees and auditors alike will not argue that much time and effort goes into a Single Audit. With that said, the Office of Management and Budget (OMB) is proposing significant changes as described in the U.S. Government’s Federal Register dated February 28, 2012.

It is evident the OMB is moving to a risk- based process. Below are the most notable proposed changes:
1. A Single Audit is only required for entities that spend $1 million or more.
2. Entities that spend between $1 million and $3 million would be subject to two compliance requirements. The allowable and unallowable costs requirement will always be one of the two requirements. The federal agency will determine the second compliance requirement that best targets the risk of improper payments or waste, fraud, and abuse.
3. For entities that spend $3 million or more, all 14 compliance requirements will be required as usual. However, the federal agency will have the ability to focus on certain requirements depending on the risk. In addition, subset compliance requirements may result that will be geared toward preventing waste, fraud and abuse.
4. OMB is considering consolidation of all of the cost principles (i.e. OMB Circular A-21, Cost Principles for Educational Institutions, OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, OMB Circular A-122, Cost Principles for Non-Profit Organizations, and the Cost Principles for Hospitals). The goal is remove significant variations in the cost principles. One of the changes includes using a flat rate versus negotiated rates for indirect cost purposes.

OMB is requesting comments regarding these proposed changes now through the end of the month of March 2012. We will continue to monitor the OMB’s activities provide updates regularly.

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