Three Types of Fraud and How to Prevent Them

Every organization is vulnerable to fraud. According to the most recently published Report to the Nations on Occupational Fraud & Abuse, the typical organization loses 5 percent of its revenues to fraud each year. Smaller organizations and nonprofits are even more susceptible to fraud losses because of lower staffing levels and technology investments.

Understanding the types of fraud and how they can happen is the first step to preventing and detecting fraud, and minimizing the impact. Fraud can be broken down into three major types — asset misappropriation, corruption and financial statement reporting.

 

Here is some insight on each type of fraud and tips to prevent them:

 

Asset Misappropriation

Asset misappropriations involve an intentional theft or misuse of the organization’s financial or non-financial resources. Common examples are stealing cash, over-billing, and inflated expense reports. This is by far the most common fraud, making up almost 90 percent.

 

The most powerful weapons against asset misappropriations are segregating duties and exception reporting. Segregating duties prevents one person from having too much control over financial activities, like separating expense approval and check signing from the person who reconciles the bank account. Exception reporting highlights things that are out of the ordinary or shouldn’t happen, like an expense report submitted for a business trip that the employee didn’t take.

 

Corruption

Corruption is the next most common form of fraud. Thirty-eight percent of the studied cases involved some form of corrupt act, often involving senior management with authority over essential elements of the organization, like sales and operations. About 70 percent of corruption cases were perpetrated by someone who misused her or his authority to gain direct or indirect benefit. Examples include bribery, kick-backs and conflicts of interest.

 

Segregation of duties and exception reporting are also useful tools to detect and prevent corruption. A zero-tolerance policy from the top is another useful deterrent to corrupt practices.

 

Financial Statement Reporting

Financial statement fraud is less common than the first two types, but is usually the most costly. While only 10 percent of fraud cases are from manipulating financial statements, the median cost is a whopping $800,000. This type of fraud is commonly perpetrated by middle or senior managers whose income is based on meeting projected financial targets. Methods to thwart financial statement fraud are independent oversight, such as audits, and effective governance. Not exactly the easy stuff.

 

Recognizing that fraud can happen and implementing a proactive action plan to minimize the impact are two steps to prevent and detect the three types of fraud. Powerful weapons like segregating duties, exception reporting and zero-tolerance policies can minimize the impact of fraud in your organization.

How Americans Spend their Tax Refunds

The numbers are huge! Just a few days before the tax deadline, almost 120 million tax returns had been filed. More than 70% of those tax returns resulted in refunds back to the taxpayers totaling almost $243.6 billion. The average refund check or direct deposit amount was $2,831, slightly larger than last tax season.

 

So how do American’s spend their tax refunds?

 

GOBankingRates, a financial information and resources website, recently polled American taxpayers about how they planned to spend their tax refunds. The results were encouraging for money folks who preach fiscal responsibility. Here’s the full article. It’s an interesting read.

 

Per the survey, the five top ways that Americans spend their tax refunds are:

 

  1. Put into Savings – Forty-three percent of the survey respondents said they will put their refunds into savings. The survey was not specific about the type of savings. Let’s hope that savings includes an emergency fund for immediate needs and retirement contributions to meet long term goals.

 

  1. Pay Off Debt – Thirty-six percent said they will use the money to pay off debt. If that’s your situation, too, start by paying debt with the highest interest rate, like a credit card balance. More debt to pay after your refund is all used? Shift the amount you were paying on the paid-off balance to the next largest debt to get it paid off more quickly.

 

  1. Pay Toward a Vacation – Ten percent set aside their refund to pay for a vacation. Seems like a nice reward for getting through the year and filing that tax return. If your vacation funding choices are limited to putting it on a credit card or waiting for your tax refund, the refund “wins” every time – unless you can pay the card balance off each month.

 

  1. Splurge on a Luxury Item – Six percent go out and buy themselves a gift, whatever their heart desires. The bigger the refund, the bigger the splurge – jewelry, car, latest “bright, shiny object”. Let’s hope that these folks feel okay doing this because they already saved an emergency fund and maximized their retirement contributions.

 

  1. Necessary Major Purchase – Five percent need to use their refund for a major necessary purchase, like a home repair or appliance. Waiting to buy something you really need can be stressful, or even unsafe. Setting aside funds for emergencies and maintaining good credit are two ways taxpayers can avoid waiting for major purchases.

 

What about getting no refund?  The GOBankingRates survey found that 36 percent of those polled this year didn’t expect to receive a tax refund. Why is that a smart move? Well, you’ll have to check back and read my next blog to find out.

Your Organization’s Financial Health

Your personal health and your organization’s financial health are the same in at least one way — serious problems could exist that you cannot see or feel. A sudden loss of income or an unexpected expense can stop the heart of your organization just like a medical crisis can stop your body. For your organization, like your body, monitoring a few key areas can alert you to problems on the horizon.

 

At a minimum, organizations should monitor financial health in these three essential areas:

 

  1. Actual vs. Expected Financial Activity

Financial performance information should be compared to planned, or budgeted, performance to determine how actual events compare to what you thought would happen. Focus on variances in significant income and expense categories. Obtain explanations for why the budget or plan was not met. Did conditions change?  Were projections unrealistic? Focus on “why” and use that information to refine budgets and plans.

 

  1. Cash Flow

Project your cash inflows and outflows for at least three months, preferably for six or more. Assess whether income that you expect to take in is going to cover the amounts you need to pay. Sounds easy, but this analysis takes some thought and effort. You need to know your payments receivable and payable, regular payments that are required no matter what, such as payroll and rent, and your reconciled bank account balances. Be realistic about payment timing and what it really costs to sustain your organization.

 

  1. Expenses

Maintaining control over spending is the most important and most difficult part of running an organization. Demands to fund day-to-day operations, in addition to investing in technology and infrastructure, are constant. Prioritizing essential expenses and growth investments is a challenge that requires regular attention. This is particularly true in newer organizations where infrastructure investments are most crucial.

 

Maintaining your organization’s health is a lot like managing your personal health. Monitoring a few key health areas can alert you to problems on the horizon, and give you an opportunity to act before it’s too late.

 

 

 

 

Is the Home Office Deduction for You?

Do you use part of your home for your business? Questions about home office deductions come up all the time with new tax clients. The topic also came up at last month’s IRS Tax Forum in Washington, DC.

 

A home office deduction is a potential IRS “red flag” because of how often it is abused. IRS audits find some taxpayers who inflate home expenses or take a deduction that isn’t allowed. Home office audits were described at the IRS Tax Forum, and it didn’t sound like fun. IRS auditors come to your home and use a tape measure on your home office. For real!

 

So how do you follow the tax rules and avoid the tape measure? A home office deduction can be taken for:

 

  1. Regular and Exclusive Use

You must regularly use part of your home exclusively for conducting business. Generally, deductions for a home office are based on the percentage of your home devoted to business use. Keep in mind that the IRS is strict about exclusive use. That means no personal items in the home office. No shared spaces like hallways or bathrooms, either.

 

  1. Principal Place of Business

You must show that you use your home as your principal place of business. Your home office must be used to substantially and regularly conduct business, such as in-person meetings with patients, clients, or customers in the normal course of your business. It’s okay if you also carry on business at another location.

 

If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. In addition to the tests discussed above, you must:

 

  1. Use the home office for the convenience of your employer, such as teleworking to reduce the employer’s real estate footprint. If you work at home to perform tasks around your personal schedule, a home office deduction is not allowed.

 

  1. Not rent any part of your home to your employer and use the rented portion to perform employee services for that employer.

 

If you qualify, the home office deduction can reduce your tax liability. Follow the rules and the IRS tape measure won’t stress you out.

NEED A MID-YEAR TAX CHECK-UP?

Anything you meant to do before Labor Day, but didn’t? Was one of those things checking your tax withholdings to avoid a nasty surprise when you file your 2016 tax returns? This year, more than before, it’s important to consider a mid-year tax withholding checkup.

 

Early tax filers who traditionally depend on getting their tax refunds early in the filing season could be disappointed in 2017. Several new factors implemented by the Internal Revenue Service to reduce identity theft and increase refund fraud protections could delay tax refunds, so it’s even more important than ever to perform a mid-year tax withholding checkup.

 

So what is changing?

 

  1. A new law effective in 2017 requires the IRS to hold refunds until at least February 15 for tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC). The IRS holds the entire refund to provide time to detect and prevent refund fraud, not just even the portion associated with the EITC and ACTC.

 

  1. The IRS and state tax administrators continue to strengthen identity theft and refund fraud protections which means some tax returns could face additional review time next year to protect against fraud.

 

As in the past, the IRS will begin accepting and processing tax returns once the filing season begins. The IRS says that in spite of the new law and steps to prevent refund fraud, most refunds will still be issued within the normal 21-day timeframe after being accepted for processing.

 

All these changes mean it’s even more essential to check on your tax withholding and plan ahead for next tax season. It’s your personal choice whether you want to have extra money withheld to get a bigger tax refund. It’s great to know how long you’ll have to wait for that big refund “pay day.”

Tools to Get the Job Done

If you don’t have the right tools, jobs take longer and don’t turn out well. Those jobs often need fixing or re-doing later. It’s the same with people. Trying to get a job done without qualified, experienced people costs your organization more money and aggravation in the long run.

 

Think that lower compensation saves money? Think your budget isn’t big enough to invest in the people you really need? Think about it this way: What does it cost not to invest in knowledgeable and experienced people?

 

Organizations are exposed to five risks by not investing in the right people:

 

  1. Limited Capacity

People without the necessary skills require more supervision and are less familiar with the latest practices, systems, laws, and other areas. To grow or to stay competitive, organizations need people that keep up with changing conditions and new methods.

 

  1. Turnover

Unqualified hires often result in higher turnover. Hiring and training takes time. Vacancies put stress on the rest of your team. Time and stress are not expense items on your financial statement, but those costs are real.

 

  1. Higher Error Rate

Unqualified employees make more errors, which is time-consuming and expensive to correct. And that assumes the errors are detected; undetected errors create costs you cannot identify.

 

  1. Inefficiency

Experienced people know what to do and how to it because they’ve seen it before. They assess new situations quickly and accurately. Inexperienced people take more time because they are figuring it out as they go.

 

  1. Regulatory or Legal Compliance Issues

Employees who are unaware of compliance issues can harm the organization, increase costs, and tarnish reputations. Issues can range from industry-specific issues to general business concerns, such as taxes and payroll.

 

Getting the right people on your team isn’t easy, but it’s impossible if you don’t pay enough to attract and retain them. Considering the five risks of not investing in the right people can reduce the expense of making a cheap decision.

Are Moving Expenses Deductible?

After month of looking, you found your dream job! It’s everything you’ve always wanted. Only problem is that it’s located about 500 miles away. Moving is expensive. You heard somewhere that moving expenses are tax deductible. Is that true?

Moving expenses can be tax deductible for “reasonable” transportation, storage, and other relocation costs, other than meals. But the deduction is only allowed under specific circumstances when you experience a job-related home move.

Answering three important questions will help you determine whether your moving expenses are eligible income tax deductions:

Is the Move for Work or Business?

To be considered a deductible expense, your move must correspond with the timing and location of starting a new job or business. Moving expenses that are incurred within one year of starting that new job or business can be considered for the deduction, assuming other tests are satisfied.

Is New Work 50+ Miles from your Old Home?

Your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.

Did You Work Enough Post-Move?

Also known as the “time test,” employees must work for 39 or more weeks during the 12-month post-move period to take advantage of the moving expense deduction. Entrepreneurs and owners must engage in their business for 39 or more weeks during the 12-month period.

The distance and time tests rules do not apply if you are a member of the Armed Forces and your move was due to a military order and permanent change of station. To claim moving deductions, file IRS Form 3903. Want more info? Check it out at http://bit.ly/2ca0HlW.

Your Budget: A Powerful Financial Tool

Your organization probably has a budget. But is that budget helping you increase income and control expenses? If not, you can use your budget as a powerful financial tool starting now! Here’s how:

 

Follow these three steps to make sure that your organization’s financial goals are being met all year long:

 

  1. Set Expectations Upfront

 

Define the process and expected outcomes from the budget comparison. Establish a formal financial oversight process stresses its importance and sets clear actions and time frames. At a minimum, a budget comparison should include an income statement and a balance sheet with current and prior year comparative data.

 

  1. Take Action to Stay on Course

 

It’s not necessary to review every financial line item. Only significant line items and budget variances should be reviewed in detail. Those areas require more action to get to the root cause of variances or unexpected results. Explaining the root cause often helps you identify the corrective action that is needed to stay on course and meet budget goals.

 

  1. Keep your Results in Mind

 

Stay laser focused on your business objectives while comparing your budget with actual financial activities. Documenting the review and resulting decisions and actions help to track progress throughout the year toward meeting financial goals and overall business objectives.

 

Regularly comparing the organization’s budget to actual financial activity is worth the time and effort. It helps organizations to determine whether budgeted financial goals are achieved and provides an opportunity to make any changes needed to stay on course.