We have been amazed at the number of people who are being asked to sign a “Statement of No Advice” by their financial Advisors.- They don’t have to take responsibility for their advice. If they don’t want to take responsibility why would you trust them?
- They don’t have to disclose how much they are being paid by the product manager.
- They don’t do the normal required information gathering. So how do theyknow your specific requirements?
- they don’t do the normal statement of advice.
We were recently engaged by the liquidators of a security company to determine the value of goodwill arising from the transfer of the business to a phoenix company.
A phoenix company is where business operations are transferred from one company to another to avoid having to meet liabilities to unsecured creditors (particularly revenue authorities and employees). A phoenix company is reborn from the ashes of its earlier destruction.
Phoenix company activities are common in the construction industry and service based industries where it is simple to start trading again under another name with new suppliers. Unsecured creditors often contractors and small businesses are left out of pocket. The major creditor is usually the Australian Taxation Office.
One of the common characteristics of companies going into administration is poor financial records and often there is very little financial information in which to form an opinion as to the value of the business assets (tangible and intangible) being transfered to the new company.
In this case, we were able to reconstruct a strong view as to the profitability for the company from and examination of a short period of sales invoices and employment records. The security company provided personnel to act as security guards at clubs and hotels. The company charged an hourly rate for the guards attendance at the premises. We were able to link the invoices to employees wage records and establish a projected gross profit for the business.
By using other external data and our own experience as to the expenses associated with security companies. We were able to establish that the business was profitable and transfered a significant intangible business asset to the new company.
We were engaged recently to determine a daughter’s future needs in respect of her father’s estate.
The daughter was unmarried and self employed as a writer. Her earnings fluctuated as you would expect with a professional writer, but she did earn a reasonable income on average. There was evidence regarding her ability to earn the same level of income into the future and the necessity for early retirement.
Her sister received property from her father before his death but the daughter was not included in the will.
Our approach in respect of her future needs was to calculate the lump sum that would provide her with an income in retirement equal to her current living standard.
Our process included:
- Analysis of her current earnings and expenditure. We calculated that her mortgage would be repaid prior to retirement and thus her income needs would reduce.
- Calculation of the lump sum that would be invested in superannuation and taking into account:
- tax deductions for superannuation contributions;
- income tax rates;
- inflation;
- investment earnings of superannuation funds and,
- her life expectancy.
The end result enabled a quick settlement because the amount was significantly less than initially claimed but through effective tax planning and the use of superannuation satisfied the daughter’s requirement for an income in her retirement.
Read more about our forensic accounting services in disputed will and estate litigation.
The payroll is the largest expense area for many organisations, and one which should be controlled carefully. Nevertheless, payroll fraud accounts for 17% of all fraudulent disbursements suffered by organisations. There are three main types of payroll fraud – Ghost Employees, Overcompensation, and Bonus and Commission Schemes.
Ghost employees
A “ghost employee” is someone on your payroll who does not work for your company. This type of fraud is relatively rare, especially in smaller organisations, but when it does occur the loss can be substantial. This fraud is set up by a person who either has authority to alter payroll records, or carries out the payroll accounting. If the fraudster is senior enough, this type of fraud can occur in quite small companies.
The ghost employee may be fictitious, false records being created but with a real address (often the fraudster’s own) and bank account for direct crediting. This “person” may be given a name close to that of a real employee to appear legitimate if noticed. Another type of ghost is a real person who has left the company but has been retained on the payroll by the fraudster, their address and banking details having been changed. Sometimes a friend or relative of the fraudster is put on the payroll, simplifying processing of pay cheques.
Measures to counter Ghost Employee schemes are centered around separation of duties and records, and scanning records for irregularities. For example, the hiring function should be separated from payroll duties, personnel records should be kept separately from payroll records and the two compared regularly, departmental heads should regularly scan payroll records attributed to their department, payroll records should be checked for employees with the same address or bank details and so on.
Overcompensation
This type of fraud is more common, but the amount lost per fraud is less than for Ghost Employees. There are two main types of fraud under this heading – overstating hours worked, and an unauthorized salary increase.
Increased “work” hours are entered into the system by falsifying the records used to calculate wages. This may be done at the worksite on a daily basis by the fraudster or an accomplice, or on approved timesheets when transferring between the authorizing manager and the payroll department. In one type of fraud, supervisors approve inflated hours for accomplice employees in exchange for a cut of the excess pay; in another, the authorizing manager’s signature is forged on timesheets. There are many variations of this type of fraud.
For salaried employees, a fraudster who has access to payroll records can “award” themselves a pay rise. This can occur quite readily in small companies if the same person also processes the payroll and makes the accounting entries.
Also worth mentioning is the practice of taking leave but not reporting it through the official channels. While this fraud does not involve an increase in remuneration, it is in reality stealing paid time.
Overcompensation is countered by measures such as scanning individual payroll records for excessive overtime and pay increases, separating payroll preparation and reconciliation functions, requiring proper authorization of pay changes etc (and checking on this) and comparing payroll expenses to budgets and previous years.
Bonus and Commission Schemes
Organisations are susceptible to Bonus and Commission schemes when a significant proportion of an employee’s remuneration is based on sales performance. There are two components driving the bonus – sales dollar and commission percentage – and both can be manipulated to increase the payout.
Sales records can be falsified on volume, perhaps through fraudulent sales orders or invoices, and price by entering a higher price than that charged on records. Such falsification is quite easy to detect if relevant reconciliations and analysis of uncollected sales are made, and comparison of sales figures between the bonus system and business records is done. More sophisticated systems, such as shipping product to an accomplice customer at the end of the relevant period, then accepting it back the next day as a return, require trend and exception analysis.
In summary, payroll fraud at a low level is probably occurring in most organisations. Unfortunately, the loopholes which allow a bit of unworked overtime to be paid, for example, are also available for a serious fraudster to exploit. This is one area in which a preventative approach is essential.
Case Studies
A temporary employee noticed that the manager did not reconcile monthly expense journals, and so did not know how much was being paid to the temp. agency. The employee was able to fill in fictitious timesheets and receive overpayment without detection.
A manager faced the problem of a valued employee threatening to leave for a better paid job, but she was not able to obtain approval for a pay rise to retain him. She “solved” the problem by routinely authorizing fictitious overtime, thereby effectively giving the employee the pay rise.
A supervisor had two jobs. In the first job he authorised timecards. One of the employees he did this for was his superior at the second job. In order to keep his second job, the supervisor authorised timecards for the employee for two years without the employee ever showing up for work. (Yes, this really happened!)
The following case does not involve payroll fraud, but utilizes a similar mechanism – instead of former employees, the fraudster used former contractors. The fraudster was employed as a financial officer by a Hunter Valley company. She was responsible for all accounts payable and receivable as well as banking, including electronic transfers. This fraudster created invoices in the name of former contractors, then was able to use her inappropriately wide-ranging authority to process payments to herself (147 of them over 2½ years). In the system, they appeared to be legitimate payments. The fraud netted $345,000, and was only discovered when the company started going backwards even though sales were booming.
Quote
“There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.” Benjamin Franklin 1706 – 1790
We were recently engaged to calculate the economic loss of a taxi operator who was significantly injured in a motor vehicle accident and was off work entirely for around 3 months.
Background
The plaintiff argued to his solicitor that he had lost a fortune as a result of the accident. His tax returns only showed a very low taxable income. For those of you who have worked with taxi drivers in personal injury, you will know that they tend not to declare very much in their tax return. On face value, the plaintiff’s claim did not look very good at all. The solicitor listened to his client and engaged us to prepare a report.
During the initial conference with the plaintiff, it became apparent that the plaintiff was not a taxi driver, but a taxi operator with 14 taxis under management and the plaintiff had a clear and concise understanding of how his business worked and its future direction.
One of the first things that we do when listening to the plaintiff’s story is compare that with the story of the financial statements. Financial statements and income tax returns tell us a story, they provide evidence of the transactions of the business. We were able to establish that the plaintiff’s story was turn and that he had in fact lost over $300,000 per year as a result of the accident, yet his tax returns had only shown an income in the year of the accident of $25,000.