As the recession / recovery continues to stagnate, we are reminded that fraud is alive and well. This makes sense intuitively because one of the primary factors present in fraud is pressure or incentive. In economically uncertain times, pressures become increasingly prevalent as the uncertainty is prolonged. A survey performed by the Association of Certified Fraud Examiners revealed, unsurprisingly, that certified fraud examiners ("CFEs") anticipated increased fraudulent activity during periods of economic recession.
As a CFE who consults with smaller business enterprises, I have seen instances of fraud that begin with the perpetrator encountering a financial need that he or she cannot meet. It can be a car repair, medical bills, or other ongoing expenses. As the pressure to make ends meet mounts, the perpetrator may rationalize the fraud by pretending that it is a loan that will be paid back, which, by the way, rarely occurs. More often than not, if the initial fraud is not detected, the perpetrator becomes emboldened to commit additional frauds. So what can a business owner do to protect himself or herself?
First of all, use common sense. Ronald Reagan popularized the phrase, "Trust but verify." No employee is above temptation. As a business owner or manager, one needs to monitor employees and verify that they are functioning in an ethical manner.
Secondly, protect your checks. Checks are one step away from being cash. Restrict access to blank check stock. Do not use a signature stamp or check-signing machine. Sign all checks without exception.
Thirdly, and most importantly, receive (unopened) and review all bank statements. Examine the checks that have been scanned for appropriateness of payee, amount, and timing. If there are any suspicious items, review the back of the check online or request a copy of it from the bank.
Fourth, know your employees and beware of tell-tale signs of fraudsters. Is someone living well beyond his /her means? Is there someone who never takes vacation and works a lot of overtime? Make vacations mandatory; and, more importantly, have another employee perform the vacationer's duties in his / her absence.
Finally, if you're uncomfortable with the effectiveness of your checks and balances (what auditors call internal controls), hire a qualified CPA / CFE to perform a fraud risk assessment for your business.
Here is an anecdote from my personal experience. I had a client who just wanted a check up on his business to make sure that no one was stealing (by the way, if you think you are not making as much income as you should, you're probably right). I arrived at his office at about 10:30 am and got introduced to his staff. I interviewed him over lunch. Upon our return, we discovered that his office manager, whom I had only met that morning, had left a note of resignation, never to return. In response to his question, I said, "Do you want to know how much and are you willing to press charges?"
As some of you are aware, there are two primary levels of service that a business valuation professional can render. The first is a valuation engagement in which a valuator provides an opinion or a conclusion of value. This is the higher level of service and it requires significant study and analysis, which translates into higher cost. The lower level of service is known as a calculation of value or preliminary valuation. A calculation does not involve the same analysis and study, which makes it less costly. However, it carries very little weight with triers of fact. In a calculation, the valuator and the client agree on what calculations to perform and the valuator exercises limited, if any, judgment.
For negotiation purposes, I often suggest a calculation of value because it is much less costly and it gives my client a starting point in determining the value of his / her business. Furthermore, if the need arises, a calculation of value can be upgraded to a valuation engagement. As a caveat, I would not prepare a calculation of value if I reasonably believed that the matter would ultimately be heard by a trier of fact.
Two cases support my opinion. In Hagar, the Court rejected a calculation of value because it lacked sufficient professional judgment. More recently, in the Marriage of Cantarella, the chancellor rejected a preliminary valuation that disputed a value previously stipulated to by both parties. As we say in Chicago, "Don't bring a knife to a gunfight."
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