Financial Fraud Investigations: Why an Employee’s Vacation is a Great Time to Detect Fraud

Time off isn’t just a necessity to help employees recover and regroup, it’s also an opportunity for an organization to measure its efficiency and to uncover vulnerabilities it may face from fraud, waste, and abuse.

Here are just a few of the ways an organization can leverage its vacation and time-off policies to help detect fraudulent activity and prevent—or, if necessary, launch—a financial fraud investigation.

1) Don’t let an employee’s time off go to waste. The first rule of a successful fraud is that it must be hidden from view. Employees who engage in fraud are often adept at using their positions to cover their tracks.

When an employee is away from the office for more than a day or two, another employee should be asked to perform the position’s key functions. If the fill-in employee notices that something isn’t right — for example, the vacationing employee isn’t following company policy or has hidden away key information critical to performing the task — a deeper review is likely necessary.

This kind of check is particularly important for positions focused on accepting or disbursing cash, purchasing goods and services, or receiving or shipping goods. All of these areas are traditional breeding grounds for employee-related misconduct, such as embezzlement fraud.

2) An employee who never takes time off should raise red flags. In an age when tech startups lionize workers for putting in 80-hour weeks and July 5 has been named “National Workaholics Day,” managers might be forgiven for thinking its counterintuitive to suspect employees who refuse to take time off.

However, in financial fraud investigations, examiners routinely find that employees under suspicion go undetected because they have exerted control over the flow of information around their work. Those employees are often the first to arrive at the office and the last to go home, and they rarely—if ever—take time off.

Refusing to take vacation should be seen as a potential red flag. Dishonest employees know that they will be unable to hide their activities if they are gone for more than a couple of days. To fight back, companies can embed a simple solution in their employee handbooks: They can make vacations mandatory.

As we noted previously, during the mandatory vacation period, the company can assign another worker to an employee’s tasks to detect any potential wrongdoing. And the knowledge that a person’s job will be under scrutiny during time away may serve as a preventative measure as well. Employees may be less likely to engage in fraud if they have a reasonable fear of detection.

3) Don’t wait for vacations to rotate job duties. Though a vacation allows an employer the opportunity to perform a spot check to help detect fraud, an organization needn’t wait for time off to rotate job duties.

In areas of particular vulnerability for issues like embezzlement fraud (an accounting department, for instance), a regular rotation of job duties among employees can serve as a strong fraud deterrent. Again, when employees know they will have others picking up where they left off, they are much less likely to use their positions to perpetrate a fraud.

4) Don’t be afraid to go deeper. Simply having an employee take over another worker’s duties may not be enough if managers suspect that a fraud is underway. A forensic examination may be necessary. This may start with a more in-depth review of accounting records and may extend to a suspected employee’s digital and personal activities.

A forensic examination may uncover fictitious vendors, invoices or payments that are consistently just below approval limits, duplicate invoices, and unexpected changes to the volume and amounts of transactions, among other issues.

To learn more about the ways an organization can leverage an employee’s time off to detect and prevent fraud or to discuss a more in-depth forensic examination, contact us for a consultation.

 

 

 

 

 

 

 

In a Financial Fraud Investigation, It Pays to Follow the Digital Footprint

Fraudsters often believe they have covered their tracks so well that their activity is untraceable, but they are increasingly running into a significant obstacle when attempting to hide their crimes: Their digital footprint.

During the last decade, people have integrated digital tools into their personal and business lives at an astonishing rate. Since 2010, for instance, the portion of the global population actively using the web has increased from 27 percent to nearly 60 percent—and the number is climbing rapidly.

And for every text, email, card swipe, social media post, and web surfing session, those internet users are leaving digital breadcrumbs. In a financial fraud investigation, digital records can be crucial in proving fraudulent activity has occurred and can also help financial fraud investigators uncover the size and scope of a fraud and identify who is involved in a scheme.

A DIGITAL STANDARD

Clearly, analysis and interpretation of electronic evidence is now a standard part of a forensic investigation. During a forensic examination, modern fraud investigators understand that no physical evidential paper trail may exist and that fraudsters may be adept at covering up their activity in an organization’s electronic accounting system.

This means the investigator must cast a much broader net. As adept as an alleged fraudster may be at hiding a transaction in an accounting program, they may not know how—or even think—to permanently eliminate incriminating emails and documents from a hard drive or cloud storage system. A voice mail stored on a web-based telephone network or a recorded video call can give them away, as can the remnants of a text message chain.

In fact, a digital footprint is often far larger than a person may anticipate, and it is far more difficult  to cover up than a physical paper trail. Deleting or encrypting messages or documents are not safeguards, as they still provide evidence via the metadata they generate.

SOCIAL CLUES

In a  financial fraud investigation, it pays to look in every electronic corner—even those that, at first glance, may seem the least likely to produce viable evidence of financial misconduct.

This includes social media. A person’s Facebook, Instagram, Twitter and other feeds can actually become something of a goldmine for investigators. Through social media, fraud examiners have access to an abundance of metadata, including timestamps and geolocations. They can examine photos, and parse the content of postings for clues.

People are often so immersed in social media that they often share a wealth of information that can be immensely helpful in a forensic examination. They may, for example, discuss or display major purchases that do not align with their current compensation—and that can trigger a line of inquiry for investigators. They may post on a timeline their whereabouts at a particular moment that contradicts an alibi or that places them in the right location at the right time to commit a fraud.

In the end, the digital portion of a  financial fraud investigation can be critical in halting a fraud, provided one has the expertise to know where to look and how to extract information that may not be obvious to the naked eye. To learn more about how FSS helps organizations combat fraud via digital financial fraud investigations, contact us here.

 

 

 

 

 

 

Business Valuation in Divorce Cases in a COVID-19 World, Part I: An Overview of Active Passive Appreciation Analysis

The impact of COVID-19 on the value of private company interests is being actively explored and discussed nationwide by business valuation professionals, their professional trade associations, and users of business valuations (e.g. attorneys).

Because COVID-19 can materially impact the value of a private company, consideration must necessarily be given to the impact of COVID-19 on an active passive appreciation (APA) analysis in a divorce case. This post is the first in a series exploring and addressing the impact of COVID-19 on APA.  While divorce cases include consideration of both business and non-business assets and liabilities, the focus of these posts will be on the business valuation in divorce cases involving the interests in private companies.

Given that COVID-19 continues to have an active impact on the U.S. and global economies and is dramatically affecting operations for public and private companies in some industries, consider these posts a work in progress and subject to revision as more information becomes available.

APA: A General Overview

An APA analysis is performed when state divorce law requires a determination of whether, and under what circumstances, value changes in a non-marital or separate business, occurring during a marriage or between the end of the marriage and the divorce trial, might be recharacterized in whole or part as marital property.

The business appraiser performing an APA analysis looks to their engaging legal counsel to define and interpret state law in the particular jurisdiction pertaining to APA, including any state-specific definitions of key terms (“marital property”, “non-marital property”, “separate property”, “divisible property”, etc.).  Given the variety of APA-related terminology utilized in divorce statutes and case law of various jurisdictions, references in this and subsequent blog posts are intended to refer to general concepts typically found in an APA context, rather than try to cover all of the jurisdiction-specific definitions and nuances of terms.  In these posts, general definitions are provided where necessary for clarity.

In practice, the non-marital or separate business interests (henceforth “Separate”) that are the subject of APA analyses are typically businesses already owned by one spouse prior to the marriage, or gifted or bequeathed to one of the spouses during the marriage

Whether changes in value of Separate businesses identified in an APA analysis are reclassified as marital property (henceforth “Marital”) is jurisdiction-specific and can depend upon factors including, but not limited to:

  • The cause(s) of the value change; and,
  • The timing of the value change:
    • Whether any change in Separate business value occurred between the date of marriage (“DOM”) and the date of separation (“DOS” – in some jurisdictions called the Date of Filing); and,
    • Whether any change in separate business value occurred after the DOS but before the date of distribution (“DOD” – in some jurisdictions also called the Date of Trial or “DOT”).

APA Overview – Active vs. Passive

Commonly recurring requirements in some jurisdictions are that value changes in Separate businesses can be reclassified as Marital based in part upon the cause(s) of the value change along with the timing of the value change, as follows:

  • Separate business value changes between the DOM and DOS:
    • Typically become Marital property to the extent they were caused by marital efforts or marital funds (often called “Active Efforts”).
    • Typically remain Separate property to the extent they were caused by factors OTHER than marital efforts or marital funds (often called “Passive Factors”).
  • Separate business value changes between the DOS and DOD:
    • Typically remain Separate to the extent they were caused by Active Efforts.
    • Typically become Marital to the extent they were caused by Passive Factors.
  • Note that in such jurisdictions, a “flip” occurs depending upon whether the measurement period is between the DOM and DOS or between the DOS and DOD:
    • Separate business value changes between the DOM and DOS caused by Active Efforts can be reclassified to Marital property;
    • Separate business value changes caused by similar Active Efforts between the DOS and DOD often remain Separate property.
    • State statute and/or case law sometimes explain this “flip” by referring to the concept that the period between the DOM and DOS is a period of an economic partnership in addition to being a marital partnership, but that the economic partnership ceases when the marital partnership ends (the DOS).

APA Overview – Hypothetical Illustration

The following graph illustrates hypothetical changes in Separate business value between the DOM and DOD.

 

 

  • The total business value is reflected by adding the blue, gray and orange areas on the graph. In this graph, the DOM business value is approximately $17 million, which increased to approximately $28 million at the DOS and approximately $38 million by the DOD.
  • The blue area reflects the cumulative DOM value, which is unchanged during the period from the DOM through the DOD.
  • Hypothetically assuming that active efforts by the owner spouse caused 75% of the value increase for the entire period from the DOM to the DOD, and that factors OTHER than active efforts by the owner spouse caused 25% of the value increase for the entire period from the DOM to the DOD:
    • The gray area reflects the cumulative increase in the Separate business value that remains separate property.
    • The orange area as of the DOS reflects the cumulative increase in the Separate business value between the DOM and the DOS that can be reclassified as marital property. Some jurisdictions characterize this amount as the part of the Separate business value increase in which the non-owner spouse gains an “equitable” Marital interest.
  • The DOS is designated in the graph as the point at which the “flip” occurs:
    • The gray area of the graph grows more rapidly than the orange area post DOS, since all of the Separate business value increase caused by the active efforts of the owner spouse post-DOS is allocated to Separate property. Increases in Separate business value post DOS caused by active efforts of the owner spouse remain Separate property.
    • The orange area of the graph grows more slowly than the gray area post DOS, as only the allocated part of the post DOS business value increase caused by factors OTHER than active efforts is allocated to Marital property. Increases in business value post-DOS caused by efforts OTHER than the active efforts of the owner spouse can become Marital property.

 

Now that a foundation for APA analysis has been laid, our future blog posts will address incorporating the impact of COVID-19 in APA analyses.

If you are interested in more information regarding business valuation in divorce cases, how you can strengthen your case with a business valuation and active passive appreciation expert, or want to learn more about our services and our team, please contact us.