Forensic Accounting, Fraud, and Economic Damages

Church Embezzlement Orange County

2013-08-26T09:36:00.000-07:00

Interim Treasurer Fiatala Manu of the First Samoan Christian Congregational Church in Santa Ana has recently been charged with the embezzlement of upwards of $110,000.

It is alleged that Manu wrote checks to himself from church bank accounts to feed a gambling addiction.

He was called on the carpet about it when an Assistant Treasurer noticed the funds missing. Subsequently Manu was arrested during a church meeting and now could face more than 11 years in prison.

This could have been prevented by strengthening the organization's internal controls.

Reduce your risk and strengthen your internal controls by implementing:

Separation of duties
Quality of employees
Bonded employees
Periods of absense
Procedures manual
Clear lines of authority and responsibility
Pre-numbered documents
Physical control over assets
Tests of controls
Controlling cash
Bank reconciliations
Whistleblower policy.

Click here for a video of the report.

CFO Financial Statement Fraud

2013-06-19T12:48:00.000-07:00

Financial statement fraud is when the financials are fabricated to make them look better for a lender or investor. Here is a great case with a big, well known company.

Former Porsche CFO Holger Haerter was found guilty of fraud after providing false information when refinancing a 10 billion euro loan.

Along with former Porsche CEO Wendelin Wiedeking, Haerter has been charged with market manipulation. As reported, “the executives have been accused of issuing incorrect statements in 2008 over the company’s intention to acquire Volkswagen shares”.

Interestingly, Volkswagen actually acquired Porsche instead.

Riverside County Real Estate Fraud & Ponzi Scheme

2013-06-06T12:19:00.000-07:00

Hendrix Montecastro, Helen Pedrino Convicted in $142 Million Ponzi Scheme in Riverside

The Associated Press reported the real estate investment scam to be approximately $142 million in fiscal scope. The defendants used seminars, internet ads, and word of mouth to lure people in Riverside County, California and Arizona to invest in a series of shell companies. The bottom dropped out on their ponzi shceme when the real estate bubble burst.

According to the California Real Estate Fraud Report, like all good ponzi schemes, friends and relatives were convinced this was a good real estate investment, and refinanced homes, cashed in their retirement plans and used money they didn't have to invest.

Non-Profit Fraud, Kareem Abdul-Jabbar’s Charity Scam?

2013-05-31T11:57:00.000-07:00

Last month the web was inundated with news of allegations made against Kareem Abdul-Jabbar’s charity, the Skyhook Foundation based out of Long Beach, CA.

In 2009 when the foundation opened, Mr. Abdul-Jabbar said “I have decided to open up the Skyhook Foundation to improve people’s lives through sports and education because my life could not have been what it is without sports and education”. Now, while Mr. Abdul-Jabbar is not listed as a defendant, his charity is said to be a front to scam people, and only benefits the members of the board.

The Urban Daily reported that Mr. Abdul-Jabbar’s manager and long-time friend Deborah Morales collaborated with Julien’s Auctions of Beverly Hills to sell the star’s sports memorabilia. As part of the arrangement made, Julien’s Auctions was to donate $300,000 to the foundation. The auction house alleges that after their donation of the agreed-upon funds, the foundation had no intention of using the funds for anything other than fraud- lining the pockets of the board of directors. They have asked for Deborah Morales to return their donation and are also requesting punitive damages.

If you look at page 18 of Skyhook Foundation's 2010 tax Form 990, it is disclosed that $200,000 went to Iconomy LLC (owned by Deborah Morales) for the purpose of purchasing the right to show a film produced and owned by Iconomy, LLC, the cost to the foundation was below fair market value and was approved by the board of directors.

So far, there has been a lack of provided proof surrounding the auction house’s allegations, and no public statement from Mr. Abdul-Jabbar’s side.

To be continued...

Fraudsters Targeting YOU! Affinity Fraud Part 3 of 3

2013-05-23T16:14:00.000-07:00

How to Avoid Affinity Fraud

Part 3 of 3

Things to keep in mind:

- If it sounds too good to be true, it is.

- Never allow someone’s rhetoric to overpower your common sense.

- Take a few days to think about and examine any investment decision.

- A “best practice” procedure is to solicit a third party professional’s expert opinion.

To watch the 3-part video on you tube: http://www.youtube.com/watch?v=vUv4dDavC6U&list=PLDF985F76B59B68E7&index=1

Fraudsters Targeting YOU! Affinity Fraud Part 2 of 3

2013-05-08T11:49:00.001-07:00

How is Affinity Fraud Accomplished?

Typically a fraudster embodies or personifies ideals held by the group to be very advantageous. In some situations this could be a member of poor community that shows outward signs of success, such as rolling into the community in a Bentley, or an older individual that boasts great success in their “multi-million dollar” portfolio to a group of senior citizens.

According to Perri and Brody (authors of article referenced below), an individual (the fraudster) uses projection bias- a psychological defense mechanism for reducing personal anxiety to transfer his or her attributes to other people in a set of circumstances. Dr. Sigmund Freud developed the concept of psychological projection- the tendency to assume that others share our similar values, beliefs, or thoughts (this is what the victims do). This creates a perfect coupling for affinity fraud. http://www.fraud-magazine.com/article.aspx?id=4294977171

In the presence of an authoritative figure, and coupled with the absence of thorough research and vetting procedures, individuals and groups of people can be taken advantage of by fraudsters of this kind who typically demonstrate “a pervasive pattern of disregard for and violation of the rights of others”, according to Perri and Brody.

Fraudsters Targeting YOU! Affinity Fraud Part 1 of 3

2013-04-30T10:53:00.003-07:00

What is Affinity Fraud?

I recently stumbled upon a 3-part video on Affinity Fraud, aptly titled Affinity Fraud: Preying on Those Who Pray. Every year, billions of dollars (in the U.S. alone) are stolen from unsuspecting victims of this kind of fraud. http://www.youtube.com/watch?v=vUv4dDavC6U&list=PLDF985F76B59B68E7&index=1

Simply put, although there’s nothing simple about it, affinity fraud occurs when individuals are victimized by someone who was able to assimilate to their “culture” in order to manipulate their financial resources. Such fraud has been called “fraud in the name of God” for the fact that congregations belonging to churches have historically been a target of such crime.

Better put by authors Frank Perri and Richard Brody in their recent article, Affinity is only Skin Deep, http://www.fraud-magazine.com/article.aspx?id=4294977171 affinity fraud is a financial scheme practice that relies on building trust with victims based on shared affiliations and characteristics- such as age, race, religion, ethnicity, or professional designations- for financial gain. Basically, a ponzi-scheme.

Former Detroit Mayor Back in the News

2013-04-23T10:08:00.000-07:00

Former Detroit Mayor Back in the News

In June of 2011 I wrote about former Detroit Mayor Kwame Kilpatrick, who has been back in the news, for a conviction on a plethora of charges, including racketeering, fraud, and extortion. He was found guilty of 24 of the 30 charges brought against him. Kilpatrick was joined in court along with two co-defendants- his father, Bernard Kilpatrick, and Bobby W. Ferguson, a city contractor. The New York Times reported nicely on this matter. Called into question in the weeks preceding the verdict, Kilpatrick’s spending habits were brought to light, including luxury cars and exorbitantly expensive bottles of champagne. Read the article here: http://www.nytimes.com/2013/03/12/us/kwame-kilpatrick-ex-mayor-of-detroit-convicted-in-corruption-case.html?_r=0

Debt Collection, or Lack Thereof

2013-04-17T14:08:00.000-07:00

Debt Collection, or Lack Thereof

As reported recently by The Long Beach Post, according to an audit of the City's Business Relation Bureau that spanned two years, $2.4 to $2.6 million in outstanding business license accounts have not been collected by the City of Long Beach. http://www.lbpost.com/business/2000001889-city-auditor-2-4-to-2-6m-in-delinquent-business-license-accounts-uncollected#.UTTbYldZ_Q8

Residents are fuming at the lack of tenacity through which the city (has not) collected on the debts, meanwhile taxes and fees continue to rise. City Auditor Laura Doud noted a lack of "comprehensive policies and procedures for the collection process" and that there "does not appear adequate oversight is in place."

Statistically debts become harder and harder to collect as time goes on. According to The Commercial Collection Agency Association, the collectability of commercial debts is as follows:

• Due Date - 94.9%

• 30 Days - 89.9%

• 60 Days - 81.3%

• 90 Days - 69.6%

• Six Months - 52.1%

• Nine Months - 39.1%

• One Year - 22.8%

• Two Years - 9.3%

To view the 24 page Audit Report: http://www.scribd.com/doc/127773940/City-of-Long-Beach-Business-License-Revenue-Collection-Audit-February-2013

Lamar Odom's Cathy's Kids a Celebrity Charity Fraud (or not)?

2013-04-03T15:23:00.000-07:00

Is Lamar Odom's charity "Cathy's Kids" a scam or not?

If you pull up the organization's tax returns on Guidestar, you will see on the second page of their tax return that the organization's primary exempt purpose is "To provide a positive impact on the lives of under privileged children and to generate funds for research, care, clinics for cancer, as well as promote education and awareness about cancer - especially for minorities."

Khloe Kardashian points to this on her website while defending the charity.

Unfortunately, the tax returns said that money went right to AAU basketball. Bad information, bad tax return. According to the TMZ website, this is disputed by Henry Forrest, the president of the AAU.

From a reading of quite a bit of outside information, it appears that Mr. Odom sponsored youth basketball teams. If these kids were "under privileged" then Mr. Odom met part of the primary exempt purpose as in italics above. The problem is the "and". Perhaps they just didn't get around to the "and" part yet. You make the call!

Before donating to a charity, it's always a good idea to check out the legitimacy of the organization at Charity Navigator, or by pulling up their tax return on Guidestar. It's all public information, so who got paid what, where the money went, is really no secret.

To be continued....

City of Stockton Bankruptcy Approved

2013-04-02T13:36:00.000-07:00

What does bankruptcy approval for the City of Stockton mean for other California cities?

Perhaps it paves the way for other California cities (such as the City of San Bernardino who filed for bankruptcy protection in August) to do the same.

According to Cal Watchdog, Your Eyes on California Government, "Stockton Bankruptcy Judge's Pedigree, History Offer Hope", the City of Stockton owes more in pensions than it can pay, and through bankruptcy, it can modify pension contracts, relieving them of some of their obligations.

Will having the ability to modify pension contracts be incentive for other struggling California cities to file for bankruptcy?

Maybe, but maybe not.... According to City Journal, "The Pension Fund That Ate California"http://www.city-journal.org/2013/23_1_calpers.html, when Vallejo emerged through Chapter 9 bankruptcy, it did nothing to reduce it's pension costs.

How do you weigh in?

Municipal Fraud Prevention-West Linn, Part 3 of 3

2013-03-27T14:21:00.003-07:00

Municipal Fraud Prevention

Part 3 of 3

- Have checks and balances, and routinely ask yourself if loopholes exist

- Cheap comes out expensive, hire external auditors, forensic accountants, and certified fraud examiners

- Turnover in your finance department isn’t always a bad thing- in some cases, an extensive level of familiarity breeds corruption

- “Crime don’t pay”

Ok, ok, so the last one was pretty facetious but some individuals not only lack fiscal ethics, but are actually in need of professional help- but I’m no shrink.

Under a new chief financial officer and staff, the City of West Linn has now won three annual GFOA (Government Finance Officers Association) awards and citizen relations are slowly on the incline.

Municipal Fraud Prevention- West Linn, Part 2 of 3

2013-03-20T08:42:00.001-07:00

Municipal Fraud Prevention- West Linn

Part 2 of 3

The current West Linn Finance Department (after the 1.42 million dollar scandal), much like a Phoenix rising from the ashes, crafted a new mission statement. The forward moving department proclaims proudly “being good stewards of taxpayers’ monies is the Finance Department’s main focus, but that alone is not enough. We strive to develop healthy partnerships with the community; we strive to be transparent with the City finances; and we always look for cost efficiencies in all City operations.” Nowadays the city has a fraud hotline and holds regular audit committee meetings.

The moral of the story, as cliché as it may sound, is: don’t let this happen to you. Part of proper municipal management is instilling a firm and precise system of internal and external processes and controls (such as background and credential checks at the time of on-boarding employees).

Municipal Fraud- West Linn, Part 1 of 3

2013-03-13T16:46:00.001-07:00

Municipal Fraud- West Linn

Part 1 of 3

Municipal fraud is all around us explains Richard Seals CFE, CPA, CMA in his recent article: From First to Worst in Fraud-Magazine. http://www.fraud-magazine.com/article.aspx?id=4294977156

West Linn, Oregon’s former city finance director, Elma Magkamit, was a compulsive gambler. She also lied about being both a college graduate and a CPA.

The former director had unprecedented control over the city’s finances, and for almost every month between 2000-2005, wrote herself a check for $30,000 (on average) from the city’s accounts payable voided check stock. This ended up being a 1.42 million dollar embezzlement scheme according to the article.

One thing that struck me from the current West Linn chief financial officer’s recent article was that before the city had discovered the fraud, it hadn’t conducted an external audit for five years (based on the City Council’s firing of the previous external auditors). In this case, the City Council’s lack of strategic offense left the city wide open.

School District Fraud - Santa Clara

2012-10-16T06:55:00.000-07:00

As moneys become tight and budgets continue to be squeezed, financial vigilance must be increased. Anti-fraud controls must be developed. Systems must continue to be reviewed and analyzed to reduce the chance of fraud.

This problem at the Santa Clara Unified School District may have been averted with proper internal oversight. The link will also link to the actual audit report!

Non-Profit Fraud, Another Church, Another CFO

2012-07-02T16:01:00.000-07:00

This time is was $900k being separated from the Archdiocese of Philadelphia. What's killing me it that it was the CFO. Another clue, from the article "...she liked to play the slots at the Borgata casino in Atlantic City...". Over a 6 year period of time this money diss appeared. Would had been discovered if it was under $100k per year?

Financial Deceit in Divorce

2012-06-29T15:47:00.000-07:00

CPA Jerome Johnson, principle of The Forensic Firm in New Mexico has an excellent video, which discusses the issue of spouses hiding assets.

More Tax Scams

2012-03-28T14:17:00.005-07:00

This one came across the news wire on Monday and I'm sorry, but I just can't resist a snarky comment.

An H&R Block manager was arrested in Van Nuys, CA in February for identity theft. Apparently he was using client's information to prepare bogus tax returns on their behalf and obtain refunds using the H&R Block "Emerald" cards to withdraw the refunds from ATM machines.

The usual corporate caveats are being ladled out, ie H&R Block takes the matter very seriously, it involves only a handful of clients, they are cooperating with law enforcement, and so on.

First off, let me say that there are a lot of experienced, competent H&R Block people out there. We have a former HRB person in our office that is very knowledgeable. However, the little secret that you won’t see in their advertising is that each year they hire a lot of inexperienced people that have taken only a 3 month class on tax prep. Just enough to be dangerous.

If you want to avoid being the subject of a tax related fraud, you should deal with a legitimate professional you know or who has been around a long time. This guy was released on Bond and could conceivably be working again in a tax office somewhere right now.

Secondly, when police picked this guy up he was loitering around ATM machines at midnight with pantyhose over his head. Apparently none of his conduct during the daytime alerted anyone to his crimes, but if you are a confused cross-dresser, it's a dead giveaway.

(Guest post by Paul P. Scholz, CPA www.paulstaxblog.com)

It's Scammertime!

2012-03-22T10:11:00.001-07:00

As we close in on April 15, the traditional tax filing hysteria with all the media attention helps spawn another side industry – tax scams. This time of year criminals use the fear of IRS to prey on victims and get them to disclose valuable info to steal identities and money.

The IRS issued a warning recently about one scam that offers free money to taxpayers who have little or no income based on the American Opportunity Tax Credit. Promoters take money to file fraudulent returns applying for bogus refunds. These tax schemes are often promoted to members of local churches or over the internet.

Recently Intuit, parent company of TurboTax software has seen an increase in phony “Phishing” scams. These thieves send emails that purport to be from Intuit or QuickBooks and ask you for personal information to complete processing of your tax returns. Once obtained, they have personal data that enables them to steal your identity and file false tax returns on your behalf.

Some things you can do to prevent becoming a victim:

Never respond to an email purporting to be from IRS. IRS does not contact taxpayers via email except when they issue public announcements to subscribers. Your email address is not on your tax return anywhere.

If you are contacted by someone purporting to be from IRS, they will have a badge and a business card. Do not disclose any information to them. If they are from IRS they will already have access to your tax files and will not need copies from you. Request their name and location and call them back on a telephone number that you obtain from public sources (phone book) as opposed to a printed business card. Ask for their supervisor’s name and which group they are located in to help you locate them.

Never deal with a tax preparer firm that is from out of state, or that promises free money from some government entitlement.

If you use tax prep software, do not disclose any personal information via email or respond to any such requests. If you have trouble with the software, deal with someone directly over the phone, and never disclose your SSN or other personal data to them.

(Guest post by Paul P. Scholz, CPA www.paulstaxblog.com

Fake Audit Reports and Fake Financial Reporting

2012-03-16T13:55:00.005-07:00

Always, always, always, call the auditor who prepared the statements to determine whether you have real statements. We just did this on our "Invisible Children" post ... and they were delighted to talk to us! (P.S. They said good things about Invisible Children)

Also check with the State Board of Accountancy look-up to see if they really have a license. It's easy.

We've found auditors who had expired licenses or were not licensed to present audit opinions. I even found a case where the "client" stole CPA letterhead and published his own audit!

This is the perfect example of a complete fake. This SEC press release shows that James Michael Murray invented a fake CPA Firm, with a noble name, Jones, Moore & Associates (JMA). He invented fake CPA's, and published faked statements. I really wonder how the SEC figured this one out.

Kony 2012, Invisible Children, Scam or Not?

2012-03-08T10:48:00.010-08:00

37,000,000 hits on you tube. Only about 1,000,000 likes. About 32,000 dislikes. (This is as of March 8, 2012.) Apparently not a whole lot of people went through the whole 29 minute video.

Many comments are found on You Tube and Facebook that this is a scam initiated by Invisible Children. Let's do some rudimentary detective work!

Here's a link to the audited statements. We called the auditors, Considine and Considine, a CPA firm founded in 1946, and verified that they prepared the statements, and have been the auditors for five years. (Real CPAs such as these would not be associated with a scam.)

Invisible Children raised $14mm in the 2010-2011 year. They spent $9mm. Approximately $7mm went to programs (78% ... pretty darn good.) The two founders and the CEO were paid roughly $90,000 each in salaries for their work (IMO a fair number for the amount of effort necessary to run an organization of this size). This data is found in this link to their tax return.

I suggest that if you appreciate the cause ... it's a fair place to send a donation!

Divorce Fraud - Hidden Income - Find It!

2012-01-17T16:15:00.000-08:00

It's always stunning to me how many families represent almost no taxable income but live in splendor in vast palatial estates in fancy neighborhoods. They often have a matched pair of incredibly expensive German cars in the driveway. Their kids go to private schools and the family passports are stamped from a variety of exotic getaways.

Then a separation prior to divorce occurs. The in-spouse (controller of the business) represents to the family law courts almost no income. The out-spouse is enraged, but can't prove the family income because they have limited records. Doomed to a life of despair among the hoi poloi (great unwashed ... aka ... common folk), they have to find a forensic accountant to save them.

Tracy Coenen, Forensic Accountant, CPA and CFF (Certified in Financial Forensics by the AICPA), has written an excellent article about how to assess income available for support via lifestyle analysis.

Another Catholic Priest Gambling with Parish Funds

2012-01-16T16:32:00.001-08:00

At least this time is was in Las Vegas.

Over 10 years apparently he pocketed $650k. Again ... no one ran into this guy in the casino?

I'm just saying ...

Some parishioners believed that he had a Robin Hood-type reason to steal.

Remember, they're called con men because THEY GAIN YOUR CONFIDENCE AND THEY ALL ARE GREAT GUYS!

City of Compton Fraud ... You're Kidding!

2012-01-16T15:52:00.000-08:00

Now the Mayor of Compton alleges fraud. Who knew?

It stopped the City from getting a line of credit to handle the $41mm deficit.

Good luck getting an opinion from the auditors. Apparently the last audit had a "going concern clause". Here's hoping the auditor gives an opinion (rather than disclaiming). Oh ... what a mess the auditors will find. Once they are alerted, they'll have to turn over all sorts of rocks and boulders and still be worried they didn't find everything.

If this was a political maneuver, it was pretty bonehead. Apparently, the Mayor is alleging that the reason for the deficit is "fraud, waste and abuse".

I'm reasonably certain that fraud, waste and abuse has something to do with it. I'm more certain that a reasonable accounting system, with reasonable over-site would clear up the FWA.

First 5 LA gets blasted for crappy accounting

2011-10-26T13:24:00.000-07:00

Can I say "crappy"? Yes, I believe I can. And did. Apparently, First 5 Los Angeles has accumulated $800 million of taxpayer money that they're sitting on. They apparently spend $180 million per year but can't quite spend the whole amount they get ... so it sits in the bank. THAT'S OUR MONEY PEOPLE!

"An audit by Harvey M. Rose of San Francisco found First 5 LA's commission was unable to monitor money that was being spent "since monthly programmatic expenditures are not presented relative to a budget." Auditors also concluded the agency was overstaffed while under-spending on programs for children."

UNABLE TO MONITOR MONEY? That is synonymous with "crappy accounting"