Rich Crawford

Friday, 16 July 2004 09:21

Battling fraud

As scandals continue to raise questions about corporate America's business practices, companies and law enforcement agencies are increasingly turning to forensic accountants for assistance in the fight against fraud.

In particular, the FBI has stressed the critical role forensic accountants play in the battle against corporate fraud.

The FBI and the American Institute of Certified Public Accountants have formed a partnership to identify, detect and halt fraudulent accounting schemes. The partnership recognizes that forensic accountants are often the ones to uncover the first evidence of wrongdoing in corporate fraud cases.

These accountants blend traditional accounting and auditing methods with investigative techniques to ferret out wrongdoing, making them invaluable to law enforcement agencies. In fact, the FBI counts among its special agents more than 1,300 former accountants who lend key support to investigations and prosecutions of fraud and other white-collar crime.

Whether in-house or from the private sector, forensic accountants also provide clear and concise accounting analyses tailored for use in the courtroom.

Payoff
In one example of cooperation between forensic accountants and law enforcement, the owner of a luxury car dealership was shocked to learn the business was almost $2 million in arrears on its line of credit, despite apparently steady sales. Unbeknownst to the dealer's controller, the owner's attorney brought in forensic accountants, who discovered discrepancies in the dealership's daily deposits.

Further investigation by the accountants revealed a complex scheme by which the controller planned to purchase the weakened dealership after fraudulently misappropriating almost $1 million in company assets and inventory for personal use. The investigators worked with the attorney general's office on a criminal investigation that led to conviction of the controller and a sentence of 15 years in prison.

Another case involved the foreign currency exchange department of a community bank. During a mandatory review by the Federal Deposit Insurance Corporation (FDIC), regulators found the department maintained inadequate controls and accountability. They issued a cease-and-desist order to the bank and requested a criminal investigation by the FBI.

Collaborating with the FBI, forensic accountants developed a computer application to analyze inconsistencies in the currency exchange department. The accountants discovered the bank had been defrauded of more than $1.5 million and testified on their analyses at trial. The investigation ultimately resulted in four convictions.

A third example of successful collaboration focused on a security company retained to provide 24-hour guard services for several public housing authority buildings. The housing authority suspected the security company was rigging its time records to overcharge for its services.

The authority and the FBI hired forensic accountants to assist in the investigation. The accountants reviewed and analyzed huge amounts of data. Investigators subsequently found the security company not only directed its guards to falsify time records but also extorted payments from some guards in exchange for continued employment.

Additionally, the company's owners were committing insurance fraud by paying the lower premiums charged for non-weapons carrying guards, when their guards did carry weapons. The accountants testified at trial, where the company's owners and several employees were convicted.

With more than 2,000 securities and corporate fraud cases pending, the FBI will likely continue to rely on the expertise of private sector forensic accountants. Their cooperation can only help in both cutting fraud losses and restoring faith in corporate America. Curtis T. Crawford, a retired supervisory special agent with the FBI now with consultants Crowe Chizek and Company LLC, can be reached at (312) 899-7091 or ccrawford@crowechizek.com.

Monday, 22 July 2002 09:47

Avoiding e-taxes

If you haven’t thought about getting your company involved in the Internet, you’re probably still living in the Dark Ages.

Retailers and consumers have embraced the advances in technology, using the Internet to buy and sell nearly everything imaginable. As you decide whether the Internet is a viable medium for your company, don’t forget to consider sales tax into the equation.

For small to medium sized businesses, the Internet is a way to reach a wider range of potential customers both geographically and demographically. The Internet allows local merchants to take products and services to an international market.

You can be open 24 hours a day, with little to no additional overhead. You don’t need additional sales staff or storefront space. Distribution costs are paid for directly by the customer. And you may be able to reduce the burden of tracking and remitting sales tax.

Elude Uncle Sam? Legally? It’s true. Here’s an example: An Ohio consumer reaches a Web site where he or she can order a CD player directly from a vendor. No Ohio sales tax is charged to the consumer because that vendor:

1. Is located outside the state of Ohio;

2. Does not have significant business activity within the state; and

3. Will ship the item into the state.

Steps must be taken to meet the criteria. In effect, a separate company must established outside of Ohio. Consider selecting a state that does not impose sales tax, such as Alaska, Delaware, Montana, New Hampshire or Oregon.

It is also important to determine if the company has “nexus,” or a significant level of business activity within Ohio. Companies that have nexus are required to charge and collect sales tax within the state. Affiliated groups, agency relationships, delivery options, physical office site and employee location also play significant roles in making this determination.

Even if your business isn’t responsible for collecting sales tax, there is still Ohio tax on Internet purchases that the consumer is responsible for paying. The Ohio Use Tax applies in situations where property is consumed within the state and sales tax has not been remitted.

Your customers may still save money by using the Internet. Instead of physically going to the store and paying the sales tax in the county where the business is located, there may be a tax percentage reduction by buying it over the Internet and paying the use tax of the customer’s home county.

There are also many consumers who save money by not paying the use tax at all — whether it is because they are unaware of the requirement, they don’t know how to file or they are willing to risk defying the law. We recommend that vendors place a disclaimer on their sites telling consumers that they may be responsible for paying use tax.

The subject of Internet commerce can provide myriad opportunities for small to medium sized businesses. However, it is important to explore all the business — and taxation — consequences of becoming involved.

Rich Warfield, CPA, is associate director, and Jill Crawford, CPA, senior associate of Saltz, Shamis & Goldfarb Inc.’s Tax Department. Saltz, Shamis & Goldfarb can be reached at (330) 668-9696.