Just because you decide to give at the holidays, it does not mean you should allow yourself to be "taken".
This article was originally published in the November/December 2010 issue of ICPAS INSIGHT Magazine.
Charles Dickens’ early childhood was scarred by the overtly hostile treatment the poor received in pre-Victorian London and his father’s overspending (resulting in a stretch in debtor’s prison). Many of his great works reflect these experiences, with his heroes typically rising above their circumstances.
One of Dickens’ best-known protagonists, Ebenezer Scrooge, Esq., had all the makings of a great forensic accountant. He was cunning, dispassionate, had a keen eye for detail, sharp business acumen, a suspicious mind and skepticism of others. Think of all the recent frauds that could have been avoided had there been a touch more “bah, humbug!” from the auditors. Scrooge’s “redemption” occurs when he is overcome with the Holiday Spirit; he opens his arms, home and wallet to his fellow man and, presumably, lives happily ever after.
If this jaded forensic accountant (i.e. me) wrote the epilogue to A Christmas Carol, Scrooge would have been visited by kindly, seemingly respectable fraudsters incognito who would have talked him out of his fortune under the guise of building a home for underprivileged youth, while scheming cohorts ransack his china and silver.
Most of us try our best to be a bit more patient, giving and positive as the holidays approach, and as we close one year and welcome another. It’s at this time of year that attendance at houses of worship swells, charitable donations rise—and fraudsters and thieves run amok. Statistics show that charity-based frauds are at their peak in November, December and January. But these aren’t the only nefarious activities witnessed around the holidays. Theft of physical assets (primarily computers), financial reporting irregularities and employee theft or abuse all occur more frequently when businesses and individuals are simply too filled with glad tidings to notice.
With office parties and increased vacation time, many offices are understaffed—and thieves know it. Several years ago, I took a call from a client who requested that I travel out of town the next day. While the rest of my colleagues marched off to a great holiday party, I stayed behind in our Chicago Loop office to prepare for my trip. While there, I was surprised to find a complete stranger roaming our halls, presumably “lost.” He was well-dressed and looked like he belonged in an office suite. However, when I approached him, he disappeared quickly down the back stairwell.
Building security later informed me that computer thieves are most active during the holidays, targeting businesses they believe to be near empty. If a computer disappears from your organization, think of the ramifications. What kind of sensitive client/company data is on the hard drive? How many IDs could be stolen? For any accountant in any role, this is a sobering thought. Envision The Grinch slinking through Whoville, stealing everything in sight, disguised as the very picture of respectability and benevolence—Santa Claus.
The holidays usher out the old year and usher in the New Year. Year-end reporting witnesses exceptional “giving” first-hand: Customers, possibly overwhelmed with glee and good cheer, will often purchase inordinate amounts of slack inventory, miraculously boosting annual sales. Oftentimes, these customers give without knowing (a truly altruistic act) because once the New Year comes and the holiday spirit wanes, sadly these sales are often reversed. But hey, the prior year finished strong! What’s more, shipping inventory to unsuspecting customers and booking the sale, aka channel stuffing, occurs more often at year-end than at any other time. And vendors are also unwitting recipients of good cheer at year-end, usually in the form of payments dated prior to the period close, but mailed well into the New Year. This cheerful scheme lowers liabilities without actually parting with the asset. And then there’s “check kiting” and “lapping” which are also schemes that rely on timing differences, and can result in Peter sending holiday cheer to Paul.
In the current economy, “flat is the new growth,” and organizations have cut back on compensation in the form of wage freezes and zero bonuses. However, creative employees find new ways to reward themselves in the form of padded expense accounts, conversion of company assets (supplies and inventory) for personal use, and mischaracterization of company funds usage. These are the gifts that keep on giving…unless the organization is vigilant.
An account of fraud from a few years back comes to mind. A bookkeeper at a large construction company had bilked the business out of millions and gave her children life-size statues of Disney characters for the holidays. These statues fit perfectly around the multimillion dollar mansion she lived in several states away. Only after the fraud was uncovered did her colleagues come forward and state that they couldn’t figure out how she lived such an extravagant lifestyle on such a humble salary. If someone is overtly over-generous and clearly giving beyond their means, it could be a red flag.
The holidays and the year-end are times to reflect and reach out to our fellow man. But that doesn’t mean it’s time to abandon common sense. Our heroic forensic accountant prototype, Ebenezer Scrooge, was last seen running through the snowy streets of London barefoot, wearing only his nightgown. Money flying from his pockets, Scrooge buys the biggest and best goose in town to share with others. What Dickens fails to mention is that Scrooge left the front door to his townhome open and all of his belongings were promptly withdrawn by a roving gang of street urchins. Not only that, but his trusty employee, Bob Cratchit, had been skimming receivables at Scrooge & Marley for years, and the entire business is now in default. Last, but certainly not least, Cratchit’s accomplice, “Tiny Tim” Leibowicz, a circus performer, was faking a leg injury and fraudulently drew workman’s compensation from Scrooge & Marley, exposing Scrooge to litigation from his insurance carrier. Hey, it could happen…Happy Holidays!