Asset Investigator Primer on Hidden Asset Discovery

Techniques Used to Find Unreported Income and Hidden AssetsFinding unreported income and hidden assets is not a matter of guesswork. While success is never guaranteed, the use of certain techniques may produce successful results. Here are a few tips to consider:1. Look at the lifestylesOne of the first steps is to look at the lifestyle of the person earning the income and match it with the income being reported. What kind of car does he/she drive and how was it paid for’.) What kind of clothes are being purchased, where does he travel and what hotels does he stay at? If there is a disparity between the lifestyle and the reported income, then one must look at the person’s debt to see if the lifestyle is paid for by borrowed money. If the debt has not increased, one must look for other possible explanations, such as a recent inheritance. If nothing seems to justify the lifestyle in excess of the reported income, then there is a good possibility that unreported income is funding the lifestyle. This hypothesis, with its justifications, may not, by itself, be convincing to the court, but it will lend significant support to other evidence.2. Look at the expensesCertain expenses are indicative of the nature of the business and often they can be verified. In the above example of the restaurant, that business sold a huge amount of beer. Since there are only a small number of beer distributors and their records are computerized, it is relatively easy in such a situation to determine the volume of beer being purchased. The same technique was used in a case involving unreported pastrami sales. The key to the case was determining the amount of raw beef navels purchased. Once one knows the amount of goods purchased for sale or manufacture, the actual sales can be determined fairly accurately after one determines the usual markup.Similarly, certain manufacturing processes may require certain usage of utilities. A product that has water as a main ingredient will have production in direct relationship to the amount of water being used by the factory. A review of the company’s utility bills may demonstrate whether production is going up or down. If the business records show that sales are down, production is down, but water usage is up, then someone will have to explain the disparity.3. Look at the cash flowHow does the money come in and who receives it’? If a certain person opens the mail, records what payments came in, and then delivers the checks to a second person, who actually makes the deposits, then there is good internal control over the funds. In that situation, it is probable that all receipts are being recorded. In smaller businesses, such as in professional practices, it is possible for the same person to open the mail and to make the deposits, and it is not unusual for the owner himself to get the mail once in a while. Furthermore, payments are often made out to an individual instead of the formal business name. Particularly with a professional practice, the name of the person is often the name of the business, or a client may issue payment in the name of the partner who provided the services. In situations where the owner might open the mail and where checks could be payable to the owner, one should review the accounts receivable records with the cash receipts records. All write-offs of significant amounts should be reviewed to see if the write-offs are merely cover-ups, for receipts that were simply deposited into a personal bank account instead of the business account. The writeoffs should be supported by documents indicating attempts to collect, such as correspondence, letters from the company’s attorney, lawsuits, etc.4. Look at the business operationsA visit to the business premises is very helpful. and sometimes it helps rule out certain areas which might otherwise be explored. For example, a business with gas stations has less of a probability of unreported income than a supermarket. A visit to the gas stations will show that all sales, in dollars. is reported by each gas pump. If the owner does not work at the gas station, he would not want the pump to malfunction, because that is his only way to determine that his employees are not stealing from him. Therefore, the pump equipment itself is very useful in determining the actual sales. In a supermarket, an owner could simply arrange that certain cash receipts are simply not deposited. It is essential to understand how the business is run, how often the owner comes to the business. what is his relationship with his employees, etc.5. Look at the industryThere are statistics available for many businesses, and the statistics of the subject business should be compared with others similar to it. In particular, the gross profit margins should be compared, and the overall profitability should be compared. If in the industry, it costs fifty cents for each dollar of sales, and in the subject business, it costs sixty five cents for every dollar of sales, then one should examine the expenses to see if they are inflated by personal or unusual expenses. It may be that there is a logical explanation for the variance of the subject business from the industry norm, but the variance itself is an indication that something is unusual, and deserving of special analysis.SummaryIn summary, while it is often very difficult to find unreported income and hidden assets, sometimes clues are left that are very meaningful to a trained eye. The problem then becomes a matter of proving the allegation, rather than determining it.

Investigative Primer on Fraud Identification

Fraud is defined as a type of illegal act in which the perpetrator obtains something of value through willful misrepresentation. Fraud usually occurs within the context of legitimate business transactions and is carried out in such a manner that legitimate business unwittingly conceals it. Specific indicators of fraud are generally difficult to identify; however, generic indicators or “red flags” (warning signals) are almost always present, and auditors must rely on understanding of how fraud is committed to successfully recognize these indicators. Both transactions that may be fraudulent and circumstances that may appear legitimate must be viewed through a lens of auditor skepticism.

 

The potential for committing fraud is greater when one or more of the following three elements exist: perceived need, opportunity, and rationalization. The motivation for most fraud is financial in nature and is fueled by the perceived needs or desires of the individual committing the fraud. The opportunity to commit fraud must exist, and weak internal controls provide such an environment. Individuals responsible for fraud rationalize their fraud: “The government is so big that what I take will never be missed.” or “They owe me.” Therefore, when conducting audits, the auditor should be on the watch for these elements as he/she looks for indicators of fraud based on a set of signs, signals, and patterns, which may be encountered during the audit.

 

Examples of these signs, signals, and patterns include the following:

 

Weak management. Failure to enforce existing controls, inadequate oversight of the control process, and failures to act on fraud are signs of weak management.

 

Loose internal controls. Inadequate separation of duties involving cash management, inventory, purchasing/contracting, and payment systems allow the perpetrator to commit fraud.

 

History of impropriety. Past audits and investigations with findings of questionable or criminal activity are very useful as roadmaps of where to look for current activity.

 

Unethical leadership. Executives who do not follow the rules and focus on personal achievement and not organization goals may be involved in fraudulent activity.

 

Promise of gain with little likelihood of being caught. When a perpetrator works in an environment of weak management, loose internal controls, and high-volume transactions, he/she has ample opportunity to exploit the situation for personal benefit.

 

Unexplained decisions and/or transactions. Transactions that are out of the ordinary and are not satisfactorily explained, for example, unexplained adjustments in inventory and accounts receivables, are often signs of fraudulent activity.

 

Failure to follow legal or technical advice. Unexplained deviation from legal and/or technical advice, particularly when concurrence is required, may be evidence of fraud.

 

Missing or altered documents. Sometimes the perpetrator includes misinformation and false data entries in records that are obvious; however, the perpetrator makes no attempt to conceal the changes. Indicators include providing information late without explanation, concealing unfavorable information, never creating required documentation, creating documentation after the fact, and destroying documents.

 

To understand and identify information that may suggest fraud, the auditor should be aware that fraud is most likely to fall within six categories of criminal violations: theft, embezzlement, fictitious transactions, kickbacks, bribery and extortion, and conflict of interest. In any of these, fraud may occur.

 

Theft involves property, facilities, services, and time.

 

Embezzlement involves money, positions of trust, and a trusted employee. The funds embezzled can be from receipts or disbursements or from fictitious transactions involving funds over which the embezzler has custody and control. Embezzlement generally results from a breakdown of internal controls, i.e., no separation of duties.

 

Fictitious transactions usually involve a single party. False records or transactions are perhaps the most sophisticated of schemes.

 

Kickbacks may be offered by a vendor or solicited by a contractor or government buyer Moneys are paid from government funds. Inflated invoices and subsequent payments generate kickback proceeds and are used to secure government or contractor business or steer business to a particular contractor. 

 

Bribery and extortion occur when an offer is made and accepted in return for abuse of position; i.e. a government official accepts something of value in return for sensitive information or in return for a favorable decision. A government official demands money in return for a favorable and expedited decision.