All The Queens Horses: A Review

By Charles Hall | Accounting and Auditing

Have you seen the movie All the Queens Horses? If not, you should. Today I review the movie created by Kelly Richmond Pope. 

It is rare that you see a movie about accounting and auditing. Rarer still, one that is engaging. And why is this documentary captivating? Well, the story for sure, but Kelly did a fine job of putting the pieces together and explaining what was done and how. She includes the key players: the Mayor, the assistant finance director, FBI agents, local citizens, and, of course, Rita Crundwell. (You'll recall from my earlier post that Rita stole $53 million to fund her horsing operations.)

At the time of Rita's arrest, she had four hundred quarter horses, a $2.1 million dollar motor coach, and $300,000 of jewelry. She had ranches and a nice home. So the movie shines the light on Rita's motive: her possessions, specifically, her horses. 

Kelly Richmond Pope highlights the key element in the twenty-year fraud: trust. Everyone believed in Rita: the mayor, the council members, department heads, and community leaders. Kelly's interviews with these people provide a nice overview of the trust element and brings to life the individuals that believed in Rita--and the subsequent pain that they suffered. 

Interspersed throughout the movie are explanations of what happened. These segments provide easy-to-understand graphics making a complex topic understandable, even to those who have no prior fraud knowledge. The movie gives insight into the opportunity element of fraud, showing that the City of Dixon did not have sufficient segregation of duties. 

Additionally, the movie provides interviews with the attorney that sued the city's auditors and bank, resulting in a recovery of $40 million. (I do not agree with the attorney's assertion that the City of Dixon had no responsibility for the detection of the fraud.. Governments are responsible for their internal controls. Those controls should be preventive and detective. Even so, the auditors should design their audits to detect material fraud.)

All the Queens Horses: A Training Tool

If you want your audit staff or your clients to understand the gravity of fraud, buy this movie and show it to them. 

This movie does a better job of explaining the psychological and financial damage of fraud than any textbook. Showing this movie in college classes would also be a great way to educate young students about this topic. 

And the beauty of this movie: it's a story. Human beings are hardwired to learn from stories.

My hat is off to Kelly. She did a fine job of bringing this important story to life for thousands of people.  Does the show educate? Yes, but it entertains as well. Well done.

Kelly Richmond Pope

Kelly is an Associate Professor in the School of Accountancy and MIS at DePaul University in Chicago where she teaches forensic accounting, managerial accounting, financial accounting and ethical leadership. For more information about Kelly, click here.

 

25 Ways Fraud Happens: Ideas for Audit Brainstorming

By Charles Hall | Fraud

As auditors perform their fraud brainstorming, it helps to have ideas to consider. So today I provide you with 25 ways fraud happens. 

25 Ways Fraud Happens

Here’s a list of common company thefts:

1. Collection clerk steals cash prior to recording it
2. Collection clerk steals cash after recording a customer receipt; he voids the receipt and adjusts (writes down) the customer’s account
3. Collection clerk places a personal check (for $5,000) in the cash drawer and takes an equivalent amount of cash; the clerk leaves the check in the drawer for months—in effect the clerk has an unauthorized loan
4. The cash collections supervisor steals cash after receiving funds from collection clerks but before the money is deposited; she adjusts the related bank reconciliation by the amount stolen
5. The person opening the mail steals checks before they are receipted; these amounts had not previously been recorded as a receivable
6. Employees steal capital assets (knowing that no one performs periodic inventories)
7. Employees use company credit cards for personal purchases but code the transactions as company expenses
8. Accounts payable clerks cut checks to themselves (or to an accomplice) but record the check as company expenses; the check signatures are forged
9. Accounts payable clerks establish fictitious vendors using their own addresses, a P.O. Box, or that of an accomplice; payments are made to the fictitious vendor and covered up with fictitious invoices; the checks are signed electronically as they are printed
10. Accounts payable employee intentionally double-pays an invoice, then requests that the vendor refund the extra payment (with the refund going directly to the payable clerk)—check is converted to personal use
11. Payroll personnel increase the pay rate—in the master pay rate file—for themselves or for friends working in the company
12. Payroll personnel pay themselves (or friends) twice for each payroll
13. Payroll personnel purposefully overpay withholding taxes and inflate the withholding amount on their own W-2, resulting a tax refund that includes the excess payments
14. Purchasing department personnel are bribed by a vendor; the vendor recoups the bribe costs by inflating its subsequent invoices
15. State, city, county elected officials are bribed; the vendor recoups the bribe costs by inflating its subsequent invoices
16. Vendors give favors (e.g., free vacations) to those with the power to buy—commonly called a gratuity; vendor recoups the cost of the favors by inflating its subsequent invoices
17. CEO orders accounts payable staff to make payments to himself (with an implied threat); payments are coded in a manner that hides the payment
18. Money is wired by the CFO to the CFO but is recorded as a legitimate expense using a journal entry
19. Money is wired to the CFO who then leaves the country without trying to cover up the theft
20. The CEO or CFO makes payments to someone who is threatening their life or is blackmailing them; the expense is coded as legitimate
21. A secret bank account is opened in the name of the business by the CFO but the sole authorized check signer is the CFO; checks are made from a legitimate business bank account to the secret bank account; the CFO writes checks to himself from the secret account
22. A sales person steals rebate checks that belong to the company; she deposits the checks into her personal bank account by writing “pay to the order of…” on the back of the check
23. The payables clerk writes a manual check to himself and then records the check with a journal entry that reflects a legitimate vendor
24. The CFO inflates revenue at year-end with fictitious journal entries; stock prices go up; the CFO sells personally-owned company stock, then the CFO reverses the year-end accruals
25. The inventory clerk steals stock and covers the theft by altering the inventory records

Fraud Brainstorming for Auditors

In performing your fraud brainstorming, consider printing out this list and seeing if any of these thefts are relevant to your audit.

The Why and How of Auditing: My New Book on Amazon

By Charles Hall | Auditing

The Why and How of Auditing

Do you ever feel trapped by an audit? Like you can’t finish. It started so well, but somewhere along the way, something went wrong. The wheels came off.

Maybe it started with your acceptance of a new client that you didn’t feel good about from the beginning.

Or possibly your new staff members don’t understand risk assessment. So they blindly followed last year’s work papers. However, the auditee has new risks, and the audit team failed to address them.

Wow, the audit budget is busted. But you still need to finish the substantive and wrap-up work. Just creating financial statements will take a week.

Additionally, you’re in a peer review year.

The clock is ticking. And how do you feel? Trapped!

Want less stress? Then check out The Why and How of Auditing.

My new book explains the full audit process, from beginning to end, from client acceptance to audit opinion issuance. Also, you’ll find helpful guidance for the audit of transaction cycles such as receivables and revenue, payables and expenses, debt, payroll, and more—all in one easy-to-understand book.

Discover helpful ways to plan, execute, and complete your audit engagements.

Imagine: quality audits finished on time.

Praise for The Why and How of Auditing

Need a quick-reference audit guide? This is it. Charles walks you from the beginning of the audit process all the way to the end, an excellent plain-english guide.

Mark Wiseman, CPA, CMA, Partner
Brown, Edwards & Company, L.L.P. Roanoke, Virginia

This is a great how-to, hands-on guide that will help you conduct a quality audit and provide value to your clients. Go over a chapter a week with your audit team. The book provides the why and how behind your audit programs and workpapers.

James H. Bennett, CPA, Managing Member
Bennett & Associates, CPAs PLLC Ann Arbor, Michigan

Thanks Charles for clarifying what’s important in an audit. Recommended reading for any auditor level.

Jay Miyaki, CPA, Partner
Jay Miyaki, LLC Honolulu, Hawaii

The author steps through each audit area in a simple manner and clearly explains topics that are often complex by providing numerous examples and personal anecdotes. I highly recommended this text to anyone in the financial statement audit profession.

Jacob Gatlin, CPA, PhD
CDPA, PC Athens, Alabama

Charles Hall’s “The Why and How of Auditing” is comprehensive, yet easy to implement. This guide will enhance the effectiveness of your audit engagements.

Armando Balbin, CPA, Partner
Downey, California

I highly recommended Charles Hall’s latest book, “The Why and How of Auditing.” Charles takes a complicated subject and makes it simple. Our team found it particularly useful in the areas of questions to ask, procedures to follow, and work paper examples.

Bill Burke, CPA, Partner
Burke, Worsham and Harrell, LLC Bainbridge, Georgia

A must-read for auditors! The Why and How of Auditing is insightful, practical, and rich with ideas. Charles takes a complex topic and breaks it down into an easy to read, well-defined road map.

Kathryn Fletcher, CPA, MBA, Partner
Draffin Tucker Atlanta, Georgia

Get Your Copy Now!

Click here to see the book on Amazon.

How to Prevent Payroll Fraud

By Charles Hall | Fraud

Do you know how to prevent payroll fraud? Today we take a look at how you can protect your business.

Direct deposit of payroll checks can open the door to theft. Also when one person is in control of payroll processes, danger lurks.

Picture is courtesy of DollarPhotoClub.com

I was teaching a fraud prevention class this past Friday, and one of the participants, a school payroll clerk named Dawn, asked me to address how fraud might occur in her department. So I asked her a series of questions.

“Does your school use direct deposit?” She answered yes.

“Do you fully control the issuance of W-2s?” Dawn said yes.

“Who adds the direct deposit information to your payroll software?” She answered, “I do.”

“Can anyone else change the direct deposit file?” Her answer was no.

“Who controls the master pay rate file?” Here again, she was the only one who had rights to this payroll function.

Then I asked Dawn if she reconciles the bank statement. She said that Randy, a gentleman sitting in front of her, reconciles the account. I was also told that they have hundreds of employees.

How Can Dawn Steal?

I told the class that a person in Dawn’s position could steal in multiple ways. Here are a few:

• She can leave a terminated employee on the payroll and change that person’s bank account number to her own, allowing her to receive all payroll payments for the discontinued staff member. Then, she can also alter the related W-2s to cover her tracks.
• She can change the master pay rate of any employee, including herself.
• She can inflate the hours worked for any employee.

Prevent Payroll Fraud

After pointing out the flaws in internal control, I asked the class how they would reduce these threats. Angela (another student) sang out: “Create transparency by allowing another person to review or see what the payroll clerk is doing.” (This made me smile since I had been preaching this idea all morning.)

To lessen the threat of fraud, always ask, “how can I create transparency?” The answer will almost always involve allowing another individual to monitor the work of the primary persons in the process. And I am not proposing that this observing person be present 24/7—just that she periodically review the activity of the primary person (e.g., payroll clerk). 

The monitoring person can be someone that works with the entity or someone from the outside (e.g., external CPA). Here are sample fraud prevention measures for the above-described threats:

• Download all the payroll records, including each employee and direct deposit bank account number; sort for identical bank account numbers (a same bank account number may mean that a terminated employee was left on the payroll, and their deposits are being routed to another person such as the payroll clerk)
• Have someone (other than the payroll clerk) pull the payroll personnel files for twenty employees and then compare the authorized pay rates (in the personnel file) to the payroll master file (in the software); tell the payroll clerk that this procedure will occur with some frequency and will happen without notice
• For hourly employees, have someone (other than the payroll clerk) pull the reported hours for two departments and review for appropriateness; inquire of the department head regarding any higher-than-normal hours
• Examine the W-2s of the payroll personnel
• Print a budget to actual salary report or a current year/prior year comparison of wages; provide the same to the governing body
• Report findings from these procedures to the governing body; do this at least once per year (regularity makes the payroll personnel think twice about theft)

Take Away

By the way, the payroll clerk was the only person with access to the payroll master file. This is not necessarily a bad thing. You want to limit the number of persons with access to payroll master file, but a second person should monitor the payroll clerk’s inputs into the payroll software.

So how can you prevent payroll fraud? Think about your own payroll system. Are there any potential threats to your payroll system? Also, be aware of backdoor payroll thefts and ghost employees.

If you’ve seen payroll fraud, please share a comment about how it happened.

If you are interested in more information about white-collar crime, check out my other fraud prevention articles.

iPad Apps for CPAs: The Tried and True

By Charles Hall | Technology

Here is a list of iPad apps for CPAs. You’ll find each one helpful in your daily work.

Checkpoint – A library of accounting and auditing publications by Thomson Reuters. You must pay for the books, but Checkpoint provides powerful search capabilities.

Notability – The best app I’ve found for taking notes. You can also record audio as you take notes and then quickly return to a specific part of the conversation by touching a written word with your iPad Pencil. I use this almost daily.

OmniFocus – A high-end to-do list. It provides contextual listings, including a hotlist (to help me remember the most important things). You can add, for instance, a to-do item for a particular client or a trip to the hardware store. This app takes some time to understand, but very powerful. Consider taking David Sparks online OmniFocus class. I found it helpful.

Box – A secure file storage system in the cloud. Very powerful. I started using Box about six months ago. There’s a learning curve, but it’s worth it. It’s pricey. I use this storage system for business files.

Dropbox – Cheaper than Box. A cloud-based storage system in the cloud. Dropbox is easy to use. I tend to use Dropbox for personal data. Dropbox seems to integrate more easily with other apps than Box does. I store large video or audio files here (rather than Evernote). This app feels like a large electronic sandbox.

Evernote – Storage app. I create “notes” inside Evernote and store whatever I desire. Evernote is my electronic library. I have saved thousands of articles and research. Apply several tags to each note, so you can quickly find the information you need.

Keynote – A slide presentation app. I use Keynote more than Powerpoint. The Keynote background slides are the best. I find it easier to create slide decks with my iPad than with my desktop.

Weather – Weather app. I start my day by checking the weather, and, when I’m going out of town, I check my destination’s weather before I leave.

Outlook – Email app. I tried Gmail for a while but returned to Outlook. It’s just easier to use. And it integrates with Office 365.

Scanbot – I take pictures of multiple pages, and the scan automatically loads to a specified Box folder.

Holy Bible – You Version Bible app. I start each day with this app. You Version is free and provides several different translations.

Explain Everything – Want your clients to see what you are drawing while you are online with them? Pull up a PDF and write on it with your iPad Pencil. Instantly your client sees what you are doing. Record the presentation (including sound) and store it. Then share the conversation with anyone. Crazy. 

Audible – Audible book app. I listen to books while I’m on the road (or when I am exercising). 

iThoughts – Want to brainstorm visually? iThoughts is your app. Create color-coded maps of your ideas. Watch their video example here. 

Pocket – An easy-to-use use app to capture internet articles as you see them. Don’t have time to read an article? Save the piece with Pocket with one click. The app shares the captured articles across platforms.

Documents – Write on PDFs or annotate them in other ways (like adding a red box to highlight an area). I don’t take paper copies of agendas or additional information to meetings. They are all here in Documents. It’s a great file manager that connects to file storage systems such as Dropbox. Documents works with all types of files, including Excel, Adobe Acrobat, Word, video files, images. 

Apple Pencil – While not an app, consider using an Apple Pencil. Mine cost about $100. I use it daily to write on electronic documents. See my demonstration here. (If you’ve tried other styluses and they’ve not worked. Try this one. I had almost given up on electronic writing instruments. Then the Apple Pencil came along.)

Your Thoughts?

What apps do you find most helpful?