All Posts by Charles Hall

Follow

About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.

How to prevent payroll fraud
Jul 06

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.

prevent payroll fraud

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
Jun 17

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.

iPad Apps for CPAs

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.

OmniFocusA 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?

$16 million stolen from bakery
May 27

How $16 Million was Stolen from a Bakery

By Charles Hall | Asset Misappropriation

$16 million was stolen from a bakery. You read that right.

Today I show you how large sums of money can be taken from a small business with one simple fraud scheme.

The Theft

Sandy Jenkins, the controller of Collin Street Bakery in Corsicana, Texas, made off with more than just fruitcakes. He took over $16 million, so says the FBI. And what did Mr. Jenkins do with the money?

He used the funds in the following ways:

  • $11 million on a Black American Express card
  • $1.2 million at Neiman Marcus in Dallas
  • 532 luxury items, including 41 bracelets, 15 pairs of cufflinks, 21 pairs of earrings, 16 furs, 61 handbags, 45 necklaces, 9 sets of pearls, 55 rings, and 98 watches (having an approximate value of $3.5 million)
  • Wine collection (having an approximate value of $50,000)
  • Steinway electronic piano (having a value of $58,500)
  • 223 trips on private jets (primarily Santa Fe, New Mexico; Aspen, Colorado; and Napa, California, among other places), with a total cost that exceeded $3.3 million
  • 38 vehicles, including many Lexus automobiles, a Mercedes Benz, a Bentley, and a Porsche
  • And more…

How the money was stolen

You might think that stealing $16 million would require an elaborate scheme. But did it? 

Here’s an example of his method: Jenkins would print a check to his personal credit card company, but he would void the check in the accounting system. (He still had the printed check.) Then, he would generate a second check for the same amount to a legitimate vendor, but the second check was never mailed. Next, Jenkins would send the first check to his credit card company.

The result: Jenkins’ credit card was paid, but the general ledger reflected a payment to an appropriate vendor.

$16 million was stolen from bakery

The Weakness that Led to the Theft

No one was comparing the cleared check payees to the general ledger. 

The Fix that Will Detect the Theft

Someone other than those who create checks should reconcile the bank statements to the general ledger. As they do, they should compare the cleared check payees to the vendor name in the accounting system. Some businesses have hundreds (or even thousands of checks) clearing monthly. Therefore, they may not desire to examine every cleared check. 

Alternatively, the business could periodically sample the cleared checks, comparing the cleared checks to the vendor payments in the general ledger. The persons creating checks should know that this test work will be performed. Doing so creates the camera effect. When people know their actions (in this case, the creation of checks) will be examined, they act differently–they are much less likely to steal.

If you desire a preventive control, require a second-person review of canceled checks.

Additionally, someone should be reviewing the profit margins of the company, comparing the ratios with prior periods.

Lastly, when segregation of duties is not possible, have the bank statements mailed to someone outside the accounting department such as an owner. That person should review the cleared checks before providing them to the accounting department. Alternatively, provide online access to the reviewing person. The reviewer should examine the cleared checks and provide documentation of his or her examination to the accounting department.

What Happened to Sandy Jenkins?

Sandy Jenkins was sentenced by U.S. District Judge Ed Kinkeade to serve a total of 120 months in federal prison. His wife, Kay Jenkins also pleaded guilty to one count of conspiracy to commit money laundering. Ms. Jenkins was sentenced to five years of probation.

In March 2019, Sandy Jenkins passed away in a federal prison.

Forthcoming Movie

You may be familiar with the movie Catch Me If You Can which chronicled the exploits of Frank Abagnale, one of the most brilliant cons of all time. Now, it appears there will be a new movie about another: Sandy Jenkins. 

make your CPE incredibly useful
May 26

Make Your CPE Useful: Seven Suggestions to Improve Learning

By Charles Hall | Accounting and Auditing

In a thirty-five year career as a CPA, you will spend well over 1,400 hours taking CPE classes. Are you using this time wisely? Today I share how you can make your CPE useful.

It’s 3:32 p.m. on a Friday and you are thinking, “When will this CPE class ever end?” Your golf swing, a late tax return, your daughter’s college tuition cost–each float through your mind. Your thoughts continue, “So much to do, and I sit here wasting another day. Why can’t this be more interesting?” Tired. Bored. Numb. You want to be anywhere but where you are. You feel trapped. 

make your CPE useful

Why does this happen? Many CPAs mistakenly believe this pain is a requirement of the profession. They seem resigned to death-by-CPE, as though there is no other choice.

But then you’ve been in classes where you’re laughing, learning, and even wanting more. The day ends quickly, and you walk away satisfied.

Wouldn’t you love to increase the quality of your training and your engagement with what you are learning? Here are seven suggestions to make your CPE useful.

1. Create Three-Year CPE Learning Goals: Tie Training to Vision

Create a three-year rolling CPE plan. While you may not be able to plan each individual class, you can still sketch out your desired objectives and learning path.

Fifteen years ago, I decided to become a Certified Fraud Examiner. I thought, “Why not use my CPE hours to move me in that direction?” Over the next year, I purchased the training material from the Association of Certified Fraud Examiners and trained. In September 2004, I reached that goal. Without the goal, the idea would still be just that–an idea. 

What training goal can you set that will make your dream a reality? What vision do you have for your future?

In your career, you will spend hundreds of hours in training. Why not use those precious hours to get you to your desired destination? Continuous learning about new things is no longer an option. There are exciting (and scary) future changes in accounting.

2. Plan Your CPE Classes Annually: Avoid Cramming in December

Planning your CPE calendar will allow you to spread out the learning load (I do not recommend taking 40 hours of CPE the last week of December). The human mind is not designed to absorb large quantities of complex information in a short period. Space out your classes. The separation will allow your mind to digest and retain what you learn. 

3. Seek Out the Best CPE Trainers: They Will Elevate Your Game

Will excellent trainers cost more money? Sometimes yes, but what’s the alternative? Cheap teachers that bore you to death. Signing up for any old class for convenience’s sake or because it’s cheap is a terrible idea.

Great trainers make for excellent learning experiences. Seek them out. Pay the extra money, if need be. This will make your CPE more useful.

4. Revisit CPE Information: Move Learning to Long-Term Memory

For each one-day class, write a one-page summary. Do this the day after you attend the course. (Once you create the one-page outline, archive it in Evernote for future reference.) Merely writing the summary will drive the learning deeper into your mind. 

make your CPE useful

Then revisit the summary using the following intervals:

  • One week later – review for 20 minutes
  • Two weeks later – review for 10 minutes
  • Three weeks later – review for 5 minutes

There’s nothing sacred about the intervals. The method is what is essential.

Additionally, try to recall the information before reviewing the notes. Doing so facilitates retention according to the book Make It Stick. Revisiting the information and trying to recall it will move your knowledge from short-term to long-term memory–where you need it!

Another suggestion to help you remember the information is that you teach it to your firm members. You can’t explain something you don’t understand. Teaching forces you to learn.

5. Use Livescribe Pen to Take Notes: Record the Audio 

For about $180, you can own the Livescribe pen. No, it will not allow you to remember everything you hear. However, it will record the full audio as you write. Then, later, you can touch a particular word in your notes with the tip of the pen and “voilà,” you hear–from the pen–what was said at that moment. You can upload the written notes and audio to your computer. Don’t ask me how it does this, but it works. Amazing! Now you can have a full recording of your training with shortcuts (notes) to find the audio you want to hear. The pen holds up to 200 hours of audio. 

In terms of learning, writing your notes is more effective than typing (and I might add, less distracting to those around you). Science has proven that writing has a more significant effect on learning and retention than typing.

Another learning tip to make your CPE useful: Read the table of contents before the class starts.

6. Read the Table of Contents: Prepare Your Mind 

The human mind likes to anticipate, to know what’s coming. If you can access your CPE material before the class, I encourage you to scan the table of contents and highlight the areas you are most interested in. Highlighting the table of contents will prepare you for what’s coming.

7. Sit Up Front: You’ll Learn More

Finally, sit up front. The farther back you sit, the more distractions you will see (like the guy reading the latest ESPN headlines or the couple talking all day).

Take Action Now: Plan Time to Consider Your Goals

I challenge you to take action now! Go ahead. Specify a time on your calendar to think about your goals and the CPE classes that will get you there. Become an expert in cybersecurity, fraud prevention, litigation support, data mining, artificial intelligence. Pick an area and move toward your goal. 

clear financial statement disclosures
Apr 27

How to Write Clear Financial Statement Disclosures

By Charles Hall | Accounting and Auditing

Creating clear financial statement disclosures is not always easy. Creating (unintentional) confusion? Well, that’s another matter.

clear financial statement disclosures

Clear Financial Statement Disclosures

Let’s pretend that Olympic judges rate your most recent disclosures, flashing scores to a worldwide audience. What do you see? Tens everywhere—or something else?

Balance sheets tend to be clear. Why? The accounting equation. Assets always equal liabilities plus equity. But there is no disclosure equation (darn it), and without such, we flounder in our communication. 

CPAs tend to be linear thinkers. We enjoy Pascal more than Hemingway, numbers more than words, debits and credits more than paragraphs. Our brains are wired that way.

But accounting is more than just numbers. It is the communication of financial statements and disclosures. In the name of clear disclosures, I offer these suggestions.

Consider Your Readers

Who will read the financial statements? Owners, lenders, and possibly vendors. Owners—especially those of smaller businesses—may need simpler language. Some CPAs write notes as if CPAs (alone) will read them. While accounting is technical, we need—as much as possible—to simplify.  

Use Short Paragraphs

Lengthy paragraphs choke the reader. Breaking long paragraphs into shorter ones makes the print accessible. 

Less is more in many instances. When we try to say too much, we sometimes say…too much. Additionally, short sentences are helpful.   

Use Short Sentences

CPAs may have invented the run-on sentence. As I read one of those beauties, I feel as though I can’t breathe. And by the end, I’m gasping. Breaking long sentences into shorter ones makes the reader more comfortable. And she will thank you. 

Use Shorter Words

CPAs don’t receive merit badges for long, complicated words. Our goal is to communicate, not to impress. For example, split is better than bifurcate.  

Attorneys are not our model. I sometimes see notes that are regurgitations of legal agreements, copied word for word—and you can feel the stiltedness. Do your reader a favor and translate the legalese into digestible—and might I say more enjoyable—language. 

Use Tables

Long sentences with several numbers can be confusing. Tables are easier to understand.

Write Your Own Note

Too many CPAs copy disclosures from the Internet without understanding the language. Make sure the language is appropriate for your company.

Put Disclosures in the Right Buckets 

Think of each disclosure header as a bucket. For example, if the notes include a related party note, then that’s where the related party information goes. If the debt note includes a related party disclosure (and this may be necessary), place a reference in the related party note to the debt disclosure. You don’t want your reader to think all of the related party disclosures are in one place (the related party note) when they are not. The same issue arises with subsequent event notes.

Have a Second Person Review the Notes

When writing, we sometimes think we are clear when we are not. Have a second person review the note for proper punctuation, spelling, structure, and clarity. If you don’t have a second person available, perform a cold review the next day—you will almost always see necessary revisions. I find that reading out loud helps me to assess clarity.

I also use Grammarly to edit documents. The software provides grammar feedback as you write. If you don’t have a second person to review your financials, I recommend it.

Use a Current Disclosure Checklist

Vetting your notes with a disclosure checklist may be the most tedious and necessary step. FASB and GASB continue to issue new statements at a rapid rate, so using a checklist is necessary to ensure completeness.   

Winning Gold

I hope these suggestions help you win gold–10s everywhere. I think I hear the national anthem.

>