If you run a business, thefts like these can and will mostly happen:
Financial Due Diligence for Commercial Real Estate is a great read for those wanting a better understanding of commercial real estate theory and practice.
In addition, to learning new ways to detect and prevent fraud, there are discussions in the book on lenders and risk management, construction lending, private lenders, loan guarantees, business plans and borrower provided financial statements.
Your financial statements are beginning to look good and the company appears profitable. Change can be a good thing, but it can also be an indicator of suspicious or fraudulent activity. While the financial ratios learned in accounting are often used as indicators of the business’s performance, it’s the changes from one period to another that we as fraud examiners are concerned with.
For example; changes in the “Current Ratio” may be the result of an embezzlement or a billing scheme. Significant or wide swings in the “Profit Margin” could be from “doctored” or artificially inflated sales. Or changes in the “Gross Profit Margin” could be warning signs of fraud or other accounting regularities, all of which require further examination.
The book “Financial Due Diligence for Commercial Real Estate” devotes an entire chapter to using financial ratios to detect fraud. In fraud examination, two or more reporting periods are often used when looking for suspect activity.
“Financial Due Diligence for Commercial Real Estate: Proven Methods to Detect and Prevent Fraud” was written by a Certified Fraud Examiner and is available on Amazon.
What’s your opinion of Certified Fraud Examiners working with developers and banks when acting at their request makes a scheduled or “drop in” visit on a project/jobsite?
The goal in mind is to deter the following actions from happening:
- The fraudulent reporting of labor by crosschecking daily sign in sheets,
- Ensuring that contractors are aware that double billing for equipment/machinery used on more
than one site will not be tolerated,
- That counterfeit or substandard parts or materials or quality less than approved by the project
owner is not being substituted in place of.
What’s the consensus? the concept is in no way meant to replace the project manager.
Can this work on a pay per visit basis?
Fraud in construction happens more often than you think! While keeping tabs on materials and equipment using cameras and onsite security is a must. It’s the “deliberate” fraudulent over-billing that can be the kiss of death! Examples of which include:
Solution: Have a third party, a Certified Fraud Examiner work with your Project Manager on a part time / contractual basis. I'm sure the word will get out ?
While no fund is ever correct 100% of the time, everyone still likes a winner. No one I know of brags about losing a million dollars in a bad real estate deal. So one has to ask, were the losses avoidable, could they've been minimized? Or were the losses the result of "changing market corrections" or just a lack of due diligence?
If you're the least bit unsure, I'd recommend that you call the fund manager! Tell them, a Fraud Examiner suggested you should call and ask what financial due diligence measures are being utilized when sizing a real estate deal? Remember to use the words "Financial due diligence." Do they brush off the question or are they happy to oblige? In the end, it's your money!
You're not alone! Many firms receive auditor reports with negative opinions that often require (CAP) "Corrective Action Plans." Ipsen Management Services is available to meet and prepare yours in response.
Corrective Action Plans usually include the following:
Before a doctor prescribes medication or treatment, the patient must first be examined and diagnosed. How else could the doctor determine what the patient’s needs are? At the same time, the Fraud Examiner must interview the client at the beginning of every engagement in order to determine what exactly are the client’s needs.
When it comes to building internal controls (policies and procedures), the Fraud Risk Assessment (FRA) is the Certified Fraud Examiner’s (CFE) tool of choice. The assessment addresses more than a dozen areas of the client’s business activity. Once completed, the CFE will have a better understanding of the client’s strengths and weaknesses, and will know better as how to create strong internal controls (company policies and procedures) that will be effective.
The interview consists of a series of questions designed to focus on areas of risk leading to the creation of the controls needed to minimize the opportunity of fraud from occurring. The four objectives of the Risk Assessment tool are to:
Strong and effective internal controls should be a desire of every business. While the introduction of technology has led to the streamlining of operations, its overall application has not reduced the opportunity for fraud as fraudsters have always found new ways to circumvent the system. Even today’s software with all its “alerts” still requires checks and balances.
My recommendation… if it’s been awhile, or if you’ve never had one, please consider having a Fraud Risk Assessment today! What’s the worst that can happen? Your employees steal you blind!
Internal controls consist of policies and procedures designed to provide a reasonable certainty to management that the organization will achieve its stated objectives and goals. While internal controls are defined as either preventative or detective, the primary purpose of internal controls is to further management’s guidelines via written policies and procedures.
The Sarbanes – Oxley Act of 2002 also requires public companies to have adequate controls in place which often subjects them to both internal and external audits designed to test the effectiveness of their internal controls over financial reporting.
Policies and their accompanying procedures are often used as tools to disseminate information, new company policies and to train employees by providing uniform instructions.
Policies can be as short as two or three sentences and are meant to be easily understood, simple statements of how the organization intends to conduct its business activities. Policies are intended to provide management with a set of guiding principles that can assist with decision making as well.
Procedures on the other hand describe the steps necessary for each policy to be put into action. To be effective procedures should outline:
- Who (by position or appointment) will do what,
- What steps do they need to take, and
- Which forms or documents if any are to be used.
To meet policy objectives, the procedures may be as simple as a few bullet points, yet can also work as forms, checklists, instructions or even flowcharts.
Sound fiscal policies are rooted in the organizations internal controls as well as the nonprofit’s desire to meet certain regulatory standards. In addition, donors to nonprofits expect compliance and expect adherence to specific policy and procedure guidelines. Documenting such policies serves as an important tool for defining the roles and responsibilities as well as ensuring the organization’s financial data is accurate and reliable.
CompassPoint, a provider of leadership development for nonprofits lists six reasons why following strong fiscal policies and procedures will ensure your organization’s quality performance.
Strong fiscal policies and procedures will:
Protect the assets of the organization;
Ensure the maintenance of accurate records of the organization’s financial activities;
Provide a framework for the organization’s financial decision making;
Establish operating standards and behavioral expectations;
Serve as a training resource for staff; and
Ensure compliance with federal, state, and local legal and reporting requirements.