Fraud: Can We Prevent It?

I may be starting an assignment shortly, working with a developer who has established a group of ambulatory clinical services. One of the concerns I raised with him in an initial interview was the limited amount of financial staff he employed. While he has great confidence in the honesty of the people he employs, I pointed out internal controls are generally weak when a single individual has responsibility for multiple aspects of cash receipts, disbursements and financial reporting. I found an interesting post on a blog called Forensic Accounting Today, written by Jeff Moore of Atlanta, GA. The post, Preventing Fraud in the Workplace, lists ten anti-fraud suggestions and has links to "the Fraud Triangle", "a fraud policy", "the fraud tree" and "red flags of fraud."

Interesting stuff, and the more you read, the more likely you are to be sensitive to the risks of fraudulent activity. I plan to use Jeff's suggestions as I educate my new client.

Accounting - Art, Science...Or Manipulation?

I've always believed accounting could be viewed as an art or a science. My own belief is that its an art. I don't mean to say the numbers should be inaccurate, just analyzed and reported from more than a straight transactional perspective. To clarify, let's look at a contra-asset account that involves an estimate, like allowances for doubtful accounts. If we prepare a monthly analysis based on consistent formulae, we derive a number for the allowance. If we book that number based on each month's analysis, we may end up with dramatic fluctuations based on circumstances that could change month-to-month. This would cause the financial statements to reflect those fluctuations, giving rise to concerns that may be unfounded. In my view, it's preferable to smooth out these fluctuations by adjusting the allowance to reflect what we know to be the trends. With a thorough knowledge of the company and industry on which we're reporting, we will have a high level of confidence that the year-end result will be accurate, but with less periodic fluctuation. This is what I mean by art, rather than science.

Ah, but what about manipulation or obfuscation? If by our art we make the reader so confused or the numbers so opaque as to be difficult to perceive or understand, we're now treading in fraudulent waters. In a March article by Sarah Johnson, in CFO Magazine, entitled "Now You Don't See It", the author illustrates through example how auditors are less likely to find manipulated earnings when management directs their attention away from areas of financial statements that contain errors. It behooves all of us to ensure we don't fall into that trap. I would be interested in your thoughts on this matter.

Not-For Profit Tax Exemptions in Peril?

Ther's a lot of buzz around the Government's scrutiny of not-for-profit enterprises. Not surprising tax exemption is being looked at, given the Federal and State budget deficits. A recent article published on the Healthcare Financial Management Association website, entitled  Tax Exempt Status: Additional Scrutiny on the Horizon?, stated "Regardless of (healthcare) reform’s ultimate fate, providers should anticipate increased federal scrutiny in this area. Given the fiscal difficulties currently being experienced at all levels of government, it’s not hard to see challenges to tax-exempt status on the horizon for many providers."  I feel certain such challenges won't be limited to healthcare organizations. The revised Form 990 has a Schedule H, to be filed by non-profit hospitals. A good summary of the shortcomings of this form in assessing a hospital's charitable works is presented on page 54 of this month's issue of Hospitals and Health Networks magazine. "Fix Schedule H Shortcomings", by Bradford H. Gray and Ashley Palmer, makes the point the expenditures measured on the form are, at best, a crude measure of community benefit. For example, they say, how does one use expenditures to assess programs to reduce teeenage pregnancy? As another example, is the value of sustaining a money-losing program that provides needed services best measured by the amount of services it requires? And, if you're industry is not healthcare, get ready for similar scrutiny. It will be up to the not-for-profit industries to convince the government as well as the public of their charitable or educational mission and the appropriateness of continued tax exemption. I'm interested in anyone's thoughts about dealing with this critical issue.