As fraud rises, CFOs must approach numbers skeptically, report finds

https://www.cfodive.com/news/Center-Audit-Quality-financial-reporting-fraud/593123/

Executives might be committed to accuracy, but middle managers and others throughout the organization must be on board, too.

The pandemic is increasing financial reporting fraud, putting the onus on CFOs to create an organization-wide system that prevents wrongdoing, a coalition of auditing and other oversight groups said in a report released today.

Financial statement fraud in public companies is real and that risk has only increased during the Covid-19 pandemic,” said Julie Bell Lindsay, executive director of the Center for Audit Quality, one of four groups to release the report.

To help ensure the integrity of their company’s financial reporting, CFOs can’t rely on external auditors as their bulwark against fraud; they must weave protection into the fabric of the organization and exercise the same skepticism toward numbers auditors are trained to do.

“The strongest fraud deterrent and detection program requires extreme diligence from all participants in the financial reporting system,” Lindsay said. “Certainly, you have internal and external auditors, but you also have regulators, audit committees and, especially, public company management.”

Heightened stress

The report looks at SEC enforcement data from 2014 to 2019, a period of relative calm Linsday said can help set a baseline for assessing how much in pandemic-caused fraud regulators will find when they do their post-crisis analysis.

“The timing of this report is really a great way to … remind all the folks in the financial reporting ecosystem that … the pressures for fraud to happen are strong right now,” she said. 

Improper revenue recognition comprises about 40% of wrongdoing in financial reporting, more than any other type, a finding that tracks an SEC analysis released last August. 

Companies tend to manipulate revenue in four ways:

  1. The timing of recognition
  2. The value applied
  3. The source
  4. The percentage of contract completion claimed

The report singles out revenue-recognition manipulation by OCZ Technology Group, a solid-state drive manufacturer that went bankrupt in 2013, as a typical case.

The company had to restate its revenues by more than $100 million after it was caught mis-characterizing sales discounts as marketing expenses, shipping more goods to a large customer than it could be expected to sell, and withholding information on product returns.

The CEO was charged with fraud and the CFO with accounting, disclosure, and internal accounting controls failures.

The report lists three other common types of fraudmanipulation of financial reserves, manipulation of inventories, and improper calculation of impairment.

Reserve issues involve how, and when, balances are changed, and how expenses are classified; inventory issues involve the amounts that are listed and how much sales cost; and impairment issues involve the timing and accuracy of the calculation. 

Increase expected

More of these kinds of problems will likely be found to be happening because of the pandemic, the report said. 

“This is where all of this comes to a head,” Lindsay said. “You certainly can see pressure, because some companies are struggling right now and there can be pressure to meet numbers, analysts expectations.”

The pressure finance professionals face is part of what the report calls a “fraud triangle,” a convergence of three factors that can lead to fraud: pressure, opportunity and rationalization.

In the context of the pandemic, pressure comes as companies struggle with big drops in revenue; opportunity arises as employees work remotely; and the rationalization for fraud is reinforced by the unprecedented challenges people are facing. 

“It could be anything,” said Lindsay. “‘My wife just lost her job, so I need to make up for it.'”

The report lists fraud types that analysts expect are rising because of the pandemic:

  • Fabrication of revenue to offset losses.
  • Understatement of accounts receivable reserves as customers delay payments. 
  • Manipulation of compliance with debt covenants. 
  • Unrecognized inventory impairments.
  • Over- or understated accounting estimates to meet projection.

About a dozen types in all are listed. 

“Past crises have proven that at any time of large-scale disruption or stress on an economy or industry, companies should be prepared for the possibility of increased fraud.” the report said. 

Lindsay stressed three lessons she’d like to see CFOs take away from the report.

First, the potential for fraud in their companies shouldn’t be an afterthought. Second, protection against it is management’s responsibility but there’s also a role for company’s audit committee, its internal auditors and it’s external auditors. Third, CFOs and the finance executives they work with, including at the middle management level, must bring that same skepticism toward the numbers that auditors are trained to bring.

“Professional skepticism is a core competency of the external auditor and, quite frankly, the internal auditor,” she said. “Management and committee members are not necessarily trained on what it is, but it doesn’t mean you shouldn’t be exercising skepticism, [which is] asking questions about the numbers that are being reported. Is this exactly what happened? Do we have weaknesses? Do we have areas of positivity? It’s really about drilling down and having a dialogue and not just taking the numbers at face value.”

In addition to the Center for Audit Quality, Mitigating the Risks of Common Fraud Schemes: Insights From SEC Enforcement Actions was prepared by Financial Executives International, The Institute of Internal Auditors and the National Association of Corporate Directors.

Beaumont victimized by medical equipment thieves, feds say

https://www.detroitnews.com/story/news/local/michigan/2021/01/14/beaumont-victimized-medical-equipment-thieves-feds-say/6655265002/

The indictment describes an inside job involving Beaumont employees who sold stolen sponges, adhesives and instruments used to inspect eyes and ears. The equipment included cystoscopes, a thin tube with a camera that is inserted through the urethra and into the bladder.

“Some of the medical devices stolen and re-sold over the Internet were possibly contaminated devices that were previously used in various surgical and other medical procedures on patients,” according to the indictment.

The three individuals charged in the indictment are:

  • Paul Purdy, 49, of Bellbrook, Ohio
  • Valdet Seferovic, 32, of Auburn Hills
  • Zafar Khan, 40, of Fenton

Purdy and Seferovic not respond to messages seeking comment Thursday while Harold Gurewitz, a lawyer for Khan, declined comment. The three defendants are scheduled to make initial appearances Jan. 21 in federal court.

“These defendants used their employment status to circumvent the safety protocols established by Beaumont Hospital to profit from the theft of medical devices and put the health and safety of the general public at risk in doing so,” U.S. Attorney Matthew Schneider said in a statement.

The wire fraud and conspiracy charges listed in the 18-count indictment are punishable by up to 20 years in federal prison.

Beaumont officials have cooperated fully with the investigation, health system spokesman Mark Geary wrote in an email to The Detroit News.

This kind of theft does a disservice to more than just Beaumont — it does a disservice to the community,” Geary wrote. “We have confidence in the legal process and trust a just result will be achieved.”

Purdy and Seferovic were friends who worked at Beaumont and had access to storage areas inside one of the system’s hospitals, prosecutors alleged. The duo gained access to medical supplies and devices, according to the government, and devised a plan to steal the equipment and sell the items throughout the U.S.

Purdy, who worked for Beaumont until resigning in 2017, never told buyers the items were stolen, prosecutors said. After he quit, Purdy recruited Seferovic to continue stealing items from the medical supply, cleaning and disinfecting rooms, according to prosecutors.

“Medical devices that are removed from their rightful place in a hospital or other medical setting put patients’ health at risk by denying them access to needed diagnostic imaging and treatment,” Lynda Burdelik, special agent in charge of the U.S. Food and Drug Administration’s Criminal Investigations field office in Chicago, said in a statement.

Purdy paid Seferovic for stolen items via PayPal and resold the devices on eBay and Amazon, according to the government. On March 28, 2018, the indictment alleges Purdy received a $4,800 wire payment from the sale of two cystoscopes.

That same day, Seferovic received a $2,550 payment via PayPal, according to the government.

In fall 2017, Seferovic also agreed to steal and sell medical devices and supplies to Khan, who owns Wholesale Medical & Surgical Suppliers of America, LLC in Flint, according to the indictment.

Seferovic would transfer stolen supplies to Khan during meetings in metro Detroit, including at a Walmart parking lot, according to the indictment. Khan, in turn, would sell the supplies and devices online at below retail price.

Seferovic’s job duties and status was unclear Thursday.

The investigation and alleged crimes have prompted internal changes at Beaumont.

“…Beaumont has enhanced security protocols and implemented additional checks and balances across the organization to reduce the chances of something like this happening again,” Geary said.

Former Tennessee hospital manager charged with stealing nearly $800K in supplies

https://www.beckershospitalreview.com/supply-chain/former-tennessee-hospital-manager-charged-with-stealing-nearly-800k-in-supplies.html?utm_medium=email

Employee Theft Quotes. QuotesGram

A former worker at Maury Regional Medical Center in Columbia, Tenn., was charged with stealing nearly $800,000 worth of medical supplies from the hospital and selling them online for his personal benefit, Williamson Source reported. 

Former system coordinator Tommy John Riker allegedly stole $798,265 worth of supplies from the hospital between 2017 and 2019. He worked in the hospital’s supply chain department and was responsible for purchasing and managing items in the hospital’s inventory control system.

His job allowed him to steal items from the hospital’s inventory and manipulate the inventory to make it seem the supplies were given to staff, according to investigators from Tennessee’s Comptroller’s Office, the Williamson Source reported. 

The stolen supplies include needles, wound dressings and surgical dressings, according to the comptroller’s report. 

Mr. Riker was indicted on one count of theft over $250,000 and 54 counts of money-laundering.

Read the full article here

Ex-California hospital CFO pleads not guilty to felony charges

https://www.beckershospitalreview.com/legal-regulatory-issues/ex-california-hospital-cfo-pleads-not-guilty-to-felony-charges.html?utm_medium=email

Binghamton Embezzlement Lawyer | Embezzlement Charges in NY

The former CFO of Health Care Conglomerate Associates pleaded not guilty to charges of embezzlement, conflict of interest and using his official position for personal gain, according to The Sun-Gazette

Alan Germany formerly served as CFO of HCCA, which previously managed Tulare (Calif.) Regional Medical Center. He also served as the acting CFO of Tulare Regional and Inyo Hospital in Lone Pine, Calif. Mr. Germany was one of three HCCA executives indicted Aug. 11. 

Mr. Germany was charged with 11 counts of embezzlement, four counts of conflict of interest, and one count each of using his official position for personal gain and failing to file a statement of economic interest. On Aug. 19, he pleaded not guilty to the charges, according to the report. 

The charges against Mr. Germany include accusations of having hospital staff generate false billing invoices and working with HCCA’s former CEO Yorai “Benny” Benzeevi, MD, to embezzle U.S. Treasury funds meant for hospital districts, according to the report.

If convicted on all charges, Mr. Germany could face more than 10 years in prison, according to the Visalia Times Delta. His next hearing is set for Sept. 30. 

 

 

 

 

The new CFO mandate: Prioritize, transform, repeat

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-new-cfo-mandate-prioritize-transform-repeat

Image result for CFO Expanding Role

Amid a raft of new duties for CFOs, our survey suggests that finance leaders are well positioned to lead the C-suite agenda by championing transformations, digitization, and capability building.
If you wanted to validate the old adage that the only constant in life is change, the results from our newest McKinsey Global Survey suggest you need not look any further than the CFO role.1 In the two years since our previous survey on the topic, CFOs say the number of functions reporting to them has risen from about four to more than six. What’s more, the share of CFOs saying they oversee their companies’ digital activities has doubled during that time. And many finance leaders say they are being asked to resolve issues in areas that are relatively new to them while continuing to mind traditional responsibilities, such as risk management, that remain business priorities.

Responses indicate that the opportunity for CFOs to establish the finance function as both a leading change agent and a source of competitive advantage has never been greater. Yet they also show a clear perception gap that must be bridged if CFOs are to break down silos and foster the collaboration necessary to succeed in a broader role. While CFOs believe they are beginning to create financial value through nontraditional tasks, they also say that a plurality of their time is still devoted to traditional tasks versus newer initiatives. Meanwhile, leaders outside the finance function believe their CFOs are still primarily focused on and create the most value through traditional finance tasks.

How can CFOs parlay their increasing responsibility and traditional finance expertise to resolve these differing points of view and lead substantive change for their companies? The survey results point to three ways that CFOs are uniquely positioned to do so: actively heading up transformations, leading the charge toward digitization, and building the talent and capabilities required to sustain complex transformations within and outside the finance function.

Changing responsibilities, unchanged perceptions

The latest survey results confirm that the CFO’s role is broader and more complex than it was even two years ago. The number of functional areas reporting to CFOs has increased from 4.5 in 2016 to an average of 6.2 today. The most notable increases since the previous survey are changes in the CFO’s responsibilities for board engagement and for digitization (that is, the enablement of business-process automation, cloud computing, data visualization, and advanced analytics). The share of CFOs saying they are responsible for board-engagement activities has increased from 24 percent in 2016 to 42 percent today; for digital activities, the share has doubled.

The most commonly cited activity that reports to the CFO this year is risk management, as it was in 2016. In addition, more than half of respondents say their companies’ CFOs oversee internal-audit processes and corporate strategy. Yet CFOs report that they have spent most of their time—about 60 percent of it, in the past year—on traditional and specialty finance roles, which was also true in the 2016 survey.

Also unchanged are the diverging views, between CFOs and their peers, about where finance leaders create the most value for their companies. Four in ten CFOs say that in the past year, they have created the most value through strategic leadership and performance management—for example, setting incentives linked to the company’s strategy. By contrast, all other respondents tend to believe their CFOs have created the most value by spending time on traditional finance activities (for example, accounting and controlling) and on cost and productivity management across the organization.

Finance leaders also disagree with nonfinance respondents about the CFO’s involvement in strategy decisions. CFOs are more likely than their peers to say they have been involved in a range of strategy-related activities—for instance, setting overall corporate strategy, pricing a company’s products and services, or collaborating with others to devise strategies for digitization, analytics, and talent-management initiatives.

Guiding and sustaining change

Our latest survey, along with previous McKinsey research,2 confirms that large-scale organizational change is ubiquitous: 91 percent of respondents say their organizations have undergone at least one transformation in the past three years.3 The results also suggest that CFOs are already playing an active role in transformations. The CFO is the second-most-common leader, after the CEO, identified as initiating a transformation. Furthermore, 44 percent of CFO respondents say that the leaders of a transformation, whether it takes place within finance or across the organization, report directly to them—and more than half of all respondents say the CFO has been actively involved in developing transformation strategy.

Respondents agree that, during transformations, the CFO’s most common responsibilities are measuring the performance of change initiatives, overseeing margin and cash-flow improvements, and establishing key performance indicators and a performance baseline before the transformation begins. These are the same three activities that respondents identify as being the most valuable actions that CFOs could take in future transformations.

Beyond these three activities, though, respondents are split on the finance chief’s most critical responsibilities in a change effort. CFOs are more likely than peers to say they play a strategic role in transformations: nearly half say they are responsible for setting high-level goals, while only one-third of non-CFOs say their CFOs were involved in objective setting. Additionally, finance leaders are nearly twice as likely as others are to say that CFOs helped design a transformation’s road map.

Other results confirm that finance chiefs have substantial room to grow as change leaders—not only within the finance function but also across their companies. For instance, the responses indicate that half of the transformations initiated by CFOs in recent years were within the finance function, while fewer than one-quarter of respondents say their companies’ CFOs kicked off enterprise-wide transformations.

Leading the charge toward digitization and automation

The results indicate that digitization and strategy making are increasingly important responsibilities for the CFO and that most finance chiefs are involved in informing and guiding the development of corporate strategy. All of this suggests that CFOs are well positioned to lead the way—within their finance functions and even at the organization level—toward greater digitization and automation of processes.

Currently, though, few finance organizations are taking advantage of digitization and automation. Two-thirds of finance respondents say 25 percent or less of their functions’ work has been digitized or automated in the past year, and the adoption of technology tools is low overall.

The survey asked about four digital technologies for the finance function: advanced analytics for finance operations,5 advanced analytics for overall business operations,6 data visualization (used, for instance, to generate user-friendly dynamic dashboards and graphics tailored to internal customer needs), and automation and robotics (for example, to enable planning and budgeting platforms in cloud-based solutions). Yet only one-third of finance respondents say they are using advanced analytics for finance tasks, and just 14 percent report the use of robotics and artificial-intelligence tools, such as robotic process automation (RPA).7 This may be because of what respondents describe as considerable challenges of implementing new technologies. When asked about the biggest obstacles to digitizing or automating finance work, finance respondents most often cite a lack of understanding about where the opportunities are, followed by a lack of financial resources to implement changes and a need for a clear vision for using new technologies; only 3 percent say they face no challenges.

At the finance organizations that have digitized more than one-quarter of their work, respondents report notable gains from the effort. Of these respondents, 70 percent say their organizations have realized modest or substantial returns on investment—much higher than the 38 percent of their peers whose finance functions have digitized less than one-quarter of the work.

Unlocking the power of talent

The survey results also suggest that CFOs have important roles to play in their companies’ talent strategy and capability building. Since the previous survey, the share of respondents saying CFOs spend most of their time on finance capabilities (that is, building the finance talent pipeline and developing financial literacy throughout the organization) has doubled. Respondents are also much more likely than in 2016 to cite capability building as one of the CFO’s most value-adding activities.

Still, relative to their other responsibilities, talent and capabilities don’t rank especially high—and there are opportunities for CFOs to do much more at the company level. Just 16 percent of all respondents (and only 22 percent of CFOs themselves) describe their finance leaders’ role as developing top talent across the company, as opposed to developing talent within business units or helping with talent-related decision making. And only one-quarter of respondents say CFOs have been responsible for capability building during a recent transformation.

But among the highest-performing finance functions, the CFO has a much greater impact. Respondents who rate their finance organization as somewhat or very effective are nearly twice as likely as all others to say their CFOs develop top talent organization-wide (20 percent, compared with 11 percent). Among those reporting a very effective finance function, 38 percent say so.

Looking ahead

It’s clear from the numbers that CFOs face increased workloads and expectations, but they also face increased opportunities. In our experience, a focus on several core principles can help CFOs take advantage of these opportunities and strike the right balance:

  • Make a fundamental shift in how to spend time. To be more effective in their new, ever-expanding roles, CFOs must carefully consider where to spend their time and energy. They should explore new technologies, methodologies, and management approaches that can help them decide how and where to make necessary trade-offs. It’s not enough for them to become only marginally more effective in traditional areas of finance; they must ensure that the finance organization is contributing more and more to the company’s most value-adding activities. It’s especially important, therefore, that CFOs are proactive in looking for ways to enhance processes and operations rather than waiting for turnaround situations or for their IT or marketing colleagues to take the lead.
  • Embrace digital technologies. The results indicate that the CFO’s responsibilities for digital are quickly increasing. We also know from experience that finance organizations are increasingly becoming critical owners of company data—sometimes referred to as the “single source of truth” for their organizations—and, therefore, important enablers of organizational transformations. Finance leaders thus need to take better advantage and ownership of digital technology and the benefits it can bring to their functions and their overall organizations. But they cannot do so in a vacuum. Making even incremental improvements in efficiency using digital technologies (business intelligence and data-visualization tools, among many others) requires organizational will, a significant investment of time and resources, and collaboration with fellow business leaders. So, to start, CFOs should prioritize quick wins while developing long-term plans for how digitization can transform their organizations. They may need to prioritize value-adding activities explicitly and delegate or automate other tasks. But they should always actively promote the successes of the finance organization, with help from senior leadership.
  • Put talent front and center. Since the previous survey, CFOs have already begun to expand their roles and increase their value through capability building and talent development. But the share of CFOs who spend meaningful, valuable time on building capabilities remains small, and the opportunity for further impact is significant. Finance leaders can do more, for instance, by coaching nonfinance managers on finance topics to help foster a culture of transparency, self-sufficiency, and value creation.