$994 billion!!! No, it is not the cost of a new stimulus plan, more TARP, another government health care plan. It is the estimated amount that U.S. organizations lost to occupational fraud in 2008.
The Association of Certified Fraud Examiners recently issued its report - Report to the Nation on Occupational Fraud and Abuse. The report was conducted by compiling data from 959 cases of occupational fraud between January, 2006 and February, 2008. It was Certified Fraud Examiners who provided data for the study. As you will see from the highlights below, fraud is a costly matter for all businesses regardless of size. Small businesses are as susceptible to it as large organizations and the private sector as susceptible as the public sector.
Because fraud is so costly, it's important to implement controls, processes and procedures for detecting fraud or potential fraud before it occurs. One of the best models you can follow is the IRS model - compliance through fear. Most taxpayers are not enthused about paying taxes and filing their returns each year, but they do so because it's the law! Most tax payers are fearful of the IRS and the consequences of not complying with the tax laws. If someone knows that their work will be reviewed, and there are procedures in place to detect fraud, it is much more likely that an individual will not attempt fraud.
Some common tips for preventing fraud are surprise audits, having a second person review work, having a follow behind to double check the bookkeeping and preparing financial statements, calling vendors to check on orders and verify they are real orders, and reconciling invoices to payments.
Here are some quick highlights of the Report To the Nation on Occupational Fraud and Abuse:
- Median loss by fraud - $175,000
- 25% of the frauds committed cost organizations more than $1 million
- Typical time frame for a fraud is 2 years
- Often times, the fraudster is a first time offender
- Most frequent way to catch frauds was through tips - 46% of cases were uncovered based on tips from employees, customers and vendors
- Anti-fraud controls did help reduce or catch fraudulent schemes. Organizations that conducted surprise audits had a median loss of $70,000 compared to $207,000 for those that did not have a plan in place.
- Most common industries victimized by fraud: banking and financial services - 15% of cases; government - 12% of cases; health care - 8% of cases
- Small businesses are not immune to fraud: Median loss for businesses with fewer than 100 employees - $200,000.
- inadequate internal controls are most common reasons that permitted fraud to occur.
- most organizations closed the barn door after the horses escaped. Anti-fraud controls were implemented by 78% of the organizations after they discovered the fraud.
- Most frequent perpetrators of fraud were upper management and accounting departments. Median loss for fraud committed by upper management was $853,000.
If you have been in noncompliance with the tax laws, playing around the edges of the tax laws, hiring 1099 contractors, rather than employees and are not worried about an audit, because the chances of an audit are low, then the next couple of posts are a must read for you.
The post, Are You Self Employed or a Small Business Owner? If So, The IRS Is Gearing Up to Evaluate How you Classify Workers, is in regards to the Dept of Treasury's recent Internal Audit Report: Employment Tax Compliance Could Be Improved with Better Coordination and Information Sharing. The othe other post, What Whistleblowers and Hedge Fund Investors have in Common should make you take notice that your business and complaince to tax law will be under the scrutiny of many prying eyes including your employees.
Both posts underscore the seriousness that the IRS is taking regarding tax fraud including the misclassification of 1099 contractors as employees. As the budget deficits grows and additional revenue is needed by the government the logical thing to do is to raise revenue through increased compliance.
In it's recently released report, Employment Tax Compliance Could Be Improved With Better Coordination and information Sharing, the Treasury states:
The misclassification of employees as independent contractors is a nationwide issue affecting millions of employees that continues to grow and contribute to the tax gap. According to program documents, closing the tax gap remains as one of the biggest challenges for the Small Business/Self-Employed Division. The Internal Revenue Service (IRS) has several opportunities to enhance compliance in its Employment Tax Program by taking measures to ensure that employment tax forms are not misused to avoid paying proper tax... 
If you combine the statements in this audit report with the IRS' recently launched program to audit 6,000 businesses, that was highlighted in a previous post, What's Your Exposure to This 1099 Issue?, there appears to be a pattern forming, i.e., the IRS will be targeting the use of 1099 workers and going after businesses they believe are misclassifying employees.
If you are a business that relies heavily on using 1099 contractors, you may want to reevaluate your use of 1099 contractors and determine if you are in compliance. Here is a link you can use to learn about more information about how the IRS classifies an employee verses an independent contractor.
Whistleblowing becomes a for-profit business. In David Kocieniewski's article, Whistle-Blowers Become Investment Option for Hedge Fundshe outlines how the hedge funds and private equity groups are getting into the Whistleblowing business by buying a percentage of future payouts.
Informants who turn in tax cheats have to wait years to get their share of any rewards from the I.R.S.'s recently expanded whistle-blower program. So hedge funds, private equity groups and other big investors are offering an alternative. they are essentially agreeing to buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistle-blowers.
The surging size of the potential awards is driving all the interest.
The Whistleblower/informant program has been on the books since 1867 and allows the Secretary of Treasury to pay rewards
for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same time.
Prior to 2006, the law had been largely unchanged and then in December, 2006 the Tax Relief and Health Care Act of 2006 was passed. prior to 2006, the rewards were discretionary, the new law changed this and provided that the rewards would be 15% to 30% of the collected proceeds. It also added Whistleblowers rights and set-up the Whistleblower Office reporting to the commissioner. The first director of the Whistleblowers office, Stephen Whitlock, was appointed in February, 2007.
Since then the program has taken off. Prior to 2006 there were very few tips of reported infractions. As the author highlights in his article:
I.R.S. offices now receive a torrent of big money claims. Accountants and company employees have taken to trooping in bearing computer records and boxes of documents to back up their claims of underpayments by big companies.
The author goes on to report the first of these big payouts.
In what is believed to be the first of these structured tax payouts, an I.R.S. informant who reported that an overseas multinational corporation had underpaid its taxes by billions of dollars received $4 million last month from a private equity firm. In exchange, the firm will receive a portion of the award the informant expects to collect eventually.
To put it simply, one just has to follow the money. If the money guys and investors see potential profits from this investment then isn't it reasonable to think that the number of whisleblowers will increase. If your business is not in compliance or you are doing things that appear to be shady, you could have an employee, bookkeeper, or contractor reporting you to the IRS for profit.
Your best strategy is always compliance and when in doubt seek the assistance of a professional CPA for guidance.