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7 Questions to ask about a Business Valuation Report

Posted by Admin Posted on May 09 2023

Business valuation experts will usually provide formal written reports that explain how they arrived at their conclusions. Asking seven questions can help you determine whether an expert’s report is comprehensive and on-point.

1. Did the expert properly define the engagement?

Most valuation reports start with a detailed description of the assignment. Beyond the name of the subject company, the definition includes:

  • The size of the interest (the ownership percentage of the number of shares or units),
  • Effective date of the valuation,
  • Intended uses of the report,
  • The standard of value (for example, fair market value, fair value or strategic value), and
  • The basis of value (minority vs. controlling basis and marketable vs. nonmarketable basis).

If the expert applied discounts for lack of control or marketability, a substantial section of the report should detail how these discounts were quantified, including any selection criteria and statistical analyses conducted on empirical data.

2. Did the expert consider all three valuation approaches?

Revenue Ruling 59-60 provides guidance on valuing private businesses that extends beyond valuations prepared for tax purposes. It requires valuators to consider whether three approaches — asset-based (or cost), market and income — apply to the subject company. Valuation reports typically describe all three methods and explain why each is (or isn’t) relevant for the subject company.

3. Were the company’s financial statements properly adjusted?

Valuators typically base their analyses on the subject company’s financial statements. The numbers may require adjustments for discretionary, unusual, nonrecurring and/or nonoperating items.

For example, some businesses pay shareholder-employees extra salary in lieu of booking dividends (or vice versa). Or a company may own investments that are unrelated to its core business operations. Financial statement adjustments may normalize results to provide insight into the company’s true earnings capacity. But adjustments don’t always apply; rather, they’re a matter of professional judgment.

4. Did the expert consider alternate sources of valuation evidence?

Business owners and attorneys should disclose other value indicators, such as buy-sell agreements, purchase offers, prior transactions and personal loan applications. These sources may provide sanity checks for a conclusion.

If these indicators conflict with a valuation, the report should explain why. For example, a prior transaction may have occurred too long ago or involved a different basis of value than the current valuation.

5. Does the report list key assumptions and limiting conditions?

The statement of assumptions and limitations may reveal a report’s Achilles’ heel. Usually an attachment to the main report, this statement may disclose, for instance, potential conflicts of interest or limitations on the data used to prepare the valuation.

For instance, a valuation firm may own a minority interest in the subject company. Or the expert may have relied exclusively on last year’s tax return, without reviewing any other financial data.

6. Did the expert conduct a site visit?

Site visits enhance a valuator’s understanding of business operations. In addition to interviewing management, it’s important to assess such factors as the condition of fixed assets, workflow, morale, signage, parking and asset security.

Adversarial situations, such as a divorce or shareholder dispute, make site visits harder to schedule. If an expert was unable to conduct a site visit, he or she typically discloses it in the statement of assumptions and limiting conditions.

7. Is the expert qualified and in compliance with applicable professional standards?

If you engaged the expert, you should have on file a biography, resumé or curriculum vitae detailing the expert’s qualifications, including professional affiliations, professional designations and years of experience. If you’re reading an opposing party’s valuation report, request this information if it’s not already included in an appendix.

We can help

The content and format of business valuation reports may differ somewhat depending on expert preferences, firm protocol and the requirements of any professional organizations to which the expert belongs. But many of the underlying analyses and explanations are similar. Contact us if you need help evaluating whether an expert’s report covered all the bases — or if you’d like us to provide a rebuttal report that highlights key discrepancies.

© 2023

Don’t fall for invoice fraud schemes

Posted by Admin Posted on Mar 23 2023

Middle-market businesses lose an average of almost $300,000 annually to invoice fraud, according to a recent survey by software company Medius and researcher Censuswide. Invoice fraud can be challenging to spot — and even more difficult to recover from — but your company can take steps to prevent it from happening.

Common types

The most common type of invoice fraud is fraudulent billing. In billing schemes, a real or fake vendor sends an invoice for goods or services that the business never received (and may not have ordered in the first place). Overbilling schemes are similar. Your company may have received goods it ordered, but the vendor’s invoice is higher than agreed upon. Duplicate billing is where a fraud perpetrator sends you the same invoice more than once, even though you’ve already paid.

Employees sometimes commit invoice fraud as well. This can happen when a manager approves payments for personal purchases. In other cases, a manager might create fictitious vendors, issue invoices from the fake vendors and approve the invoices for payment. Such schemes generally are more successful when employees collude. For example, one perpetrator might work in receiving and the other in accounts payable. Or a receiving worker might collude with a vendor or other outside party.

4 steps

To stop invoice fraud and perpetrators from succeeding in their schemes, take the following four steps:

1. Conduct due diligence. Verify the identity of any new supplier before doing business with it. Research its ownership, operating history, registered address and customer reviews, if they exist online. Also, try to find someone who has done business with the vendor and can vouch for its legitimacy. This could be a competitor or an employee who knows the supplier from working at another company.

2. Review invoices carefully and methodically. Don’t “rubber stamp” invoices for payment. Look them over for any red flags, such as unexpected changes in the amount due or unusual payment terms. Manual alterations to an invoice require additional scrutiny, as do invoices from new vendors. If something seems wrong, contact the vendor that issued the invoice to confirm it’s legitimate. If the response lacks credibility or raises additional concerns, decline to pay until you’ve cleared up any confusion.

3. Control the review and approval process. Implement and adhere to antifraud controls when processing invoices. For example, confirm with your receiving department that goods were delivered and check invoices against previous ones from the same vendor to ensure no discrepancies. Also, you may want to require more than one person to approve invoices for payment.

4. Depend on technology solutions. Automating your accounts payable process can help prevent and detect invoice fraud. For example, using optical character recognition (OCR) to scan and read invoices can help ensure they’re paid on time and that the amounts and line items match the prices quoted and any documentation in your company's financial records. OCR minimizes employee intervention and the potential to divert payments to personal accounts. It also makes collusion with vendors more difficult.

If the worst occurs

Even if you take all precautions, invoice fraud may occur. If you discover a scheme in progress, act quickly to minimize the damage. Notify your bank or credit card company to stop payment on invoices that haven’t yet been paid. And if you intend to file an insurance claim or want to pursue criminal charges, be sure to file a police report.

We can help you and your attorney build a case against a suspect by gathering and analyzing fraud evidence and even testifying in court. Contact us if you need assistance or have questions about invoice fraud.

© 2022

Employer Retention Tax Credit – Being Targeted for Fraud

Posted by Admin Posted on Mar 01 2023

All business owners have heard the radio ads and received emails and phone calls from salespeople telling them that they qualify for the Employee Retention Tax Credit (ERC).  Free and quick money, large amounts of money.  Please be careful and very cautious.  There are many scams out there preying on business owners.  They take a large fee up front and tell the business owner what ever needs to be said to get the owner to agree to file for the credit so that they get their fee.  I am seeing the criminal division of the IRS make the abuse of this credit a top focus over the next few years (FINCEN). 

When being sold by these ERC salespeople ask yourself these questions:

  • How long has this business been around.  Did you verify their history on the Secretary of State website?
  • Do they offer you a bond or a copy of their insurance policy covering you for all damages if they are wrong and you do NOT qualify for the credit?
  • Can I pay them a fee for the calculation (by the hour or small fee) or are their fees only a percentage of the credit?


These scam artists were not in business prior to 2020.  They will most likely take your fee, close up shop by 2024 and leave town or be sued by victims and be bankrupt.  Their guarantees and agreements don’t protect you if they are gone or have no money.

To qualify for the Employee Retention Credit, you must have:

1) A significant decline in revenue during 2020 (50% from 2019 or 20% in January through September of 2021)

– OR -

2) Orders from an appropriate governmental authority

If you did not have a decrease in the revenues of your business, we strongly recommend consider your qualification for the ERC. 

IRS Notice 2021-20 and IRS bulletin IR-2022-183 issued October 19, 2022, provided clear answers to the questions of:

What orders from an appropriate governmental authority may be considered by an employer for purposes of determining eligibility for the employee retention credit?  (Section C, question #10).

            Answer:  Examples listed that DO NOT QUALIFY:

  • Public Health Emergency, Health and Human Resources Secretary Alex Azar II declared a United States Public Health Emergency on January 31, 2020.
  • National State of Emergency. President Donald J. Trump declared a National Emergency on March 13, 2020.
  • Centers for Disease Control (CDC) Guidance. The Centers for Disease Control Interim Guidance for Businesses and Employers Responding to Coronavirus Disease 2019 (COVID-19) (the “CDC Guidance”).
  • Occupational Safety and Health Administration (OSHA) Guidance. On March 9, 2020, OSHA issued guidance for workplaces, which continued to be updated and revised throughout 2020 and 2021.
  • The State of Georgia had no closure requirement that can be relied upon.  The State of New York did have force business closures.

If a governmental order causes the suppliers to a business to suspend their operations, is the business considered to have a suspension of operations due to a governmental order? (Section C, question #12)

Answer:  An employer may be considered to have a full or partial suspension of operations due to a governmental order if the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations.  – If this happens you had a decrease in revenue.  If your business did not close or suspend your operations (and you did continue to pay your employees), then you do NOT qualify for supply chain interruption to qualify for the ERC. 

If you do claim the credit, you must amend your 2020 and 2021 business tax returns and remove the payroll expense matching the ERC amounts.  (eg. If you received a $300,000 credit, then you have to amend your 2020 and 2021 returns and increase your taxable income by $300,000.)   The ERC salespeople are not telling you this fact.

If you claimed a $300,000 credit, the salesperson likely took 30%, $90,000.  You now must amend your returns and claim income of $300,000 for 2020 and 2021.  Assume your personal tax rate for Federal is 25% and State Is 5%, 30% combined, you owe approximately $90,000 in taxes.  You now have $120,000 left of the $300,000 credit.  This is the best situation for you if you DO qualify for the credit.

When the IRS audits your payroll tax returns and determines you DO NOT qualify for the ERC because you incorrectly relied upon supply chain or governmental orders to suspend operations, you now face payroll tax penalties for the false payroll tax returns that you amended to get your credit.  The failure to pay penalty will cost you $75,000, 25% of the $300,000, before interest, plus you owe the IRS back the $300,000 you should not have received. 

It is very likely that business owners who have received the ERC have spent the money.  It is not in their savings account.  If you did not qualify for the ERC and the IRS audits you, they have 6 years to audit you, you have spent the money and the salesperson has skipped town with your fees.   Unfortunately, the ERC is from payroll taxes.  These are considered trust fund taxes, meaning, that you cannot file for bankruptcy and have this go away, these taxes are exempt from being discharged in bankruptcy.

I apologize for the alarm and tone of my warning.  The ERC will be one of the biggest financial scandals in our lifetime.  Remember that if it is too good to be true, it probably is. 

If you have been approached by or worked with someone that you paid for you to obtain the ERC and you did not have a decrease in revenues, please contact me.  It will be a confidential conversation where I can give you guidance.


Jeff Forrestall CPA, CFF, CFE, ABV, CVA, PFS

Master’s degree in Fraud and Forensic Examination

Managing Partner

Forrestall CPAs, LLC


Valuing a startup business

Posted by Admin Posted on Feb 22 2023

Many startup ventures have never generated positive cash flow — or even revenue. How can a valuation analyst value a startup business when it has no track record? Without historical performance to rely on, valuators often turn to the entrepreneurs’ forecasts. However, no one can see into the future. So, prospective financial statements can be subjective and risky, especially in today’s volatile marketplace.

Professional skepticism

When evaluating prospective financials, valuators must exercise professional judgment and consider making adjustments where necessary. For example, whether or not an entrepreneur has put together formal financial projections can provide insight into the most important determinant of a startup company’s ability to succeed: management.

Other important considerations include the startup’s competitive advantage, business type, market size, and potential growth opportunities.

Lifecycle of a startup

The stage of development is also an important factor — each stage has different implications for the company’s value. Initially, in the “seed” stage of development, the entrepreneur simply has an idea. At this point, venture capitalists and other investors may provide seed capital or first-round financing. As the company continues to develop a product or service, it may begin to test the concept and seek further financing. However, it’s not yet earning revenue.

After the product or service is fully developed, the company may start reporting revenue, but it might not be profitable yet. The company graduates to an established business once it’s consistently earning revenue and has achieved positive operating cash flow. At this point, the entrepreneur may decide to sell the business or negotiate an initial public offering.

As a startup evolves through these stages, entrepreneurs and investors agree that the company’s value grows. But their perceptions of value often conflict, because each has different ways of estimating value.

Dueling perspectives

Put simply, the entrepreneurs that start a company want the highest possible value. These owners believe they should be compensated for their “sweat equity,” research and development costs, and forgone salaries, bonuses and benefits. The further along a company progresses in its evolution, the more entrepreneurs invest — which translates into a higher value.

Conversely, outsiders want to pay the lowest price possible for the largest piece of the pie. Investors are usually skeptical and will want to discount management’s projections. They want to minimize risk — not only through lower initial values, but also through liquidation preferences, conversion options, preferred dividends, redemption rights and restrictions on the entrepreneur’s actions. They may also require a seat on the board of directors.

A balanced approach

Discussions with investors, partners and potential buyers can begin only when the entrepreneur knows the startup’s value. An independent valuator takes an unbiased look at the company’s financial projections. Using objective sources — such as marketing data, industry benchmarks and comparable companies — the valuator blends the owner’s financial projections with the investor’s concerns to come up with a market-based estimate of value. Contact us to determine the fair market value of your startup business.

© 2023

Does your family business’s succession plan include estate planning strategies?

Posted by Admin Posted on Jan 17 2023

Family-owned businesses face distinctive challenges when it comes to succession planning. For example, it’s important to address the distinction between ownership succession and management succession.

When a nonfamily business is sold to a third party, ownership and management succession typically happen simultaneously. However, in the context of a family business, there may be reasons to separate the two.

Retaining control

From an estate planning perspective, transferring ownership of assets to the younger generation as early as possible allows you to remove future appreciation from your estate, thereby minimizing estate taxes. Proactive estate planning may be especially relevant today, given changes to the federal estate and gift tax regime under the Tax Cuts and Jobs Act.

For 2023, the unified federal estate and gift tax exemption will be $12.92 million, or effectively $25.84 million for married couples. That’s generous by historical standards. In 2026, the exemption is set to fall to about $6 million, or $12 million for married couples, after inflation adjustments — unless Congress acts to change the law.

However, when it comes to transferring ownership of a family business, older generations may not be ready to hand over the reins — or they may feel that their children aren’t yet ready to take over. Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the company. Providing heirs outside the business with equity interests that don’t confer control may be an effective way to share the wealth.

Possible solutions

Several tools may allow you to transfer family business interests without immediately giving up control, including:

  • Trusts,
  • Family limited partnerships,
  • Nonvoting stock, and
  • Employee stock ownership plans (ESOPs).

Owners of smaller family businesses may perceive ESOPs as a complex tool, reserved primarily for large public companies. However, an ESOP can be an effective way to transfer stock to family members who work in the company and other employees, while allowing the owners to cash out some of their equity in the business.

Owners can use this newfound liquidity to fund their retirements, diversify their portfolios or provide for family members who aren’t involved in the business. If an ESOP is structured properly, an owner can maintain control over the business for an extended period even if the ESOP acquires a majority of the company’s stock.

Conflicting needs

When it comes to succession planning, older and younger generations of a family business may have conflicting objectives and financial needs. If any of the strategies mentioned here interest you, or you’d like to discuss other aspects of succession planning, please contact us.

© 2022

Ratio analysis: Extracting actionable data from your financials

Posted by Admin Posted on Dec 09 2022

What do you do with your financial statements when your auditor delivers them? Resist the temptation to just file them away — they’re more than an exercise in compliance. With a little finagling, you can calculate key financial ratios from line items in your company’s financial statements. These metrics provide insight into historical trends, potential areas for improvement and how the business is likely to perform in the future.

Financial ratios are generally grouped into the following four principal categories:

1. Operating

Operating ratios — such as the gross margin or earnings per share — evaluate management’s performance and the effects of economic and industry forces. Operating ratios can illustrate how efficiently a company is controlling costs, generating sales and profits, and converting revenue to cash.

This analysis shouldn’t stop at the top and bottom of the income statement. Often, it’s useful to look at individual line items, such as returns, rent, payroll, owners’ compensation, interest and depreciation expense.

2. Asset management

Asset management ratios gauge liquidity, which refers to the ability of a company to meet current obligations. Commonly used liquidity ratios include:

  • Current ratio, or the ratio of current assets to current liabilities,
  • Quick ratio, which only considers assets that can be readily liquidated, such as cash and accounts receivable,
  • Days in receivables outstanding, which estimates the average collection period for credit sales, and
  • Days in inventory, which estimates the average time it takes to sell a unit of inventory.

It’s also important to consider long-term assets, such as equipment, with the total asset turnover. This ratio tells how many dollars in revenue a company generates from each dollar invested in assets. Management must walk a fine line with 1) efficient asset management, which aims to minimize the amount of working capital and other assets on hand, and 2) satisfying customers and suppliers, which calls for flexible credit terms, ample safety stock and quick bill payment.

3. Coverage

Coverage ratios measure a company’s capacity to service its debt. One commonly used coverage ratio is times interest earned, which measures a firm’s ability to meet interest payments and indicates its capacity to take on additional debt. Another is current debt coverage, which can be used to measure a company’s ability to repay its current debt.

Before a company that already has significant bank debt seeks further financing, it should calculate its coverage ratios. Then it should consider what message management sends to potential lenders.

4. Leverage

Leverage ratios can indicate a company’s long-term solvency. The long-term debt-to-equity ratio represents how much debt is funding company assets.

For example, a long-term debt-to-equity ratio of five-to-one indicates that the company requires significant debt financing to run operations. This may translate into lower returns for shareholders and higher default risk for creditors. And, because the company needs to make considerable interest payments, it has less cash to meet its current obligations.

Basis of comparison

Ratios mean little without appropriate benchmarks. Comparing a company to its competitors, industry averages and its own historical performance provides perspective on its current financial health. Contact us to help select relevant ratios to include in your analysis. We can help you create a scorecard from your year-end financial statements that your in-house accounting team can recreate throughout the year using preliminary financial numbers.

© 2022

Is your construction company a C corporation? Beware of “unreasonable” compensation

Posted by Admin Posted on Nov 08 2022

Many construction businesses are structured as C corporations. If that’s the case for your company, you’re probably aware that C corporations usually prefer to classify payments to owners as tax-deductible wages because it lowers corporate taxes. However, as you’re likely also aware, if the IRS believes that an owner’s compensation is excessive and unreasonable, it may claim that payments are disguised dividends — and deny deductions for them. Earlier this year, in Clary Hood, Inc. v. Commissioner , the U.S. Tax Court found that a construction company owner wasn’t entitled to the deductible amounts he’d claimed in two tax years and that he was subject to a penalty. But there was some good news for the taxpayer. Deductions redetermined The company involved in the case primarily provided land grading and excavation services for construction projects in the South Carolina region. The owner founded the business with his wife and, together, they served as the sole shareholders and members of the board of directors. Using a multifactor test, the Tax Court found that the taxpayer failed to adequately establish how the deductible amounts being claimed for each of the two tax years were both reasonable and paid solely as compensation for the owner-founder’s services. However, the court didn’t deny the deductions. Rather, it redetermined the deductible amounts of compensation that the owner-founder could claim. The taxpayer could still deduct up to the redetermined amounts — which were less than what he’d originally claimed but still more than what the IRS was arguing for. The court noted various factors were most relevant and persuasive in reaching its conclusion. These included: The taxpayer’s distribution history, How the owner-founder’s compensation was set in the years at issue, and His involvement (day-to-day activities) in the business. The court also heard testimony from an expert, who included compensation for surety bond guaranties in his analysis and provided a well-reasoned salary comparison against industry standards. Penalty applied Another interesting aspect of the case was whether the owner-founder should be subject to the accuracy-related substantial understatement penalty for both tax years. To wit, the court didn’t uphold the penalty against the construction company and its owner-founder for the first of the two tax years. Although the taxpayer’s understatement was substantial for both years, the evidence demonstrated reasonable cause and reasonable reliance on professional advisors for the first year. Notably, the taxpayer showed that the company’s advisors were competent professionals with sufficient expertise to justify reliance and no inherent conflicts of interest. The owner-founder also provided evidence that the advisors were given all relevant information and that he relied on their advice. However, the court upheld the accuracy-related substantial understatement penalty for the second year. This is because the taxpayer provided almost no evidence regarding professional advice received in calculating the deduction amount. Although the owner-founder alternately claimed substantial authority for his position and the use of a certain test to determine the deductible amount, he failed to prove substantial authority to claim the amount. A strong defense As this case shows, the IRS will challenge deductions for owner compensation that it deems unreasonable. However, as the case also demonstrates, thorough documentation and expert advice can help owners of C corporations defend themselves. We can assist you and your construction company’s co-owners in determining reasonable compensation amounts. Clary Hood, Inc. v. Commissioner , No. 3362-19, March 2, 2022 (U.S. Tax Court) © 2022

Measuring residual value for the discounted cash flow method

Posted by Admin Posted on Oct 04 2022

When valuing a business using the discounted cash flow method, residual (or terminal) value is a key component. The International Valuation Glossary — Business Valuation defines residual value as “the value as of the end of the discrete projection period in a discounted future earnings model.”

Business valuation experts typically consider the capitalization of earnings method and the market approach when estimating residual value. Either (or both) may be appropriate, depending on the nature of the business, purpose of the valuation, reliability of the company’s financial projections and availability of market data.

Capitalizing earnings

The capitalization of earnings method is based on the assumption that cash flow will stabilize in the final year of the projection period. However, this is also the time period that’s subject to the greatest margin for error because it’s the furthest into the future.

Under the capitalization of earnings method, residual value equals expected future cash flow (the numerator) divided by a capitalization rate (the denominator). The long-term sustainable growth rate is used in the numerator to determine cash flow in the final projection period. Then it’s used again in the denominator because the capitalization rate equals the discount rate minus this growth rate.

Because it’s in both the numerator and the denominator, the long-term sustainable growth rate can have a significant effect on residual value. A minor change in this rate can have a major impact on business value.

Applying the market approach

Another way to estimate residual value is to assume that the business could theoretically be sold at the end of the discrete period in an arm’s length transaction. Using the market approach, a business valuation expert considers comparable public stock prices and sales of comparable private businesses. Although the market approach sounds straightforward, it can sometimes be difficult to find comparable transactions, especially for small private companies.

Comparable market data also might serve as a sanity check. For example, a valuation expert might compare:

  • The implied pricing multiples from a residual value that’s been calculated using the capitalization of earnings method, and
  • Average pricing multiples from comparable transactions involving similar companies in recent years.

There may be cause for concern if, say, a company’s residual value generates a price-to-revenue multiple of 5.0 and comparable transactions during the last 12 months indicate an average price-to-revenue multiple of 1.2. The expert would need to explain the reason for such a discrepancy — or possibly adjust his or her analysis.

Need help?

Residual value can be a major part of the valuation puzzle, so it’s important to get it right. Like annual cash flows over the discrete projection period, residual value is discounted to present value to arrive at the value of a business under the discounted cash flow method. Contact us to develop a residual value that’s based on reliable projections and objective market data.

© 2022

Highlights from the latest ACFE fraud report

Posted by Admin Posted on Sept 16 2022

Preventing, detecting, and investigating occupational fraud requires a deep understanding of the types of schemes, potential financial losses, emerging threats and risk mitigation strategies. To that end, the Association of Certified Fraud Examiners (ACFE) has published its “Report to the Nations,” the preeminent source for occupational fraud statistics and trends, every two years since 1996.

The 2022 ACFE report covers 2,110 occupational fraud cases in 23 industries and in 133 countries. Surveyed organizations have lost more than $3.6 billion to fraud. The report can help your organization understand and mitigate fraud threats. Here are some of the highlights.

Three types

The ACFE divides occupational fraud schemes into three types:

Asset misappropriation. This includes cash theft, fraudulent disbursements, larceny and misuse of inventory and is the most common type of occupational fraud, accounting for 86% of cases. The median loss for these schemes is $100,000.

Financial statement fraud. The least common type of fraud (9% of cases), financial statement schemes generate the highest losses — a median loss of $593,000 in the 2022 report.

Corruption. This falls between asset misappropriation and financial statement fraud in terms of losses and frequency. In the 2022 report, corruption costs resulted in a median loss of $150,000.

Fraud experts who participated in the study estimate that the average organization loses 5% of revenue to fraud each year. This percentage can serve as a starting point for determining your risk of suffering financial harm.

Detection and the role of tips

According to the ACFE report, a typical fraud case generates losses of $8,300 per month and lasts for 12 months. Forty-two percent of frauds in the report were uncovered via tips, with more than half of those provided by employees. Forty percent of tips came via email, 33% via a web-based form and 27% from phone calls.

The volume of email and web-based tips exceeded the number of tips submitted via phone hotlines. However, organizations offering hotlines reduced the median loss of fraud by 50%, from $200,000 to $100,000. Those organizations detected fraud faster and reduced the duration of schemes by 33% — from 18 months to 12 months.

Antifraud controls

Almost half of the cases analyzed in the 2022 report were determined to occur because the organizations lacked adequate internal controls or managers had overridden existing controls. The report also highlighted a lack of management review and a poor “tone at the top” as primary control weaknesses contributing to fraud.

Not surprisingly, the ACFE found that the existence of antifraud controls can lower fraud losses and accelerate fraud detection. To help organizations understand the impact of internal controls, the ACFE details the effect of 18 common policies on median loss and median duration of fraud schemes. These include hotlines, surprise audits, codes of conduct, antifraud training and proactive data monitoring.

For example, when job rotation or mandatory vacation policies are in place, the median loss from fraud is $64,000. When neither control is in place, the median loss climbs to $140,000. Similarly, when organizations have job rotation or mandatory vacation policies in place, fraud schemes typically last eight months. This duration doubles to 16 months when those controls aren’t in place.

Learn from others

The ACFE report is relevant to organizations of every size and in every industry. Learning about the losses of others can help your company better assess risk and take steps to mitigate fraud. If there’s one overwhelming takeaway from the ACFE reports, it’s that internal controls are essential. Contact us for help assessing your control needs.

© 2022


Posted by Admin Posted on Sept 15 2022

This is the home of our new blog. Check back often for updates!