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Creating an Effective FCPA/UKBA Compliance Program

Last month I discussed the potential risks that a company faces under the U.S. Foreign Corrupt Practices Act of 1977 (FCPA) and the U.K. Bribery Act of 2010 (UKBA) when conducting business in foreign countries. This month, I’ll present the key components of an effective FCPA/UKBA compliance program.

There are seven key components to an effective FCPA/UKBA compliance program. They are the following:

1) Establish standards and procedures to prevent and detect criminal conduct and ensure compliance with government regulations and industry standards.

2) Create a culture of compliance led by the company’s senior management. This means that senior management must:

– Be knowledgeable about the content and operation of the compliance program;
– Exercise reasonable oversight of the implementation and ongoing review of the effectiveness of the compliance program;
– Assign specific senior level manager(s) overall and day-to-day operational responsibility for the program; and
– Provide the necessary authority and resources to enable successful implementation and ongoing review of the program.

3) Use reasonable efforts to exclude known violators from activities that could lead to program violations. This also requires that the company exercise due diligence in the screening of current and prospective employees for past illegal or improper conduct.

4) Provide reasonable ongoing communication and training to senior management, employees and third-party agents regarding the standards and procedures of the compliance program.

5) Monitor, audit and evaluate the effectiveness of the compliance program on a regular basis. Included within this component are:

– The establishment of a monitoring/auditing program to verify that the compliance program is being followed, which will necessitate the use of internal audit staff or external forensic auditors;
– Evaluation of the effectiveness of the compliance program at regular intervals, including analysis of monitoring/auditing results as well as use of feedback from senior management, employees, third-party agents and others; and
– The use of hotlines to enable employees, third-party agents and others to anonymously or confidentially report or seek guidance about potential criminal conduct without fear of retaliation.

6) Establish of appropriate performance incentives and disciplinary measures that are promoted and enforced consistently within the company to support the compliance program.

7) Establish appropriate response to detected criminal conduct, and subsequent reassessment of the compliance program to reduce the risk of the same conduct occurring again. This requires that the company take the appropriate steps to report detected criminal conduct and cooperate with law enforcement. In addition, the company must take reasonable steps to modify, if necessary, its compliance program to prevent similar conduct in the future.

Of course, no program can prevent rogue employees or agents from violating the FCPA or UKBA, but a well-designed and implemented compliance program — with effective communication and training as well as regular monitoring and evaluation — can minimize the risk of a company and/or its employees violating the FCPA or UKBA. In addition, the existence of such a program can mitigate punishment of the company in event of violation of either statute.

Valuation Issues to Consider During Healthcare Acquisition Negotiations

In response to the Affordable Care Act, more hospitals and large physician groups are buying physician practices to control referral sources, service quality and operating costs. This increase in practice acquisitions is expected to continue for the foreseeable future. Because of this, it is more important than ever for both acquirers and acquirees to consider key valuation issues when negotiating an acquisition.

Among these key issues are:

1. The potential impact of the ACA on the future revenues of the acquired practice

For example, if the acquired practice has a level of patient readmissions that could cause the acquirer to receive a reduction in Medicare payment rates, the acquirer would want to reduce the valuation of the acquired practice to account for this impact on its future revenues.
2. The impact on future revenues and costs of the acquired practice due to the departure of practice physicians

Often one or more physicians will depart when the practice is sold. Sometimes these physicians retire or relocate, other times they plan to set up their own local practice in competition with the acquired practice. In either case, this will have an impact on future revenues and costs. Accordingly, the acquirer will want to adjust the valuation of the acquired practice for such departures.

3. Analyzing future competition and local conditions at each acquired practice location

Acquirers need to consider the potential impact of future competition and local economic conditions at each location to be acquired. This includes asking such questions as:

  • Is a competing hospital or large physician group planning to encroach on the area of a practice location?
  • Is the local area population growing or shrinking?
  • Are any large local employers closing?
  • Are any large local employers entering the area?
  • Are the population demographics (average age, ethnic mix, average earnings, etc.) changing?

The answers to these questions may cause the acquirer to adjust the valuation of the acquired practice.

4. Physician compensation and benefits

Acquirers and acquirees need to consider the impact of planned changes in physician compensation and benefits. Often, hospitals and larger physician practices will require more productivity-based measures for compensating physicians coming from smaller practices which have fewer such measures. However, benefits may be less generous than at the smaller practices. To account for such differences, acquirees may want to negotiate either minimum guaranteed compensation for the first few years after acquisition or an upward adjustment to the valuation of the acquired practice.

5. Other important considerations

Other factors that may impact the valuation include:

  • Whether the acquisition will affect the acquirees’ referral sources;
  • Whether there are agreements with key sub-contractors (such as outside physicians, labs, medical equipment providers, etc.) and whether such contracts must be renegotiated;
  • The malpractice insurance claims history of the acquiree; and
  • Whether receivables, medical supplies and/or specialized equipment are also being acquired.

Because of increased practice acquisition activity in response to the ACA, it is important for both acquirers and acquirees to consider the key factors identified above, and how they impact on the valuation of an acquired practice.

Protecting Your Auto Dealership From Fraud

Owning and operating an auto dealership can be a rewarding experience. Despite the long hours and myriad of issues facing the dealer, a well-run dealership can be a source of satisfaction and financial reward. However, the complexity of auto dealership operations can give employees and others the opportunity to commit fraud, thereby diverting significant profits from the dealership. This article will address several of the most common dealership frauds and provide solutions for preventing them.

Certain departments are more likely to see fraud. These include: new car sales, used car sales, service and parts. Here are some fraud risks in each of these departments.

New Car Sales

Problem: Sales management or staff issuing “dealership rebates” not authorized by the manufacturer

Solution: Require all salespeople and sales managers to sign a statement acknowledging that “dealership rebates” are not permitted. Have your controller or accounting manager review every financed sale to make sure that no “dealership rebates” are present. Because this scheme is also accomplished with a customer receivable or promissory note to reflect equity in the bank deal, any promissory notes or receivables must be approved by the general manager or dealer.

Problem: F & I or sales employees preparing fraudulent credit applications for customers

Solution: Inform all employees, in writing, that having customers sign blank credit applications is prohibited. Require that all deals where the customer seeks financing include a one-page document (with very large type) that states, “Customers are not permitted to sign blank credit applications.” The document should require that the customer sign an acknowledgement of this.

Used Car Sales
Problem: Used car management wholesaling cars below book value or purchasing cars at auction for excessive prices in return for kickbacks

Solution: The accounting department should be required to track the source and price paid for all used cars brought into inventory. The accounting department should also regularly check the price paid for used cars purchased at auction against the book value. In addition, general managers or dealers should regularly review all used car sales with a gross profit of less than $1,000 in order to determine the cause.

Service Department
Problem: Sales staff releasing serviced vehicles without customer payment

Solution: Make sure that only authorized service personnel have access to customer vehicle keys. Post signs prohibiting anyone other than authorized service personnel from releasing a customer’s vehicle. Inform all employees that they will be held personally financially liable for any unpaid repair bills if they allow a customer to take their vehicle from the service department without paying the bill in full.

Problem: Service staff charging the manufacturer for warranty repairs not performed

Solution: The service manager should make sure that all service staff members (service writers and mechanics) understand the implications of warranty repair fraud. Advanced authorization from either the service manager or assistant service manager should be required for all warranty repairs. Evaluation of service management job performance and bonuses should include controlling warranty repair charges to the manufacturers.

Parts Department

Problem: Parts department management or staff substituting aftermarket parts for manufacturer-authorized parts

Solution: Make sure that all parts and service personnel are adequately trained regarding the requirements to use manufacturer-authorized parts. Consider installing a fraud hotline that allows employees to anonymously report allegations of fraud (such lines are relatively inexpensive to install and use). Also, have the accounting department conduct unannounced spot bin counts to determine if all of the inventory in the parts department is on the pad.

Problem: Parts department management writing off parts as obsolete and then selling the parts off the books

Solution: The general manager or dealer must review and approve all such write-offs. The accounting department should prepare a comparison of the obsolete parts identified by the manufacturers and those being written off. All discrepancies should be investigated. Also, on a monthly basis the accounting department should reconcile the pad to the general ledger balance. Variances here also need to be investigated.

The Annual Check-up
Just as people have an annual physical exam or check-up to make sure they’re well, every dealership should have an annual check-up to minimize the likelihood that its health is at risk due to fraud. One of the best ways to prevent fraud in your dealership is to let employees know that you are regularly checking up on them. So by taking this relatively inexpensive measure on an annual basis, you are killing two birds with one stone. While the annual check-up alone will not prevent all fraud, it’s a very good start to helping ensure that your dealership’s profitability is not being reduced due to fraud.

Are Your Clients at Risk Under the Foreign Corrupt Practices Act or the U.K. Bribery Act?

If any of your clients conduct or plan to conduct business in any foreign country, then you should read this blog.

The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) makes it a crime for a business or any of its officers, directors, employees, agents or shareholders to bribe a foreign official, foreign political party or candidate for political office, for the purpose of influencing a foreign official in order to obtain or retain business.

The U.K. Bribery Act of 2010 (UKBA), which is due to take effect on July 1 and has been described as “the FCPA on steroids,” takes this further by giving the U.K. jurisdiction over any commercial organization that conducts operations in the U.K., regardless of where the bribe is paid.

This means, for example, that if an agent of a U.S. company with operations in multiple countries, including at least one U.K. country, pays a bribe to a foreign official in any of those countries (U.K. or not), the U.S. company could be convicted under the UKBA. The UKBA also prohibits facilitation payments and certain entertainment and promotional expenditures permitted under the FCPA.

Recently, the Securities & Exchange Commission, U.S. Justice Department and FBI have aggressively investigated and prosecuted companies for FCPA violations. In 2010, the top eight FCPA settlements (with either the SEC or DOJ) totaled more than $1.5 billion. As of December 2010, the U.S. Justice Department had about 150 ongoing investigations and prosecutions.

Both the SEC and DOJ have also been focusing on prosecuting individuals, including company management, in addition to the financial settlements. In one recent case, the SEC brought claims against both the CEO and the CFO of a large nutritional/personal care products company for failing to adequately supervise the miscreant employees of a foreign subsidiary. The U.K. Justice Ministry, instead of providing specific written guidance regarding the key provisions of the UKBA and the applicability of the UKBA to non-U.K. companies, has decided to let the U.K. courts decide these issues.

All of this means that a company currently conducting or planning to conduct business in any foreign country could face a significant financial risk and a risk of prosecution of its management under either the FCPA or UKBA.

So, how does a company minimize this risk? The answer is to put in place an effective and robust FCPA/UKBA compliance program and to actively audit and/or monitor compliance, especially in high-risk locations. Having such a program will minimize the risk of violating the FCPA and UKBA and is the only acceptable mitigating factor to reducing the size of financial settlements and penalties if a company is convicted of violating either statute. Forensic accountants can assist you in this role.

In the next edition of this blog, I’ll address the key components of an effective FCPA/UKBA compliance program. Stay tuned.

– See more at: http://thelegalintelligencer.typepad.com/tli/2011/05/are-your-clients-at-risk-under-the-foreign-corrupt-practices-act-or-the-uk-bribery-act.html#sthash.zTEiO6Ek.dpuf

Reducing Litigation Costs Through Specialized Software

Using specialized data-mining software in complex litigation support and forensic accounting engagements can yield significant cost and time savings. In most forensic accounting engagements, time is of the essence and, when litigation is involved, deadlines for discovery or accepting proposed settlement offers can become a major issue.

If it normally takes several weeks to perform a particular analysis of large amounts of data and the analysis results in a dead end, the use of data-mining software can be especially valuable in affording time to conduct alternate analyses. A recent engagement of mine, which I detail below, required only one person working for three days as opposed to a team of two people working for several weeks to perform the analyses and obtain the results.

In this particular engagement, a multi-location retailer believed that its controller may have been defrauding the company through a variety of means. It was suspected that the controller was purchasing goods from the company without payment and making fraudulent payments to one or more of her own businesses through accounts payable.

The controller had been married multiple times and had been known by eight different names including alternate spellings. In addition, she had lived at six different addresses during her tenure as controller.

I obtained an electronic copy of all company sales and accounts receivable transactions for the 10 years that the controller had been with the company. This consisted of more than 1 million transactions in more than 250,000 customer accounts.

Using specialized data-mining software, I was able to analyze customer accounts and transactions for matches with any of the controller’s names or known addresses. I also reviewed the write-offs of any balances in such customer accounts.

I determined that the controller had purchased goods through eight different customer accounts, that a former spouse had purchased goods through two different customer accounts, and that a former live-in boyfriend had purchased goods through yet another two different customer accounts. During further research of nonpayment account reductions in balance, I found that on 13 different occasions the controller had written and processed either credit memos or write-offs to these accounts. Each of these nonpayment account reductions was determined to be improper and had been processed without the proper approvals.

I also obtained the company’s vendor files. Using the same data-mining software, I compared the billing and payment addresses of the company’s 1,200 vendors with the known addresses of the controller. I was able to determine that payments had been made over several years to a consulting company with the same address as one of the controller’s known addresses.

As demonstrated by this particular engagement, the benefits of using specialized data-mining software in complex litigation support and forensic accounting engagements can be substantial and should be seriously considered in such cases for cost and time savings.

– See more at: http://thelegalintelligencer.typepad.com/tli/2012/04/reduce-costs-of-litigation-support-with-specialized-software.html#sthash.7N3YD25y.dpuf

Executive Culture is Essential in Preventing Employee Fraud

I was recently involved in a fraud investigation of the CFO of a privately held company that spent years following the directives of the majority shareholder to run the majority shareholder’s personal and/or nonexistent expenses through the company. In addition, the CFO was directed to implement other schemes that the majority shareholder designed to defraud the minority shareholders. After a few years, the CFO saw an opportunity to enrich himself by embezzling funds from the company. He did so to the tune of more than $7 million. When caught, he explained his actions by stating he was just doing the same thing that his boss did.

“Tone at the top” refers to the ethical atmosphere created by company management. The Association of Certified Fraud Examiners has established a direct correlation between the tone at the top and the risk of employee fraud in companies. If company management sends the message – either explicitly or implicitly – that fraud is acceptable to management, then some employees will rationalize that it is OK for them to commit fraud. Management may send this message by engaging in such fraudulent behavior as:

  • Overstating revenues or understating expenses so that the company appears more profitable than it really is (financial statement fraud).
  • Understating revenues or overstating expenses so that the company appears less profitable than it really is (tax fraud).
  • Giving or accepting bribes, kickbacks or inappropriate gifts.
  • Engaging in price fixing.
  • Submitting false or inflated expense reports for reimbursement.
  • Having the company pay personal expenses.
  • Lying to employees, customers, vendors, regulatory officials or the public.

Because it is almost impossible for management to engage in such behavior without involving one or more employees (for example, having accounting employees submit improper entries to the financial reporting system; directing staff to pay knowingly false expense reports; or approving vendors who are not the lowest cost quality bidders), this fraudulent behavior becomes known to other employees.

Even if management is not committing fraud, its failure to communicate disapproval of employee fraud will lead employees to believe that those at the top are indifferent to fraud.

To prevent employee fraud, management must set the tone and actively communicate disapproval of fraud. This requires management to take the following steps:

Communicate to employees what is expected of them. This means establishing policies and procedures to let employees know that fraud is unacceptable to management and that the company is taking active steps to prevent such schemes. Employees should also receive regular fraud and ethics training.

  • Lead by example. Regularly demonstrate that management finds fraud unacceptable and will not engage in such violations.
  • Provide a safe mechanism for reporting violations. This can include establishing a confidential hotline for reporting fraudulent activity.
  • Reward integrity. Include acting with integrity in employee incentive programs.

By setting the right tone at the top, management can demonstrate ethical leadership in preventing employee fraud.

 

Understanding Your Business’ Financial Statements Is the First Step Toward Preventing Fraud

Many of my recent forensic and litigation engagements have arisen when business owners (including legal and other professional firms) suddenly learned that trusted individuals within their businesses had perpetrated a fraud upon the business. Most of these business owners had received regular monthly or quarterly financial statements for the business but had failed to read and understand them. Had they done so, they could have caught the fraud earlier or prevented it altogether.

Why does this happen? My experience reveals that most of these business owners had minimal knowledge and understanding of their business’ financial statements, and instead relied upon another owner/partner or trusted employee to handle all of the business’ financial matters. In each case, a careful analysis of the financial statements would have identified that something was wrong. Furthermore, when the economy was booming (as in the early to mid-2000s) and/or the company was growing, the fraud could be more easily hidden. However, when revenues and cash collection slowed down, it became more difficult to hide the fraud.

Let’s look at two examples.

Financial Fraud: Destroyed Cash Sales Invoices and Pocketed Cash

In one instance, the trusted employee in a business that generated a significant amount of cash sales destroyed cash sales invoices (so they were never entered into the accounting system) and pocketed the cash. In addition, at the end of each quarter (when he produced financial statements for the owners), the trusted employee made a large journal entry to increase the cash account balance so it appeared as if the business had more cash than it did. If the business owners had understood the quarterly financial statements, they would have noticed that: (1) the gross margin on sales had begun to decline significantly even though neither selling prices nor purchase prices had changed (because sales costs were entered into the accounting system, but the corresponding sales were not); and (2) the accounts payable balance kept growing significantly (because there was insufficient cash to pay the bills). Also, if any of the business owners had reviewed the monthly bank statements, they would have noticed that the cash balance shown on the bank statements was significantly lower than that shown in the financial statements.

Financial Fraud: Cash Distributions Without Informing Partners

In another instance, one business partner took significant cash distributions from the business without informing his other business partners. Because this business partner controlled the financial matters of the firm, he was able to mask these cash distributions by recording the distributions as increased operating expenses of the firm. If the other business partners had read and understood the financial statements, they would have noted that certain expense balances were much higher than expected, and they would have raised the issue with the financial management partner. (For example, more than $25,000 in office supply purchases in one month for this 10-person company or more than $20,000 in travel expenses in a month when no one in the company had traveled out of town.)

Business owners who regularly read and understand their business’ financial statements can identify warning signs in those statements and stop or prevent fraud from occurring.

Discovery of Hidden Assets

In divorce proceedings and certain types of commercial litigation, counsel may suspect that the opposing side has hidden some assets. A forensic accountant can be of great assistance in formulating discovery information requests and conducting the analysis that will aid in the identification and location of potentially hidden assets.

In order to identify hidden personal and/or business assets, counsel must address his/her discovery requests not just to the known (items identified on the tax return, items of which his/her client is aware, etc.) but also to the potentially unknown.

Upon receipt of this information, the forensic accountant will perform analyses and asset searches that may identify or point to the potential existence of such items as:

  • Income or other payments received that have not been deposited to known accounts.
  • Funds deposited for which there is no documentation as to the source of the funds.
  • Funds withdrawn for which there is no documentation as to where the funds went.
  • Direct wire transfers made to or from unknown accounts.
  • Unusual activity involving the safe deposit box (this could be indicative of cash or other assets being placed in or removed from the box).
  • The existence of previously unknown off-shore bank accounts, or investment accounts or other assets.
  • The substitution of lower value assets for higher value assets (for example, substituting an inexpensive work of art for an expensive work of art)
  • The proceeds of expense reimbursements, loans or advances or other non-payroll payments from the spouse’s company.
  • The existence of off-balance sheet accounts.
  • The existence of intangible assets with a value in excess of the book value.
  • The existence of fixed assets with a value in excess of the book value.
  • Transactions with related parties (this may be indicative of non-arm’s length transactions that could have been used to reduce the value of the company).
  • Unusual company transactions with third parties (this could be indicative of attempts to reduce the value of the company by transferring funds or assets to third parties).
  • Hidden insurance policies for which the defendant is the beneficiary.
  • Trusts for which the defendant is a beneficiary.

Because each divorce or commercial litigation matter has its own particular set of circumstances, it is critical that the review of the discovery request between counsel and the forensic accountant occur as early as possible in the discovery process. The forensic accountant can help identify specific documents that should be included in the discovery request. This will allow the forensic accountant to conduct thorough analysis asset searches to identify or point to the existence of such assets.

– See more at: http://thelegalintelligencer.typepad.com/tli/2011/10/discovery-of-hidden-assets-.html#sthash.wO91XNyS.dpuf