5/15/2015. Using Financial Data and Ratios to Drive Performance and Detecting Fraud in the Workplace

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1 Using Financial Data and Ratios to Drive Performance and Detecting Fraud in the Workplace by Donna M. Ingram, CPA, CFE, CFF Donna M. Ingram, CPA, PC Luca Pacioli, the "Father of Accounting", wrote on accounting ethics in his first book Summa de arithmetica, geometria, proportioni, et proportionalita, published in Ethical standards have since then been developed through government groups, professional organizations, and independent companies. These various groups have led accountants to follow several codes of ethics to perform their duties in a professional work environment. Example CHC Balance Sheet (Page 1) December 31, 2015 and ASSETS Current Assets: Cash $ 49,200 $ 83,725 Marketable Securities 28,375 35,000 A/R net 110,650 99,200 Inventory 12,725 8,475 Prepaid Expenses 10,000 5,500 Total Current Assets 210, ,900 Property Plant & Equipment: Land and improvements 100, ,000 Buildings 450, ,000 Equipment 122, , , ,500 Less: Accumulated Depreciation 202, ,500 Net Property Plant & Equipment 470, ,000 Other Assets: Investments (Held to Maturity) 48,000 48,000 Goodwill 65,000 65,000 Deposits 1,000 1,000 Total Other Assets 114, ,000 Total Assets $ 794,950 $ 825,900 1

2 Example CHC Balance Sheet (Page 2) December 31, 2015 and LIABILITIES Current Liabilities: Notes Payable $ 25,000 $ Accounts Payable 94,700 81,100 Accrued Payroll and Related Expense 37,300 14,500 Other Accrued Expenses 22,800 20,600 Current Portion of LTD 41,600 40,000 Total Current Liabilities 221, ,200 Long Term Liabilities: Long term debt, net of current portion 435, ,100 Total Liabilities 656, ,300 NET ASSETS Unrestricted 61, ,600 Temporarily Restricted 76,375 83,000 Total Net Assets 138, ,600 Total Liabilities and Net Assets $ 794,950 $ 825,900 Vertical Analysis One technique in financial statement analysis is known as vertical analysis. Vertical analysis results in common size financial statements. A common size balance sheet is a balance sheet where every dollar amount has been restated to be a percentage of total assets. Vertical Analysis Benefit The benefit of a common size balance sheet is that an item can be compared to a similar item of another company regardless of the size of the companies. A company can also compare its percentages to the industry's average percentages. A common size balance sheet also allows management of two different companies to compare the magnitude of a balance sheet item without either one revealing the actual dollar amounts. 2

3 Example CHC Common-Size Balance Sheet (Page 1) December 31, 2015 and ASSETS Current Assets: Cash 6.19% 10.14% Marketable Securities 3.57% 4.24% A/R net 13.92% 12.01% Inventory 1.60% 1.03% Prepaid Expenses 1.26% 0.67% Total Current Assets 26.54% 28.08% Property Plant & Equipment: Land and improvements 12.58% 12.11% Buildings 56.61% 54.49% Equipment 15.41% 13.62% 84.60% 80.22% Less: Accumulated Depreciation 25.47% 22.10% Net Property Plant & Equipment 59.12% 58.12% Other Assets: Investments (Held to Maturity) 6.04% 5.81% Goodwill 8.18% 7.87% Deposits 0.13% 0.12% Total Other Assets 14.34% 13.80% Total Assets % % Example CHC Common Size Balance Sheet (Page 2) December 31, 2015 and LIABILITIES Current Liabilities: Notes Payable 3.14% 0.00% Accounts Payable 11.91% 9.82% Accrued Payroll and Related Expense 4.69% 1.76% Other Accrued Expenses 2.87% 2.49% Current Portion of LTD 5.23% 4.84% Total Current Liabilities 27.85% 18.91% Long Term Liabilities: Long term debt, net of current portion 54.77% 52.08% Total Liabilities 82.62% 70.99% NET ASSETS Unrestricted 7.77% 18.96% Temporarily Restricted 9.61% 10.05% Total Net Assets 17.38% 29.01% Total Liabilities and Net Assets % % Other Important Tools Trend Analysis analyzing at least 3 years of data for unusual or unexpected trends Budget Comparisons compute favorable and unfavorable variances and determine causes Ratio Analysis compare applicable ratios to historical (financial and non financial) information AND peers Liquidity Financial Distress or Viability Performance (personnel, marketing, space, etc.) 3

4 Are You Viable? A going concern is a business or organization that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months. It implies that the business or organization has the ability and intention to keep running its activities at least for the next year. Example CHC P&L Year Ended December 31, 2015 and Revenue from Operations $ 3,467,250 $ 3,458,600 Gain (Loss) on Investments (6,625) 2,000 Non Operating Revenue 22,000 39,350 Net Revenue 3,482,625 3,499,950 Personnel Costs 2,838,500 2,742,750 Contract Costs: SS Pharmacy 3,500 3,550 X Ray 22,500 21,750 Lab 73,600 74,800 MIS 78,200 62,425 Other 25,450 26,950 Supplies: Medical 53,400 54,625 Lab 37,900 37,350 Office and Other 82,300 51,400 Other: Professional Fees 30,000 30,000 Rent 40,000 40,000 Utilities and Telephone 109, ,225 Due & Memberships 28,500 27,500 Repairs & Maintenance 47,800 33,975 Other 112, ,850 Total Expenses 3,584,075 3,418,150 Increase (Decrease) in Net Assets $ (101,450) $ 81,800 Example CHC Common Size P&L Year Ended December 31, 2015 (with comparative data) Revenue from Operations 99.56% 98.82% 98.50% 98.13% 97.99% Gain (Loss) on Investments 0.19% 0.06% 0.04% 0.10% 0.13% Non Operating Revenue 0.63% 1.12% 1.46% 1.77% 1.88% Net Revenue % % % % % Personnel Costs 81.50% 78.37% 78.01% 77.86% 77.98% Contract Costs: SS Pharmacy 0.10% 0.10% 0.09% 0.09% 0.08% X Ray 0.65% 0.62% 0.60% 0.59% 0.55% Lab 2.11% 2.14% 1.93% 1.87% 1.90% MIS 2.25% 1.78% 1.33% 1.15% 0.98% Other 0.73% 0.77% 0.75% 0.79% 0.71% Supplies: Medical 1.53% 1.56% 1.53% 1.58% 1.52% Lab 1.09% 1.07% 1.06% 1.00% 1.01% Office and Other 2.36% 1.47% 1.21% 1.15% 1.11% Other: Professional Fees 0.86% 0.86% 0.85% 0.82% 0.80% Rent 1.15% 1.14% 1.10% 1.05% 1.06% Utilities and Telephone 3.15% 3.15% 3.12% 3.08% 3.05% Due & Memberships 0.82% 0.79% 0.79% 0.75% 0.78% Repairs & Maintenance 1.37% 0.97% 0.73% 0.69% 0.69% Other 3.24% 2.88% 2.35% 2.07% 1.76% Total Expenses % 97.66% 95.45% 94.54% 93.98% Increase (Decrease) in Net Assets 2.91% 2.34% 4.55% 5.46% 6.02% 4

5 Ratio Analysis = Quantitative Analysis of Financial Ratio analysis is used to evaluate various aspects of a company s operating and financial performance such as its efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating. Ratios are also compared across different companies in the same sector to see how they stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of fundamental analysis. Current Ratio Current assets alone don t tell us a whole lot, but when we divide them by current liabilities we are able to determine whether the company or organization has enough money to cover shortterm debts. Current Ratio = Current Assets/Current Liabilities A Picture Tells A Story 2 Working Capital Working Capital

6 Going Concern Evaluation Z Score (Working Capital/Total Assets) * (Net Assets/Total Assets) * (Operating Income/Total Assets) * (Net Assets/Total Liabilities) * (Revenue/Total Assets) * "Z" Score "Z" Score Probability of Bankruptcy 1.10 or less Very high probability 1.11 to 2.60 Not sure (gray area) 2.60 or higher Very low probability Receivable Ratios Receivables Turnover = Operating Revenue Accounts Receivable Days Receivable = 365 Receivables Turnover What About These? Revenue/# of Patients (daily, weekly, monthly, annually) # of Patients (day, week, month, year) Patient Statistics (self pay, private pay, Medicare, Medicaid) # of Patients/# of Employees (day, week, month, year) Operating Expenses/# of Patients (monthly and annually) 6

7 Analyzing The Data May Lead To The Discovery Of Fraud Types of Fraud to Consider Cooking the Books Budgets Grant Applications and Reports Financial Statements and Reports MD&A Footnotes Embezzlement and Asset Theft Fudging on Time Cards Corruption Conflicts of Interest Bribery Kickbacks Bid Rigging Illegal Gratuities Economic Extortion Unauthorized use of this material is Fraud Basics Fraud is an attempt to unlawfully obtain money or assets of another. Psychological deterrents, physical security and internal controls are no match for a determined employee thief with access to assets and accounting books (but are still needed). Criminals weigh the risk of apprehension, severity of punishment and social disapproval against the expected rewards. Unauthorized use of material strictly 7

8 ELEMENTS/CHARACTERISTICS OF FRAUD Perpetrator gained trust/confidence Perpetrator used trickery/ cunning; not force FRAUD Embezzlers rarely save/ invest; they spend Fraud rarely terminated voluntarily ELEMENTS/CHARACTERISTICS OF FRAUD Perpetrator becomes more confident/greedy Perpetrators grow careless/ overconfident/ makes mistakes FRAUD Most significant contributing factor failure to enforce internal controls Magnitude of fraud leads to detection Internal Motives An employee feeling under compensated A worker feeling unfairly treated in performance evaluations A high volume of work that results in an employee feeling incredible job pressure A staff member sensing that promotions are based more on politics than on hard work. Some of these motives may be real, while others may be perceived. Unauthorized use of material strictly 8

9 External Motives A substance abuse problem Extreme financial stress Health problems (including those of family members) Gambling problems A feeling of pressure to achieve a certain lifestyle Unauthorized use of material strictly The Fraud Triangle How Do You Know Your Co-Pays Are Being Properly Deposited? As reported December 21, 2014 An employee at a Marlton, New Jersey doctor's office has been charged with stealing over $100,000 in co pay fees, authorities say. 56 year old Joyce Russo of Browns Mills, NJ was charged Thursday with stealing $129,018 during a two year period. Police say Russo was stealing part of the patients' copays. 9

10 Segregating Duties Possible Scenario: One employee would be entirely responsible for the cash drawer, including daily balancing and taking the deposit to the bank. Another employee is the control person who will receive patient encounter forms and receipts but does not have access to the cash drawer and does not take deposits to the bank. If there is a third employee who takes the money to the bank, that means another step is added to make sure the deposit amount is confirmed. What Should You Look At Here? Fraud in the Headlines October 2014 I am totally aware that I have deceived and betrayed a person who treated me as a friend and confidante, as well as a trusted employee. Suzanne Glawatz Her problem is obviously a lack of conscience and arrogance and greed. Someone with a stitch of moral fiber could not look me in the eye everyday and do this to me year after year after year. Dr. Grassi 10

11 What s the #1 Fraud? This is what a blank check now looks like. Who Gets the Mail? Unauthorized use of materials is strictly 11

12 Fraud in the Headlines August 16, 2014 Since 1999, Medicare has spent $8.2 billion to procure power wheelchairs and scooters for 2.7 million people. Today, the government cannot even guess at how much of that money was paid out to scammers. Unauthorized use of this material is Fraud in the Headlines April 10, 2015 BIRMINGHAM, Ala. (AP) The former Community Health Clinic CFO of two Alabama nonprofits for the poor and homeless will plead guilty to defrauding millions of dollars from the clinics and the federal agencies that fund them. Fictitious Vendor Schemes Most fictitious or ghost vendors provide services rather than goods In most of these frauds, a post office box is used as the vendor s preferred address for payments In rare cases, employees have used their own home address as the address of a phony vendor relying on the presumption that no one will look very closely at the address! 12

13 Fictitious Vendor Schemes- Continued One variation on the fictitious vendor scheme is the fraudulent payment to a vendor that was a valid vendor at some point in the past The vendor itself is not fictitious, the invoice and the goods or services supposedly provided are The perpetrator uses old invoices from the vendor to create invoices that appear to be legitimate It is quite easy to replicate a vendor s logo and standard fonts and formats Fictitious Vendor Schemes Financial Controls Requiring that the following information be obtained from all new vendors Complete name Employer identification number Type of entity Street address Phone and fax numbers Contact names Credit Card Abuse Do you have a Policy? Who has access to card or account info? Do you only pay the company s credit card? Are the purchases valid and approved? Pitfalls in proving case 13

14 Expense Report Fraud This is one of the fasted growing forms of fraud and abuse in the United States Some employers have cited rampant abuse among employees in which the per incident loss is inconsequential, but the cumulative effect is quite large Double reporting schemes are popular Two employees each submitting the same expenditure for reimbursement, when only one employee actually paid for the expense Fictitious charges (websites available) Some Fraud Indicators Delays in production of requested data or documents Documents provided are copies, rather than originals Missing data or documents Missing or unusual information Vendor/Contractor with high turnover or is experiencing financial difficulties Crude looking invoices/documents Unauthorized use of this material is What Keeps People Honest? Integrity and values Publicity Lack of a need Lack of an opportunity Lack of a rationalization Fear Unauthorized use of material strictly 14

15 Minimizing the Risks Preventive Controls Detective Controls Thorough Investigations Unauthorized use of material strictly QUESTIONS Unauthorized use of materials is strictly 15