|
|
Protecting Yourself From Fraud: Do Your Financial Statements Add Up?
By Diane C.O. Gilson, CPA, CIA
Don’t make the mistake of having someone review your financial statements and management documents for you because you don’t understand them or don’t have the time to do it. Thieves could be filching your assets and hiding the evidence in doctored documents.
Insist on regularly receiving financial statements and management documents at a specific time each month. Then take the time to become very, very familiar with them. (If necessary, ask your accounting advisors for some in-depth training in how to read and interpret them.) It’s the best way to spot something out of the ordinary and uncover fraud. Here’s what to look for as you review the following documents.
Balance Sheet
The balance sheet basically states what you own (assets), what you owe (liabilities), and what is left over (equity) on a given date.
Pay close attention to what changes from period to period (i.e., accounts receivable, accounts payable, work in process, various loan balance accounts, fixed asset accounts, etc.). Determine which accounts should be increasing or decreasing and ask for supporting schedules. (Read Protecting Yourself From Fraud: Accounting Report Review for some more details about balance sheet supporting schedules and change reports.)
Because business owners tend to focus on income statements, embezzlers often find it easier to conceal fraudulent activity in balance sheet accounts. Check your balance sheet very carefully.
Income Statement
Fraudulent activity also can be hidden in an income statement, particularly in accounts with large cost accumulations (e.g., building materials, trade contractors, payroll, etc.).
Ask for income statement reports that show the most recent month’s activity and year-to-date activity. The reports should include a “percentage of income” column that shows what percent of your income you are spending on each type of expense.
If your chart of accounts and accounting reports are properly structured, you will also be able to see the amount of gross profit earned and the related gross profit margin percentage. Make sure your income, direct costs, and gross profit dollars and percentages are in line with your estimates and goals.
Overhead accounts (e.g., rent, telephone, accounting fees) generally have far fewer dollars flowing through them. Although they’re typically less prone to fraudulent overcharges, you shouldn’t overlook them.
Job Cost Reports
There are two basic types of job cost reports: account-based reports and job-stage reports.
When you review a profit and loss by job (account-based) report, make sure the report’s job cost accounts total agrees with your company totals for those same accounts. If they don’t, you’ll know that some costs have not been assigned to jobs and your individual job cost reports are not accurate. It would be fairly easy to “bury” fraudulent materials cost in an account and never have it show up on a job cost report.
Once you’re sure all job costs have been assigned to a job, then look at your job cost by job-stage reports.
You may ask, “How could fraudulent activity be concealed in a detailed estimate vs. actuals by job-stage report if I’ve followed all of the previous balancing processes?” Well, let’s be creative--embezzlers are.
What if your estimate included costs for something the client decided not to include, or what if the cost of drywall decreased but your estimate didn’t reflect the change? And what if an embezzler wrote a check to a phony supplier for the amount of the difference? Would you spot it? Probably not; we’re usually “wired” to look for variances. If they look normal, fraudulent costs easily could be overlooked.
Recommendations
- Become an “informed consumer” of your company’s financial information.
- Just as you “measure twice, cut once,” look at your information from a variety of perspectives and angles.
- Do not assume that data is correct just because it’s printed in an official-looking format. Probe and double-check different areas every time you review your financial statements and management documents.
Other Smoke Alerts in Your Financial Reports
- Numbers that don’t add up or make sense to you.
- Numerous, confusing entries (e.g., many “ins” and “outs,” various “error corrections,” etc.).
- Journal entries with no explanations or supporting documentation.
- Income or expense accounts with numerous “netted” entries. Increases and decreases normally should be recorded in clearly labeled accounts at gross (e.g., discounts to customers should be posted in an account labeled “customer discounts”).
- Balance sheet accounts with unsupported balances.
- No periodic review, comparison against estimated or expected results, or accountability for specific accounts’ correctness or balances.
- Accounts with confusing or unclear names (e.g., “pending unearned receivable clearings” or “deposit application cancellations” or “suspense”).
- Accounts that aren’t sufficiently specific (e.g., “advertising”).
- Missing documentation or support materials (e.g., original invoices, missing cancelled checks, etc.).
- Supporting documents are photocopied, not originals.
- Bank accounts (or other balance sheet accounts) are reconciled weeks or months late.
- Reconciliations don’t agree with your books or with the bank’s balance.
- Old outstanding checks removed from the books without discussion or approval. Have they been converted to cash?
Thoroughly investigate anything fishy and ask for supporting evidence. Ask about anything you don’t understand. Don’t just write off an unexplained loss as a one-time thing. Like fire, fraud only gets worse if it’s allowed to spread.
Diane C.O. Gilson, CPA, CIA, is a Certified QuickBooks ProAdvisor and MasterBuilder ProAdvisor, author, trainer, and construction accounting coach, as well as a frequent speaker at The International Builders’ Show and The Remodelers’ Show. Her firm, Info Plus Accounting PC/CPA, offers bookkeeping and support services to help construction companies do more accurate and timely job costing and run better management reports. Contact Diane at 734-544-7620 or Help@InfoPlusAcct.com.
Check out Accounting with QuickBooks Pro® for Home Builders and Remodelers. From writing payroll checks to generating up-to-date income statements, this book will help you get the maximum benefit from your accounting system and put good financial controls in place. It includes a CD-ROM with a trial version of QuickBooks Pro®. The price is $22.50 for NAHB members and $25 for non-members. Call 800-223-2665 or visit http://store.builderbooks.com/cgi-bin/builderbooks/28?id=EswEIsgV&mv_pc=66 to order it online.
|
 |
|
Work Smarter at www.nahb.org/biztools
You don’t have time to surf all over the Internet when you need information fast.
Now it’s easier to find solutions to the tough business management and information technology issues you face daily.
Just type www.nahb.org/biztools into your Internet browser. You’ll instantly be taken to Business Management Tools, a library of members-only resources brought to you by NAHB’s Business Management Department.
www.nahb.org/biztools contains articles, Web pages, books, and other resources developed by and for contractors like you. Their voices and best practices appear throughout these materials, providing you with hands-on, workable solutions. We’ve also tapped the brains of IT professionals and financial consultants who know the home building industry inside and out.
Content is organized in 10 categories:
Find what you need and get back to work quickly with www.nahb.org/biztools. [return
to top]
|
|
|
GLI Solution—We Need Your Help to Make it Happen
As you know all too well, the market for general liability insurance has taken a disastrous turn over the past two years. That’s why NAHB is rolling out one of the most important initiatives in its history. This effort is designed to solve the residential construction industry’s general liability insurance (GLI) crisis.
Last year, NAHB assigned a task force to work on this problem. At the International Builders Show in January, that task force put forward a plan of action that the officers and executive board fully endorsed. The cornerstone of the plan is a strategic relationship with Marsh, the global insurance consulting firm, to develop a range of GLI coverage options for builders, remodelers and subcontractors. These products will be available in every state.
We are now moving into the implementation phase. The first step will be collecting critical insurance information from a sample of 4,000 builder, remodeler, and trade contractors from around the country. To do that, we need your help.
NAHB is asking members to send Marsh a description of their businesses and insurance coverage information for the past five years – preferably for the past ten years; a completed survey that gives information such as the size of the company and insurance policy information; and a consent letter that gives Marsh permission to contact the member’s insurance carrier to obtain loss-run information.
Marsh will use this information to develop new insurance products for our members. The more information Marsh gets, the better the product will be. The goal is to complete data collection by July 15. If we meet that deadline, we anticipate bringing new products and coverage to market early next year.
All company-specific information collected as part of this initiative will be kept in strict confidence and will not be shared with any NAHB staff or members. Any products developed through this initiative will not supplant the products now offered by HBAs that already offer GLI coverage.
To obtain a copy of the GLI survey or consent letter, select this link or contact the NAHB Member Service Center at 800-368-5242 x8600. If you have questions about the data collection initiative, contact Brett Diggs at 800-368-5242 x8453 or Clayton Traylor at x8490. [return
to top]
|
|
|
Pass it On
You probably know someone who wants to read this valuable newsletter too. So go ahead and send this newsletter to any NAHB member you know who might benefit from it. They’ll be sure to thank you for it! [return
to top]
|
|
|
NAFTA Lumber Ruling a Win for Housing Affordability
An April 30, 2004 North American Free Trade Agreement (NAFTA) panel decision stating once again that U.S. lumber producers are not threatened with injury from Canadian trade practices represents an important win for housing affordability, free trade, and millions of domestic lumber consumers who are already feeling the pinch of soaring prices.
“For the second time, a NAFTA panel has determined the domestic lumber industry’s injury threat allegations are baseless and contrary to law. We call on the Administration not to engage in any legal delays and to allow the implementation of this decision. It’s high time to roll back the 27 percent duties on Canadian lumber and end the hidden tax imposed on American home buyers and renters,” said NAHB President Bobby Rayburn.
The ITC ruled in May of 2002 that the U.S. lumber industry was threatened with injury by Canadian lumber imports. The ITC action allowed the U.S. Commerce Department to impose countervailing and anti-dumping duties averaging 27 percent on Canadian softwood lumber shipments into the U.S.
Last fall, NAFTA determined that the ITC did not provide adequate explanation or support for its decision on threat of injury and gave the ITC 100 days to reconsider the case. The NAFTA verdict released April 30, in response to the ITC’s reassertion of the injury threat, rejects the ITC’s finding and says it “is not in accordance with the law and is not supported by substantial evidence.”
Further, the NAFTA ruling gave the ITC 21 days to once again attempt to prove its threat-of-injury analysis.
With the price of framing lumber now at $451 per 1,000 board feet -- up 40 percent from the beginning of the year and at its highest level since July of 1999 according to the authoritative trade publication Random Lengths -- Rayburn said this decision could not have come at a more opportune time.
“It is absurd for U.S. lumber producers to complain they are being harmed by legitimate competition from Canada. “The duties are icing on the cake for domestic producers -- artificially boosting their profits and lumber prices at the expense of U.S. consumers,” said Rayburn. [return
to top]
|
|
|
How Does Your Business Measure Up?
Get your copy of the 2004 Cost of Doing Business Study and you’ll instantly see how your financial performance stacks up against the rest of the industry. The publication gives home builders a rare glimpse at other builders’ books by providing data about profitability, cost of sales, and expenses from hundreds of home builders across the country.
In this 2004 edition, you’ll learn how to develop cost control systems and get tips on cutting cycle time. Start working more profitably by ordering it today.
[return
to top]
|
|
|
NAHB’s University of Housing Offers Risk Management Course
Risk Management and Insurance for Building Professionals, offered by the NAHB University of Housing, is designed to help builders and developers avoid, minimize, and transfer risks and, where possible, buy insurance and make insurance claims. Select this link for a list of current offerings of this course and a full course description.
This course may also be scheduled through your licensed state or local home builders association. For more information on how to schedule this course at your state or local HBA, e-mail Maria Alonso. [return
to top]
|
|
|
Did Someone Forward This to You?
To get this valuable newsletter every month, just go to:
http://www.magnetmail.net/actions/nahb_newsletter_subscription.cfm?user_id=mmbl [return
to top]
|
|
|
Business Opportunities From NAHB Departments and Councils
Spotlight Your Design Skills
Co-sponsored by Professional Builder magazine and NAHB, the annual Best in American Living Awards recognize builders, developers, architects, land planners, designers, and other industry professional who produce homes that illustrate design quality and success in the marketplace and exemplify the best in American living.
The registration deadline for the awards is July 1 and entries are due by July 15.
For information, eligibility requirements, and application forms, visit www.housingzone.com/, or call NAHB at 800-368-5242 x8309 or Professional Builder at 630-288-8184.
Highlight Workforce Housing Projects
The Innovation in Workforce Housing Awards (IWHA) are designed to recognize outstanding examples of workforce housing communities across the nation that provide decent and affordable homes for nurses, police officers, schoolteachers, retail workers and the like near areas in which they work.
IWHA is open to builders, architects, designers, developers and land planners nationwide. Communities completed or for which the first model opened, or the first unit was occupied, between January 1, 2002 and July 1, 2004 are eligible to enter. Entries must be postmarked no later than July 1.
For additional entry guidelines and an entry form, select this link.
Showcase Your Commercial Project
Sponsored by NAHB’s National Commercial Builders Council, the 2005 Awards of Excellence — Building Excitement program recognizes achievements in the national commercial building industry for design (remodeling and new construction), market appeal, energy efficiency, challenges faced during building and overall success of the project. All builders, architects, designers, engineers, contractors, developers and building owners nationwide are eligible to enter the competition.
All entries must be received by July 26. Select this link to download the call for entries brochure and entry form . For more information, contact Carmel Nayman at 800-368-5242 x8410.
Do Business in Mexico
The Mexican home building market is expected to grow to a value of $6.7 billion by 2005. Want a piece of it? Attend the 2nd International Housing Conference of the Americas, which takes place November 7-10 in Mexico City and is sponsored by NAHB International.
Conference highlights include pre-arranged, one-on-one networking meetings between U.S. and Mexican company representatives, property tours of Mexico’s top builders, and interactive, highly informative panels. Simultaneous English/Spanish translation is included for all sessions.
The first 200 registrants to the 2nd International Housing Conference of the Americas will receive complimentary registration to the 2005 International Builders Show in Orlando, FL, January 13-16, 2005.
Select this link to register online for the conference. For more information about NAHB International, call 800-368-5242 x8417 or e-mail international@nahb.com. [return
to top]
|
|
|
Member Advantage: NAHB Members Receive 5% Discount From AT&T Wireless
Now through a special affiliation between NAHB and AT&T Wireless, NAHB members can take advantage of a 5% discount each month on qualified wireless service charges. Qualified charges include one-time charges for wireless service activation, conversion and rate plan changes, monthly wireless access charges, home wireless airtime charges, roaming airtime charges incurred in AT&T Wireless markets, charges for detail billing, and charges for additional features such as voice mail.
For information on activating new AT&T Wireless service call 888-444-4410; be sure to mention code 50001515 and your NAHB membership.
If you have existing AT&T Wireless service and would like to start receiving the 5% discount, please call 800-459-6524 and mention code 50001515 and your NAHB membership. Or visit the Web site at http://www.attws.com/specials/wap/.
For the most up-to-date details on the Member Advantage discount program and all of the participating companies, go to http://memberadvantage.nahb.org.
Or visit www.nahb.org to explore the full range of benefits associated with membership in your local, state, and national home builders associations.
Important Information
General requirements: Requires credit approval, $36 activation fee, annual contract, $175 cancellation fee, and a compatible device. Subject to terms and conditions of service and the applicable rate plan and promotional materials for the service you select. Roaming, additional minutes and long distance charges, and other restrictions, charges, universal connectivity charge, surcharges, monthly Regulatory Programs Fee of $1.75 per line, and taxes apply. Not available for purchase or use in all areas. May not be available with other offers.
5% discount: Available only to active members of associations participating in the AT&T Wireless Association Program with a qualified AT&T Wireless Association Agreement (WAP Agreement). Discount is activated only when you call the toll-free membership verification number listed above. Discount is only available on select AT&T Wireless plans and only applies to qualified charges as described in your association’s WAP Agreement. It may take up to ninety (90) days for the discount to appear on your account. Additional terms, conditions and restrictions apply – contact NAHB or your local AT&T Wireless representative for details. [return
to top]
|
|
|
