Lunch with the auditor a bad thing?

1. A formal examination, correction, and official endorsing of financial accounts; especially, those of a business, undertaken annually by an accountant.
2. A systematic check or assessment; especially, of the efficiency or effectiveness of an organization or a process, typically carried out by an independent assessor.
3. In computer programming: a process used to detect accidental input or processing errors as well as fraud, often using test data and special-purpose software.
4. Another aspect of computer programming in which a set of procedures are established to ensure the quality and integrity of a data base and to carry out such a process or procedure.
5. Etymology: from Latin auditus, “a hearing”; past participle of audire, “to hear”.

It now stands for the official examination of business accounts, which were originally oral or spoken. The verb is from about 1557.

OK folks, now that I let y’all in on one of the secret questions you must successfully answer to learn the secret handshake of becoming an auditor, namely that to verb “audit” and the term “auditor” are derived from the Latin word for “listening” and “hearing” let’s examine an alternative world, where auditors must work in silence and are not allowed to ask questions:

Fillingame disagreed with Atkinson’s report in a telephone interview shortly after Thursday’s meeting.

“I read the report and was shocked at the amount of inaccuracies and the amount of very flawed details within the report,” Fillingame said. “It was obvious that a lot of the facts that were supposedly presented were taken from conversations and not drawn from the documents. Really, some of the more serious (accusations), and I’m very concerned about that.”
Fillingame said any information the council required has always been available at city hall, and any problems were due to a lack of manpower to duplicate and deliver the information.

I can understand Hizzoner’s confusion because he was not in attendance when Sam Atkinson, Director of the Office of the State Auditor’s Performance Audit Division, presented her office’s report on the causes of the many well documented problems contained in the FYE 9-30-2014 municipal audit report performed by the firm Wright, Ward, Hatten and Guel.  In its simplest terms the performance audit is a report on an audit report.

To the extent the Performance Audit Division owes its origins to what I’ll term an auditing fad dating from the 1990s it would follow it is not the same type of engagement as an audit in accordance with GAAS and GAGAS.  This explains why Ms. Atkinson is well qualified to run the Performance Audit Division because she is a Mississippi Governmental Finance expert rather than a CPA although her division has several on staff.  Hizzoner and the City’s finance department employees could certainly have benefited from training Atkinson gives at events like MML and that is really what the performance audit process is about, improving performance by pinpointing the root causes of the problems so corrective action can be taken. Continue reading “Lunch with the auditor a bad thing?”

Today’s Auditing Moment: Rental Real Estate Transactions and Money Laundering. (Part 1)

CPAs that perform audits of financial statements under the Codified Generally Accepted Auditing Standards are typically well versed in the standards and practices detailed therein but to the extent continuing education on the topic of auditing often focuses on notable audit failures such as those involving ENRON and Mississippi’s own WorldCom along with a host of others dating back to the 1920s the study of what went wrong is both natural and needed.  Out of the ENRON and WorldCom disasters came a host of new auditing standards. I particularly thought the AICPA did a good job with AU Sections 314, 316 and 317 which deal with understanding the entity in question, and the risks associated with the entity including fraud and illegal acts.

Today, the realities of the post Katrina Mississippi coast is the growth of the rental real estate in terms of sheer number of units, often built solely as a result of post Katrina taxpayer subsidies.  The number of units constructed has resulted in a market overcapacity and that in turn impacts the monthly price of the rentals.  With insurance sky high the top and bottom line squeeze on the owners of the units can lead to pressure to do some very unsavory things. Let’s begin with the National Association of Realtors Anti Money Laundering page:

The crime of money laundering continues to be a growing area of concern in the United States. Therefore, law enforcement agencies and the financial sector devote considerable time and resources to combatting these illegal financial activities. However, many non-financial businesses and professions are also vulnerable to potential money laundering schemes.

Real estate professionals are a category of the non-financial business sector that may encounter persons engaging in money laundering activities. The purpose of this fact sheet and suggested voluntary guidelines is to increase real estate professionals’ awareness, knowledge, and understanding of the potential money laundering risks surrounding real estate and enable them to identify practical measures to mitigate the risks.

It is at this point that I’ll observe that while most people understand the concept of money laundering in a general sense they do not understand the specific elements so here it the skinny:

The actual process of money laundering is a three step process that is initiated by introducing the illegal proceeds into the financial system, e.g., breaking up large amounts into small deposits or by purchasing financial instruments, such as money orders, which is referred to as placement. This is typically followed by distancing the illegal proceeds from the source of the funds through layers of financial transactions, referred to as layering, and finally by returning the illegally derived proceeds to the criminal from what appears to be a legitimate source, known as integration.

So there we have it folks, money laundering is a three step process defined by 1. Placement 2. Layering and 3. Integration but this is different from the legal definition of the crime of money laundering. Here in the US, I find the FBI primer page on the topic to be very useful because in the US the crime of money laundering is just a 2 step process: Continue reading “Today’s Auditing Moment: Rental Real Estate Transactions and Money Laundering. (Part 1)”

Today’s auditing moment: Fictitious Vendor Embezzlement

The proof is so well hidden in the paper trail investigators need to know where to look.

First some mood music to set the theme:

I’ve Got Your Number ~ Journal of Accountancy

Frank Benford made a simple observation while working as a physicist at the GE Research Laboratories in Schenectady, New York, in the 1920s. He noticed that the first few pages of his logarithm tables books were more worn than the last few and from this he surmised that he was consulting the first pages—which gave the logs of numbers with low digits—more often. The first digit of a number is leftmost—for example, the first digit of 45,002 is 4. (Zero cannot be a first digit.) Benford extrapolated that he was looking up the logs of numbers with low first digits more frequently because there were more numbers with low first digits in the world.

OK, I know those of you that are not mathematically inclined are scratching their heads wondering what the heck I am talking about so here goes.  This morning Dixygirl left a comment on the Mississippi Department of Marine Resources post quoted above which described “Fictitious Vendor Embezzlement” aka “Ghost Vendors”.  Chubb, the world’s leading good faith insurer (as opposed to the bad faith variety) has put out a resource on this topic for their business insureds that is well worth quoting that described the scheme: Continue reading “Today’s auditing moment: Fictitious Vendor Embezzlement”