Forensic Accounting

My company can’t afford an antifraud program. Oh, Really?

Two things arrived in my digital devices today that reinforced the fact that your and my businesses cannot afford to not have an effective antifraud program.

In September 2013, I blogged about a Federal grand jury indicting on 10 counts of mail fraud Sandy Jenkins, the former longtime corporate controller for Collin Street Bakery, the  Corsicana, Texas fruitcake company.  He is accused of embezzling “approximately $16,649,786.91” between 2005 and 2013.  See that blog for details.

Yesterday, a Federal grand jury returned a 22-count indictment, known as a superseding indictment, against old Sandy and his wife, Kay, the latter being indicted for the first time.  Among other new charges, they are accused of lying on a loan request to buy a home in Santa Fe when they declared that they earned $25,000 per month.  (Would they have avoided that charge if they had declared that they stole “approximately” $154,164.69 per month?)

Anyway, after discussing the case with my CPA friends in industry and in public practice, I can only reach the conclusion that the fruitcake company was devoid of effective internal controls and antifraud programs.  Stay tuned for Sandy’s trial, which is supposed to begin April 7.

Also, this morning brought to me the article “What’s your fraud IQ?” from the March 2014 edition of Journal of Accountancy.  The article poses 10 questions to assess your knowledge of the appropriate steps for preventing fraud.  It is on the website  Click through the tab for Journal of Accountancy.

Take the test.  Do badly?  Fear for your business enterprise.


Tax Court

Tax Court is Not Nice to a Lady in Distress

Linda Sharp, a former university professor of choral music, received a settlement from the University of Northern Iowa for “emotional distress damages only,” according to the settlement agreement, in the amount of $210,000. She claimed that she had been treated badly by her superiors and, based on the several newspaper accounts in Cedar Rapids, Iowa (where the story got a lot of press coverage), I can see why she complained. She had severe clinical depression and a host of other psychiatric diagnoses.

She excluded the first $70,000 payment, which was received in 2010, from gross income on her 2010 return. She attached to a her return a note (not the prescribed form) that she was doing so. She relied on the advice of her attorney. The IRS disagreed with her exclusion.

Professor Sharp lost the case. Basically, in a recent memorandum decision, Tax Court Judge Kroupa said that the plain language of the settlement agreement kept the payment from being excludable under IRC Section 104(a)(1) and (2), which allows exclusion from gross income for (1) amounts received under workmen’s compensation insurance for personal injuries or sickness and (2) damage amounts received on account of physical injuries or physical sickness.

Then, Judge Kroupa upheld the IRS’s imposition of a 20% accuracy penalty for substantial understatement of tax. One of the ways to avoid the penalty is for the taxpayer to have relied the advice of a competent tax professional. Possibly because of a procedural matter, there was not much proof offered into evidence that the attorney who advised her was knowledgeable about taxes. (Yet, it appears from footnote 4 in the opinion that this same attorney was representing her in this Tax Court case!)

Judge Kroupa lowered the boom on Professor Sharp: “It is difficult to imagine how petitioner, a professional, accomplished woman, could reasonably rely on an attorney whose tax advice was so contrary to such an established body of law. In any case the record fails to reflect that petitioner reasonably believed her attorney to be a competent tax adviser with sufficient expertise to justify reliance.”

Judge Kroupa, I respectfully dissent. She’s a music educator! I know a bunch of professional, accomplished, very bright music professors. I doubt seriously if any of one of them has a sufficient grasp of the tax code to overrule the attorney who is representing her or him before the Tax Court. It’s like I told someone today: as smart as he/she is, I wouldn’t want a brain surgeon doing my taxes.