Skimmer fraud is a global epidemic – are you stepping up to the plate and helping your borrowers?
Skimmer fraud costs businesses billions of dollars annually in the United States, according to a report released in February by the Association of Chartered Certified Accountants USA (ACCA) and Pace University.
The average loss per skimmer scam was around $50,000 in 2011 — up from some $30,000 in 2010. Unfortunately, this trend isn’t showing any signs of stopping.
Skimmer scams can damage a business’s reputation, compromise its ability to service debt and generate financial losses. Even though it’s most common among restaurants and retailers, skimmer fraud is a risk for any business that takes electronic payments.
What is “Skimmer Fraud”?
“Skimmers” are electronic devices that are used to read and store electronic data. They can be installed directly on ATMs, gas station pumps and point-of-sale terminals to extract data from magnetic stripes on payment cards. Some schemes even use small cameras to simultaneously record personal identification numbers (PINs).
After skimming the electronic data, thieves will usually clone payment cards. The phony cards might be used to purchase high-end goods that can sell quite easily on the black market or online marketplaces.
U.S. is Vulnerable to These Threats
Skimmer fraud has become a global epidemic, which is often perpetrated by Eastern European crime rings. Unfortunately, the United States is especially vulnerable to these threats. Why? For one thing, it has more ATMs than any other nation, and U.S. credit cards don’t contain global chips, which makes them easier to skim and clone.
Restaurants in the United States also typically swipe customers’ cards away from the table, which creates an opportunity for dishonest restaurant staff to skim a patron’s electronic data using handheld devices. In other countries, however, payment cards are swiped at the table, never leaving diners’ sight.
While skimmers have been around for years, today’s devices are smaller, they have more memory and they incorporate advanced encryption methods that can make them harder to detect. Some skimmers even use wireless technology. In January, 13 people were indicted for operating a skimmer fraud ring. They stole upwards of $2 million using Bluetooth-enabled skimmers at gas stations.
How to Prevent or Mitigate Skimmer Scams
There are several ways you can protect your borrowers from skimmer scams. Here are just a few:
- Inspect card readers for tampering and using skimmer detection cards.
- Install surveillance cameras to record activity at ATMs, gas stations and ticket kiosks.
- Prohibit cashiers from leaving their registers or terminals.
- Require employees to swipe payment cards in customers’ plain view.
- Equip point-of-sale terminals with anti-skimming devices.
U.S. retailers are also validating transactions using ZIP codes, driver’s licenses or PINs. What does the future hold? Look for biometric data — such as fingerprints or irises — to authenticate transactions.
Keep Abreast of Skimmer Fraud
If you want more information on the ACCA’s report, look for “skimmer fraud” on the association’s website (http://www.accaglobal.com). In addition, work our forensic accounting team. We can provide additional information on prevention and detection.
Freed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can help you reduce the risk of lending or assist your clients with our business advisory, audit, fraud detection and prevention, and tax services.
For more information about our business advisory, audit, and other accounting services contact us here, or call us at 716-847-2651.
How Accurate are Corporate Earnings Reports?
Author: Tim McPoland
Researchers from Duke University and Emory University recently released surprising results of their study on the prevalence of corporate earnings “management.” As described in the report, “Earnings Quality: Evidence from the Field,” the researchers surveyed 169 CFOs of public companies and conducted in-depth interviews of 12 CFOs and two setters of accounting standards. Their report provides valuable insight into earnings manipulations that potentially could affect damages calculations and other legal matters.
Signs of quality
The report explains what constitutes high-quality earnings. According to the surveyed CFOs, a company’s earnings are “high quality” when they’re sustainable and backed by actual cash flows. Other, more-specific characteristics of quality include consistent reporting choices over time and avoidance of long-term estimates.
The study’s researchers indicate that this view of earnings quality is consistent with a valuation perspective because a company’s value is assessed by estimating and discounting the stream of future profits. Thus, current earnings should be considered high quality if they serve as a reliable guide to a company’s long-term profits.
What’s wrong with management?
For its part, earnings management is defined as manipulation that misrepresents performance but nonetheless falls within Generally Accepted Accounting Principles (GAAP). The CFOs estimated that, in any given period, roughly 20% of companies manage earnings, and that the typical misrepresentation was about 10% of reported earnings per share.
The study’s subjects believe that 60% of earnings management increases income, while 40% decreases income. While the latter figure may sound counterintuitive, the researchers attribute it to accounting practices such as “cookie jar reserves,” whereby, for example, a company records a discretionary expense in a period with high profits because it can afford to take the income hit.
“Big baths” is another accounting practice that could explain the 40% decrease. In that scenario, a company manipulates its income statement to make weak results appear even worse by, for example, shifting profits from a bad year forward to artificially enhance the following year’s earnings. Such manipulation produces a performance bonus.
Watch for red flags
Researchers asked the participants to list three red flags that would help detect earnings misrepresentations. The most commonly cited were:
- Earnings inconsistent with cash flows. More than 100 CFOs identified this or the similar “weak cash flows” and “earnings strength with deteriorating cash flows” as warning signs. The authors noted that the importance of the link between earnings and underlying cash flows was prominent throughout the study.
- Deviation from norms. Deviations from industry norms or experience registered 88 responses. Specific examples include disparity in financial statement items such as cash cycle, average profitability, revenue and investment growth, and asset impairments.
- Unusual accruals. Another red flag is “lots of accruals or unusual behavior in accruals,” including large jumps. The CFOs emphasized changes in accruals, as opposed to extreme levels of accruals.
With reported earnings playing a critical role in a variety of legal matters — from damages calculations to transaction prices — your clients can’t afford to take them at face value. A qualified financial expert can help detect managed earnings that misrepresent performance.
If you have any questions about reported earnings or any other forensic accounting issue, give us a call at 716.847.2651, or you may contact us here.
Court Allows Lost Profits Expert Testimony
Author: Tim McPoland
When an opposing party in a lawsuit challenges the admissibility of an expert’s testimony, the matter often comes down to one of two interpretations: whether the court believes the party’s arguments go to the admissibility of the evidence or to the weight of the evidence. The ruling in a federal district court case, BK Cypress Log Homes v. Auto-Owners Insurance Co., illustrates such determinations and highlights the need to present relevant expert testimony.
BK Cypress Log Homes sued Auto-Owners Insurance Company, alleging bad-faith conduct in the handling of a third-party claim. The defendant moved to exclude the plaintiff’s damages expert’s testimony on the grounds that his techniques weren’t generally accepted in the economic community. The expert used a two-part model, estimating lost profits with both the before-and-after and yardstick methods.
In his first calculation, he determined the plaintiff’s profit margins before and after the loss period. He attributed the difference to effects created by BK Cypress owner Jim Keeton’s participation in dispute-related activities that should have been handled by the defendant and that resulted in operational inefficiencies.
In the second calculation, the expert considered what the plaintiff’s sales would have been if the company had matched the industry average sales for the loss period. He used sales information from a log-home industry publication, as well as a “sample survey” of members of the Log Homes Council. Together, these sources yielded growth rate numbers for six companies.
Court rejects challenge
In the Florida court, the defendant asserted that the plaintiff’s before-and-after analysis wasn’t acceptable because it assumed that all loss in profitability was attributable to the defendant’s bad faith. In particular, Auto-Owners faulted the lack of data documenting:
- The amount of time Keeton spent attending to dispute-related matters, and
- The failure to account for time he would have expended on such matters even in the absence of bad faith.
The court concluded that the defendant’s criticisms should be raised through cross-examination of the expert and other witnesses regarding the assumptions underlying the damages calculation.
The defendant also argued that the yardstick analysis wasn’t acceptable because, among other things, the expert’s report didn’t establish that the businesses used to measure the losses were sufficiently similar to BK Cypress. The court denied the motion to exclude this part of the analysis — but without prejudice to the defendant’s right to exclude the testimony at trial if the plaintiff was unable to establish the survey data’s reliability through other evidence.
Rebuttable witness also rebuffed
Notably, the court also rejected the testimony of the defendant’s financial expert because he didn’t provide an estimate of damages. It characterized that expert’s testimony as a rebuttal opinion that failed to offer an alternative analysis methodology.
In the end, the court decided that the defendant’s expert’s testimony wouldn’t aid the jury in determining damages and would in fact be “redundant and unduly prejudicial.” Instead, the defendant was instructed to explore the criticisms in its expert’s report during cross-examination of the plaintiff’s expert and other witnesses.
If you have any questions about lost profits, testimony or any other litigation support issue, give us a call at 716.847.2651, or you may contact us here.