The Internal Revenue Service is warning taxpayers to be on the lookout for charity fraud, as accountants look to advise clients on how to detect and avoid fraud.
On Giving Tuesday and as part of Charity Fraud Awareness Week, the Internal Revenue Service highlighted its continued support of international efforts to fight fraud and charity scams.
The IRS issued an advisory on Giving Tuesday calling attention to Charity Fraud Awareness Week. It noted that charitable organizations lose 5% of their revenue each year to fraud, according to the Fraud Advisory Panel, a U.K.-based organization that leads the effort in organizing Charity Fraud Awareness Week, which runs from Nov. 27-Dec. 1.
“Unfortunately, charity scammers look for opportunities to take advantage of situations, such as natural disasters, when exempt organizations are making an effort to help,” said Robert Malone, the IRS director of exempt organizations and government entities, in a statement Tuesday. “Donors and charitable organizations alike should remain vigilant to protect their assets from fraudsters. I urge donors to verify a charity’s tax-exempt status at Tax Exempt Organization Search before donating goods, services or money.”
Fraud is similarly pervasive at many for-profit companies. According to the Association of Certified Fraud Examiners’ 2022 Occupational Fraud report, companies lose an average of 5% of their revenue to fraud each year.
“We see fraud all over the map,” said Kaitlin Accardi, a consulting manager at The Bonadio Group, a Top 50 Firm based in Pittsford, New York, which helps clients with fraud detection. “We see payroll fraud, credit card fraud, asset misappropriation and corruption. It usually comes down to a lack of controls within the company: no separation of duties, and one person doing too many things without a lot of oversight.”
She spoke with Accounting Today during another fraud-themed week earlier this month, International Fraud Awareness Week. The federal government has been uncovering billions of dollars in fraud in several pandemic-related relief programs like the Paycheck Protection Program, the Employee Retention Tax Credit and Economic Injury Disaster Loans.
“We’ve seen instances where everybody applied for a PPP loan, whether they needed it or not,” said Accardi. “Who am I to judge whether they did, but ultimately everything was forgiven and a lot of it was cash in people’s pockets. In smaller companies or places where there’s fewer people watching where the money is going, a lot of that money was just taken out of companies through larger distributions and things like that.”
The federal government’s Pandemic Response Accountability Committee has been tracing where the money has gone to fraudsters and helping to catch them so they can be prosecuted. Michael Horowitz, an inspector general at the Justice Department who chairs the PRAC, spoke about its work during the Association of Certified Fraud Examiners’ Government Anti-Fraud Summit earlier this month. He noted that the PRAC created a data analytics platform called the Pandemic Analytics Center of Excellence to trace where fraudsters were using the same Social Security numbers to claim loans.
“It was apparent to us right from the beginning that whether you’re looking at $2 trillion, or $5 trillion, the only way to conduct effective oversight is to be able to use analytics to look for anomalies,” said Horowitz. “We saw that through the work of our data scientists at the PRAC.”
His committee issued a fraud alert in January after data scientists at PACE took at look at the 35 million Social Security numbers that were used in applications for PPP and EIDL loans. They were able to identify over 69,000 questionable Social Security numbers that had been used to obtain $5.4 billion in PPP and EIDL loans and grants.
Use of that technology has spread across the federal government. “Our analytics platform is being used by more than 40 federal law enforcement agencies, inspector-generals and non-IGs, law enforcement, Secret Service, FBI, Homeland Security agencies,” said Horowitz. “We’re working with state and local authorities as well using our data analytics platform. We’re supporting hundreds of cases involving billions of dollars of potential fraud and we have many cases that we refer to sometimes as our Lamborghini cases.”
Those cases involve scammers using money from the federal government’s pandemic relief programs to fund some lavish expenses.
“We’ve got people with fancy cars, fancy homes, jewelry, all sorts of things,” said Horowitz. “And of course, it’s important to make those cases. It’s important to find cash. It’s important to seize ill-gotten gains through these properties. But when you seize that property, you then have to deal with it, and the Marshals Service has to sell it, and you end up with pennies on the dollar for the taxpayers ultimately. What anybody who’s done this knows is that the best way to protect taxpayers and the integrity of programs is to stop the fraud before it happens. We’re also chasing overseas fraud. At the start of the pandemic, many people were stuck overseas, so you could be overseas applying for a loan or for a UI benefit, but that would be one of the first things you’d want to look at if you were looking for potential anomalies.”
AI for fraud
His committee is also eyeing the use of artificial intelligence for fraud.
“AI obviously presents some positives and a lot of risks,” said Horowitz. “One of the things we’ve seen coming out of the pandemic was some of the obvious weaknesses that most of us knew existed in technology within agencies themselves. … One of the big worries is if you have such outdated systems already, and you don’t have the wherewithal or the ability to migrate them to current systems, where are you going to be when AI is pushing forward?”
He was at another recent ACFE conference in Seattle earlier this year where there was a panel discussion demonstrating how easy it is to use AI to do phishing and create fictitious records, documents and identities, and how difficult it is for even sophisticated entities such as major banks to detect it.
An identity fraud report released Tuesday by Sumsub, an online identity verification service, found a massive increase in instances of deepfakes, fraud and identity theft around the world.
Sumsub reported a tenfold increase in AI-powered fraud and deepfakes across the globe in the past year, including a 1,740% surge in North America alone.
“Deepfakes pave the way for identity theft, scams, and misinformation campaigns on an unprecedented scale,” said Pavel Goldman-Kalaydin, head of AI/ML at Sumsub, in a statement.
Forensic accounting
Accounting firms are using technology to uncover fraud as well. At Bonadio, Accardi works on detecting and exposing fraud for the firm’s clients. “Our department does forensic accounting,” she said. “We do everything from large corporate jobs, to smaller things, personal items and things like that.”
Expense reimbursements can be one area for fraud where employees try to divert company funds to buy items for themselves, perhaps by sneaking in purchase orders when they have the ability to sign off on such transactions.
“A lot of times we see people who are at the top level and respected within the company, or the higher-ups who have the credit cards, and a lot of what we see is over-the-top travel expenses and accommodations and things like that, the $1,000 seat upgrades that aren’t necessary, or travel stays beyond the business purpose,” said Accardi. “Going for a conference and staying a couple of extra days, and trying to slide that through reimbursement, or over-the-top entertainment expenses, and things like that.”
Financial statement misappropriation and manipulation also occur. “We’ve seen instances where people are inflating their numbers,” said Accardi. “A lot of times it is to secure financing, or to appear better to investors. Maybe they’re not having such a great year, and manipulating the timing that revenue came in could make your year seem a lot better than it actually was.”
Other forms of corruption, such as payoffs and money laundering, can also occur. “I’ve seen on a smaller scale, say, contracting vendors that you have personal relationships with, or awarding bids to certain contractors that you might have relationships with,” said Accardi. “In turn, they’re inflating their invoices, or sending invoices for work that wasn’t performed, and you’re signing off on it.”
Client confidentiality prevents the discussion of specific cases. Bonadio tends to work with business clients rather than the police or the FBI, although in some instances, the firm will work with law enforcement in cases of elder abuse fraud, as well as with agencies like Adult Protective Services and Lifespan.
“Generally, we don’t work directly with law enforcement,” said Accardi. “Usually we do most work through attorneys. We’re either hired directly by the companies or through an attorney to do work. They look at it and determine where they’re going to go from there.”
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