To generate revenue and foster customer loyalty, many businesses, including retailers, airlines and credit card companies, create loyalty and reward programs. Such programs can help companies attract and retain customers, but they may also be subject to fraud and abuse.

ATO risk

Loyalty programs are particularly vulnerable to account takeovers (ATOs). In these schemes, a criminal assumes control of a customer’s loyalty or rewards account and monetizes it. The thief redeems points for goods and services for personal use or sells them on the black market. These days, the information usually ends up on the dark web.

ATOs often are successful because many loyalty programs lack the robust fraud controls and dedicated teams of investigators to prevent and investigate them. Often, companies don’t understand the extent of fraud and abuse taking place in their programs to justify the investment.

3 steps

To help minimize fraud risk and limit financial losses, consider taking the following steps:

  1. Conduct a risk assessment. Review your loyalty program’s terms and conditions, structure, and activity to ascertain the potential for fraud and abuse. Think about engaging a suitably qualified fraud professional with experience evaluating loyalty programs to guide your efforts. 
  2. Gather and analyze historical losses. Establish a central location for employees to report fraud and abuse. Dissect each loss to identify its root causes and develop a list of potential control failings for remediation. And, if you don’t already have one, establish an anonymous hotline for employees and customers to report suspected fraud.
  3. Evaluate technology solutions. Use the results of your risk assessment and historical analysis of losses to pinpoint potential weaknesses for technology to address. For example, technology can help authenticate customers to prevent ATOs. It can also monitor transactions for activity indicative of fraud. 

Watch your customers

Although ATO schemes involving criminals are common, your company can’t overlook the potential for legitimate customers to abuse your loyalty program. For example, customers may redeem points, then deny doing so and ask you to credit their accounts. Sometimes unethical customers sell their points to online brokers and deny having done so when challenged. Customers could also open multiple accounts under their own or assumed identities to receive new account sign-up bonuses.

Finally, don’t overlook the fact that employees may compromise loyalty accounts. Make sure managers are aware of the possibility and keep an eye on workers with access to the accounts.

Maintain strong security

Contact us for help assessing the security of your loyalty program. If you suspect a widespread fraud problem, we can devise controls to limit thefts and losses.

© 2021 Covenant CPA

Early revenue recognition has long accounted for a substantial portion of financial statement fraud. By recording revenue early, a dishonest business seller or an employee under pressure to meet financial benchmarks can significantly distort profits. Fortunately, fraud experts have tools to expose such manipulation.

Multiple methods

Early revenue recognition can be accomplished in several ways. A dishonest owner or employee might:

  • Keep the books open past the end of a period to record more sales,
  • Deliver product early,
  • Record revenue before full performance of a contract,
  • Backdate agreements,
  • Ship merchandise to undisclosed warehouses and record the shipments as sales, and
  • Engage in bill-and-hold arrangements.

In this last scenario, a customer agrees to buy merchandise but the company holds the goods until shipment is requested. It and any of these schemes might be carried out by one employee or several in collusion.

Expert strategies

Probably the most obvious marker for early revenue recognition is when a company records a large percentage of its revenue at the end of a given financial period. Significant transactions with unusual payment terms can also be a danger sign. When these or other red flags are unfurled, it’s time to investigate.

Fraud experts might compare revenue reported by month and by product line or business segment during the current period with that of earlier, comparable periods. They typically employ software designed to identify unusual or unexpected revenue relationships or transactions.

Reading the signs

If, for example, an expert suspects merchandise is billed before shipment, he or she will look for discrepancies between the quantity of goods shipped and quantity of goods billed. The expert will also examine sales orders, shipping documents and sales invoices; compare prices on invoices with published prices; and note any extensions on sales invoices.

What if the expert suspects merchandise was shipped prematurely? He or she compares the period’s shipping costs with those in earlier periods. Significantly higher costs could indicate an early revenue recognition scheme.

The expert also may sample sales invoices for the end of the period and the beginning of the next period to confirm the associated revenues are recorded in the proper period. If phantom sales are suspected, reversed sales in subsequent periods and increased costs for off-site storage may provide evidence of fraud.

Exposure can be fatal

If improper revenue recognition is exposed to the public, the resulting scandal can destroy a company. Contact us immediately if you suspect it or other forms of financial statement fraud.

© 2019 Covenant CPA