COVID-Related Fraud Risk on the Rise

Feb 19, 2021

Many small business owners do not believe their businesses can or will fall victim to occupational fraud. Due to this belief and budget restrictions, many small businesses do not make this a priority, which leaves them vulnerable.

According to the Association of Certified Fraud Examiners’ 2020 Report, financial statement fraud is the costliest type of occupational fraud affecting organizations. Financial statement fraud is not only costly from a fiscal standpoint, but it also impacts trust within the organization, the community, and with investors.

The rapid advance of COVID-19 has placed a significant strain on organizations and individuals alike. Donald R. Cressey’s fraud triangle theory includes the three major factors that are commonly present when financial statement fraud occurs: Pressure, Opportunity, and Rationalization.

Here is how COVID-19 has impacted these factors:

Pressure – Organizations are facing challenges never experienced before. COVID-19 has left many facing revenue loss, supply chain disruptions, and employee wellness concerns. All these factors, and more, are causing undue pressure to meet financial expectations.

Opportunity – While organizations are receiving state and federal funding to cope with the financial impact of COVID-19 disruption, there are dramatic shifts in operations with remote working and a reduction of in-office staff. This means internal controls are reduced and accessibility increased. These become prime opportunities for fraud.

Rationalization – Mounting stress impacts individual decision-making skills, leading people to rationalize actions they would otherwise regard unacceptable or illegal. Employees may rationalize they are “owed” financial support because of the work they do.

Some potential areas to consider when thinking about your organization include:

  • Revenue recognition – The timing and amount of revenues recognized.
  • Allowances and reserves – Changes in methodology and unusual adjustments.
  • Valuations – Significant estimates used in projections, declining cash flows, and idle assets.
  • Treatment of expenses – Expenses are recorded in the proper period.
  • Disclosures – The adequacy and sufficiency of disclosures.
  • Margins – Reasonableness of margins given the current year operations.
  • Internal control – Opportunity for control override.

These are just a few of the common ways for financial statement fraud to occur. While we all work diligently to recover from the COVID-19 disruption, we need to be aware of the heightened risks and adjust our processes and tasks to monitor for this risk.

If your company needs assistance, William Vaughan is here to assist you.

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Juli Seiwert, CPA

419.891.1040 |

Categories: Audit & Accounting, COVID-19

Grant vs. Debt Accounting For PPP Funds

Jan 15, 2021

Over the past several weeks’ companies have started to receive notification of forgiveness of their PPP loans. As you begin to think about how you will account for your loan and forgiveness, it is important to remember proper GAAP accounting. As we noted in our prior blog, Accounting for PPP Loan Proceeds, the legal form of a PPP loan is debt. However, the PPP loan does include a forgiveness component which under certain scenarios permits treating the proceeds as a grant and following IAS 20 Accounting for Government Grants as an option. To be treated as a grant, the proceeds must be reasonably assured they will comply with the eligibility and forgiveness requirements. The biggest difference between the two options is under grant accounting, the income is recognized as the costs are incurred and for debt accounting, the gain is recognized when the entity is notified of forgiveness.

PPP loans should be derecognized when the debt is extinguished, in accordance with the guidance in ASC 405-20, Liabilities: Extinguishments of Liabilities. Under this guidance, debt is extinguished when either the debtor pays the creditor, or the debtor is legally released from being the primary obligator. As a result, when treating the PPP loan proceeds as debt you recognize the income in the year the company is notified of forgiveness. For any business with a 12/31 year-end who receive notification after such, even if the financial statements have not been issued, the gain should be recognized in 2021. If a company wants to recognize the gain during the fiscal year 2020 they should consider grant accounting.

Each borrower under the PPP program should carefully analyze its unique facts and circumstances in determining the appropriate accounting. Regardless of the accounting approach followed by a borrower they should disclose in the footnotes how the PPP loan was accounted for and where the related amounts are presented in the financial statements. Should you have questions about your specific situation, please contact your William Vaughan Company advisor or reach out to our contributor, Juli Seiwert in our firm’s audit department.

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Juli Seiwert, CPA
Audit Senior Manager, William Vaughan Company | 419.891.1040

Categories: Audit & Accounting, COVID-19