Elizabeth Woodward, Director of Forensic Accounting and Litigation Support, and Nick Lynch, Associate Director of Forensic Accounting and Litigation Support Services, recently presented on fraud risk considerations at the University of Kentucky’s National Conference on Equine Law. They covered top 10 considerations specific for equine clients and operations:
- Horse farms are often controlled by high net worth absentee owners. Ensure proper controls are in place to mitigate fraud risk in their absence.
- Farm management is often passionate about horses, but may lack financial sophistication. Make sure they are treating the farm like a business and implementing proper internal controls.
- Employees at farms (and related family offices) may develop a sense of entitlement that allows them to rationalize fraud based on the farm owner(s) lifestyle. (e.g., I give everything to this farm. Why shouldn’t I enjoy a higher lifestyle? They won’t miss the money anyway.) Be aware that this increases the risk of fraud.
- Farms may rely on a single employee or small group of employees for all accounting functions. Ensure duties are properly segregated, especially within the cash receipt and disbursement processes.
- There sometimes is a lack of transparency in syndicate expenses. Ensure that expenses are being segregated and billed appropriately. Syndicate managers and members should exercise due diligence to see that only appropriate expenses are being captured and billed.
- An ethical culture is the cornerstone of a strong internal control environment. Management must set the tone; employees will tend to follow their lead.
- Develop proper purchasing procedures, including authorizations, approval thresholds and strong bidding practices.
- Credit card usage is a common area of abuse and should be limited to necessary situations. Most expenses should follow the normal check disbursement or expense reimbursement (e.g., travel expenses) processes.
- Horse farms often lack formal policies and procedures. Develop formal policies and require employees to review and acknowledge them.
- Tips are the most likely source of fraud detection. Consider an ethics hotline to facilitate tips.
- Absentee Owners
- High Wealth Families
- Passion for Industry