Archives for November 2026

Section 225 doesn’t make overtime tax-free

Earmark Team · November 5, 2026 ·

“They say politicians campaign in poetry, but they govern in prose.” Jeremy Wells, EA, CPA, opens Episode 37 of Tax in Action with that line, and it frames the new overtime deduction well.

“No tax on overtime” is the poetry. IRC Section 225 is the prose.

Overtime isn’t exempt from tax. For tax years 2025 through 2028, eligible taxpayers may deduct a limited portion of qualified overtime compensation. The deduction requires a Social Security number (SSN) and comes with income limits, filing-status rules, and strict reporting criteria. Here is what tax professionals need to know.

“No tax” is really a limited deduction

Qualified overtime compensation is still part of gross income and subject to federal income tax withholding, Social Security and Medicare taxes, federal unemployment tax, and applicable state taxes.

But Section 225 created a temporary deduction on Schedule 1-A. Clients can claim it whether they itemize or take the standard deduction, but it doesn’t reduce adjusted gross income.

The main limits are:

$12,500 for single and head-of-household filers
$25,000 for married couples filing jointly
A reduction of $100 for each full $1,000 of modified AGI above $150,000, or $300,000 for joint filers
No inflation adjustment or carryforward for unused amounts
No deduction for married filing separately
An SSN valid for employment, issued before the return’s due date (including extensions), for each person whose overtime supports the deduction; an ITIN doesn’t qualify.

For this purpose, modified AGI adds back income excluded under Sections 911, 931, and 933. The income phaseout applies after the filing-status cap.

But before applying those limits, we must identify the qualifying compensation.

The tax answer starts with federal labor law

Qualified overtime compensation is the amount required under Section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate. For a covered, nonexempt employee, the FLSA generally requires time-and-a-half pay for hours over 40 in a workweek.

Under the usual time-and-a-half calculation, only the extra half-time premium qualifies. The employee’s regular wages for those hours don’t. Special rules apply to certain employees whose overtime is calculated under alternative provisions of FLSA Section 7.

Under the usual FLSA rules, each workweek stands alone. If an employee works 30 hours one week, 50 the next, and 35 the third, the employer can’t average the weeks. The 10 hours above 40 in the second week create the overtime obligation.

Voluntary premiums and amounts required only by state or local law don’t qualify beyond the federal minimum. Qualified tips, as defined in Section 224(d), are excluded from qualified overtime compensation, whether or not the taxpayer claims the tips deduction.

FLSA coverage is also a facts-and-circumstances question. Common exemptions include certain executive, administrative, professional, outside-sales, and computer roles. If an employee disputes their classification, refer the client to an employment attorney or HR professional. Our role is to understand the tax treatment and check the reporting.

Payroll labels can hide the qualifying amount

Jeremy’s examples involving an employee named Eve show why we can’t rely on the word “overtime” alone. Assume Eve is eligible for FLSA overtime, all listed amounts relate to hours subject to the usual federal overtime requirement, and the pay multiples use her FLSA regular rate. Under those assumptions, each record produces the same $5,000 qualifying amount:

$5,000 labeled as the FLSA overtime premium: Use $5,000
$15,000 of total time-and-a-half pay: Divide by three. Only $5,000 is the half-time premium.
$10,000 described as the premium above regular pay under a double-time plan: Divide by two
$20,000 of total double-time compensation: Divide by four

The FLSA regular rate isn’t necessarily the employee’s base hourly wage. It generally includes nondiscretionary bonuses, commissions, and other compensation unless a statutory exclusion applies. Employers and payroll providers don’t always use these terms consistently. Confirm whether the number represents total overtime pay, the full premium above regular wages, or the FLSA half-time premium.

Separate reporting becomes mandatory with tax year 2026

Because the law passed mid-2025, the IRS offered transition relief for that year only. Employers were encouraged, but not required, to identify qualified overtime separately. Employees could use pay stubs, Form W-2 Box 14, or one of the reasonable methods in Notice 2025-69.

For 2026, employers must report qualified overtime on Form W-2, Box 12, Code TT. A pay stub or Box 14 entry isn’t enough. In rare cases involving a worker treated as an independent contractor for income tax purposes but as an employee under labor law, the amount may appear in Form 1099-NEC Box 1d or Form 1099-MISC Box 14.

If an employer reports too little, the taxpayer must request Form W-2c. If the employer won’t provide a correction, the taxpayer cannot use the omitted amount to calculate the deduction. Form 4852 cannot substitute for employer reporting for this purpose. If the employer reports too much, the taxpayer still can’t deduct more than the qualifying overtime actually paid.

That makes payroll review an essential part of tax preparation.

The final deduction may be smaller than clients expect

The calculation follows three steps: determine qualified overtime compensation, apply the filing-status cap, and then apply the modified-AGI phaseout.

Jeremy’s examples show the result:

A single taxpayer with $15,000 of qualified overtime and $75,000 of modified AGI may deduct $12,500
At $175,000 of modified AGI, the same taxpayer’s deduction falls to $10,000
Joint filers with $15,000 of qualified overtime and $250,000 of modified AGI may deduct the full $15,000
At $450,000 of modified AGI, the phaseout reduces that couple’s deduction to zero

Because the deduction doesn’t reduce AGI, it doesn’t change premium tax credit calculations, IRMAA, taxable Social Security, net investment income tax thresholds, or other AGI-based provisions. It also doesn’t reduce FICA or self-employment tax. However, because it reduces taxable income, it can affect the qualified business income deduction’s taxable income limitation and thresholds.

Replace the slogan with a review process

Section 225 is a narrow, temporary deduction, not tax-free overtime. For each affected client:

Identify the FLSA-required half-time premium
Check filing status, modified AGI, and SSN eligibility
Reconcile payroll records with Form W-2, Box 12, Code TT
Request a corrected form when the reporting is wrong
Explain what the deduction will and will not change

Political slogans are memorable. Our job is to translate them into the numbers that go on the return. For Jeremy’s complete walkthrough, listen to Episode 37 of Tax in Action.

Your client lost it all at the casino, so why do they still owe tax?

Earmark Team · November 5, 2026 ·

Your client hands you a Form W-2G showing $75,000 of slot winnings. “I lost all of it,” the client says, “so there shouldn’t be anything to report, right?”

Jeremy Wells, EA, CPA, recently encountered a similar case at his firm. As the conversation unfolded, the client’s combined wins and losses potentially reached hundreds of thousands, possibly even millions, of dollars. So what belongs on the return? The $75,000, the full activity, or nothing?

In this episode of Tax in Action, Jeremy explains why the answer starts with the activity rather than the paperwork. Starting in 2026, even breaking even can produce taxable income.

Start with the wager, not the payout

Before calculating losses, determine whether the client’s income came from wagering. Neither Section 165(d) nor its regulations define a wager. Jeremy draws on the courts’ approach, which defines a wager as something of value placed at risk, with an uncertain outcome and a possible prize or return.

Skill doesn’t automatically rule out wagering, nor does an entry fee automatically establish it. Ask what the payment purchased. Was it access to a competition, or a stake in an uncertain outcome?

A paid raffle is a wager. A free promotional drawing isn’t, because the participant risks nothing. The prize is generally taxable under Section 61, but it doesn’t count as wagering gains that you can offset with gambling losses.

The stake also establishes basis. Bet $100 against a friend’s $100 on a coin flip and win the $200 pot. Your gain is $100, not $200. If you lose, your loss is the $100 wager.

Next, we need to decide how to measure that activity.

Measure sessions without netting the year

For slot play, courts and the IRS support session accounting rather than tracking every lever pull. Compare the amount available when the session ends with the amount brought into it. For example, if you start with $100 and leave with $200, you have a $100 gain. If you lose the entire stake, you have a $100 loss.

Jeremy cautions that this authority is strongest for slots. Don’t assume the same accounting unit fits poker, sports betting, or other activities.

“Session accounting isn’t annual netting,” he emphasizes. Consider three sessions:

Session one: $1,000 gain
Session two: $700 loss
Session three: $200 gain

Report $1,200 of gains and calculate the deduction from $700 of losses. Don’t report $500 of annual net income. For a casual gambler who itemizes in 2026, the loss deduction is $630 (90% of $700).

Those separate totals drive the new tax result.

The 2026 limit creates income without profit

Before 2026, Section 165(d) generally limited deductible wagering losses to wagering gains. The One Big Beautiful Bill Act adds another restriction starting in 2026, since deductible wagering losses equal the lesser of 90% of wagering losses or wagering gains.

Congress is considering legislation that would remove the 90% restriction retroactively for 2026. The examples below apply the law currently in effect; check for legislative changes before preparing returns.

For a casual gambler who itemizes:

Gains: $100,000
Losses: $100,000
Permitted loss deduction: $90,000
Taxable income remaining: $10,000

The client broke even financially, but not for tax purposes.

Joint filers combine both spouses’ gains and both spouses’ losses, keeping the totals separate before applying the limit. Taking the standard deduction means a casual gambler can’t deduct any losses. Some states don’t allow a wagering-loss deduction, and high-income taxpayers may face a further reduction in itemized deductions under amended Section 68.

Casual gamblers report gains on Schedule 1 and permitted losses on Schedule A. The gains increase adjusted gross income (AGI), but losses don’t reduce it. That mismatch can increase taxable Social Security, reduce income-based credits and deductions, and increase Medicare income-related premiums. Although casual gambling winnings generally aren’t net investment income, they increase MAGI and can expose more of the taxpayer’s other investment income to the net investment income tax. Jeremy flags the Medicare issue because many gamblers are retirees.

Professional gamblers use Schedule C, but that doesn’t remove the limit. Wagering losses and otherwise allowable wagering-related business expenses are still subject to Section 165(d). The law makes that expense treatment permanent and adds the 90% restriction. Professionals also pay self-employment tax on net earnings.

Professional status depends on regular, ongoing activity pursued for income or profit, not the client’s chosen label.

Reliable records must support the totals no matter which reporting path applies.

A W-2G tells only part of the story

A W-2G reports certain gambling winnings, not a complete accounting of the client’s activity. Depending on the type of gambling, the reported amount may already subtract the winning wager. Determine whether it includes any return of the client’s stake, then reconcile it with the records supporting the wagering or session result.

Jeremy shared an example. A client receives a W-2G for a $2,000 slot jackpot, starts the session with $500, and leaves with $1,600. Assuming the client added no funds and withdrew no winnings during play, the session gain is $1,100: the $1,600 remaining minus the $500 starting amount.

Ask for records instead of simply accepting the client’s explanation.

The reverse also happens. Smaller wins, sports bets that fail the 300-to-1 reporting test, cash play, and foreign or online activity can produce taxable gains without a W-2G. As Jeremy says, “These are information reporting thresholds. They aren’t income exclusion thresholds.”

So the preparation process must reach beyond the forms.

Build a return you can explain

Use Jeremy’s workflow to turn scattered paperwork into supported totals:

Identify all activity: Ask about every casino, sportsbook, app, and type of gambling
Gather the records: Collect W-2Gs, payer statements, and wager, session, and account histories
Separate gains and losses: Use the appropriate accounting unit, then apply the deduction limit
Reconcile the forms: Report the proper gain, claim reported withholding, and retain a form-by-form, session-by-session reconciliation. Consider attaching an explanatory statement.

Under Revenue Procedure 77-29, clients should log dates, activities, establishment names and locations, companions, and amounts wagered, won, and lost. Bank records, ATM records, player histories, and travel records supplement that log. Annual casino win-loss statements rarely provide the session detail needed.

“I lost it all” isn’t a reporting method. Establish basis, separate winning and losing results, and reconcile before applying the 90% limit. Educate clients now so their records can support the return later.

Listen to Jeremy explain the calculations and preparation workflow in Episode 38 of Tax in Action.

How to Use AI in the Month-End Close Without Losing Your Audit Trail

Earmark Team · November 5, 2026 ·

“It’s rare these days for an AI company to actually want to demo the product,” Blake Oliver, CPA, said at the start of this Earmark Expo. “Maybe it’s because there is not that much there in a lot of cases.”

Savant Labs showed its product anyway. After Shaan Mistry (VP Solution Consulting, Savant) set the scene, Barry Burns (Co-Founder and VP Customer Success and Community, Savant) built an automated month-end trial balance live while Blake and David Leary asked questions. The session made a useful point for anyone being told to “use AI” in their close. As Barry put it, AI can’t do your close today. The payoff comes from using an LLM to build and document a deterministic, auditable workflow, so humans and controls own the answer instead of the model.

Below, we cover why LLMs fall short for regulated work, how the demo turns AI output into a fixed process, which controls make it auditable, and what questions remain.

The problem: AI that can’t show its work

Shaan said the core issue is LLMs aren’t deterministic. “Ask it a question today, and it gives you an answer. Ask it tomorrow, and it may give you a different answer.” There’s also no audit trail, so the results can’t withstand regulatory scrutiny.

Barry pointed out that a forecast only needs to be “directionally correct,” so it’s fine to have Claude help you build one. The close and tax returns are different, because each has one right answer that you have to prove. “You can’t use AI for that,” Barry said, at least not today, “because you can’t show your work.” You also can’t show a record of humans making decisions and approvals along the way.

David shared a familiar headache. When something lands in QuickBooks through an API, a bad connection can make it look like he did it, even when it came from Blake or Claude. Shaan put the stakes plainly: accounting, finance and tax are heavily regulated, and they “can’t afford to have AI making things up.”

Let AI write the process, not the numbers

Savant points the AI at the process, not the result. Barry, playing a senior accountant at a fictional company, opened Claude and asked Savant’s connector, Savvy, to help automate his month-end trial balance. He supplied August and September NetSuite exports, a chart of accounts and his adjusting entries.

Savvy asked clarifying questions before jumping into classifying transactions. Should only approved entries post, or proposed ones too? Was the default flux threshold of 10% or $10,000 acceptable? Then it produced three things:

Process documentation that identifies the preparer, reviewer, escalation owner and workflow owner. Barry noted that the document works even outside Savant, in Excel or any existing process.
A proposed work paper with tabs that match the process documentation.
A canvas workflow in which every step is a deterministic data process. “The same inputs go in. The same outputs come out every time.”

The workflow targets a specific pain point: restating the trial balance “four or five times in the same month,” with each restatement taking “five hours to readjust.” NetSuite exports add their own chore, because you have to calculate balances manually. Blake joked, “You have never had a problem with reporting until you’ve seen a NetSuite export.”

“Savant isn’t really doing my accounting AI for me; it’s helping me build a deterministic process,” David said, summing it up.

Controls an auditor would recognize

What makes this usable for accountants is governance. When Barry edited a variance rule on the canvas, nothing changed in production. Every change goes through maker-checker approval. The submitter adds notes, someone with the right access approves the change, and only the published version runs. “No one can come in here and just cowboy it,” Barry said.

The run history records each execution, the version it used and the data at every step. Barry pointed to the classic Excel nightmare, where, after 30 changes to a work paper, someone asks, “What was change number 15? That’s so hard in a manual Excel-based process.”

Other controls include:

Automatic process documentation updates: Publishing a new workflow version updates the documentation, so it doesn’t drift out of sync.
Logged review decisions: Review items are sent to reviewers through email or instant messaging apps like Microsoft Teams. Reviewers’ decisions feed into the next run, and the run history captures them.
SOX activity log: It records who accessed, modified, submitted, approved and ran each flow.

Blake described the overall effect as, “You’ve taken the probabilistic technology and made it deterministic.”

Reality check: adoption and lock-in

Barry, putting on his “sales hat,” described controllers who are “getting pressured to leverage AI” while their teams have been “doing things the same way in Excel for 20 years.”

David raised a fair concern that past the first prompt, the canvas involves “a lot of clicking.” Barry pointed to the Savant Academy courses and live onboarding, as well as Savvy, Savant’s AI copilot, which helps users make changes through plain-language prompts. He said some users sign up on Monday and have their first workflow in production by Friday. This was a vendor demo, so take the claims with a grain of salt. The session didn’t test them.

David also asked what happens if a firm switches from Claude to Copilot. Barry said the workflows are LLM- and ERP-agnostic and would stay intact.

If you can’t show your work, you can’t sign it

The case Savant made is that the defensible use of AI in the close today is building governed, repeatable processes, not generating answers. You can’t stand behind a number you can’t trace. A deterministic workflow with version approvals and run history gives you something to defend in an audit.

The demo covered a trial balance, but Barry listed reconciliations, accruals, flux analysis and apportionment as other candidates. Watch the full on-demand webinar to see the live build, and judge the workflow and audit trail for yourself.

How Do Accounting Firms Stay Valuable When Everyone Has the Same AI Tools?

Earmark Team · November 3, 2026 ·

If polished output becomes as easy to produce as heating up dinner, what will clients still pay your accounting firm for?

David Leary calls this AI’s “microwave moment.” Anyone can get useful results without the setup that once required technical skill. But easier tools don’t guarantee better service. They can also send generic replies or change a database without asking.

In Episode 507 of The Accounting Podcast, David and co-host Blake Oliver explore what firms can offer when competitors (and clients) have similar tools. Their discussion points toward personal attention, accountable automation, professional judgment, and relationships beyond the deliverable.

When Useful AI Requires Less Setup

David tested Meta’s AI, Muse, while researching bar events before a Bills game in Los Angeles. It produced a polished, web-page-style schedule. Blake noted that Claude could create something similar if asked for an artifact. David’s point was that he hadn’t needed to ask.

“I didn’t have to create projects,” David said. “I didn’t have to configure background agents working. I didn’t have to ask for an artifact. I didn’t even know I wanted one.”

But Blake questioned the economics. Generating those results uses tokens, which cost money. David noted that basic use is free, with paid subscriptions available to heavier users, but both remained skeptical of Meta’s privacy promises.

Easier, faster work also raises a pricing question. Blake cited PwC partner Jeanelle Johnson, who said clients now expect some projects that took eight to ten weeks to take about four.

“If the time shrinks, what happens to the bill?” Blake asked. He expects consulting fees to fall unless firms deliver more value.

That pressure also affects how clients reach the firm.

Your Client’s AI May Become the Front Door

David asked Muse to book a haircut. It couldn’t because his barber only takes phone calls. He warned that firms without online booking may lose business when clients ask AI assistants to schedule appointments.

Blake imagined a firm with its own MCP server, which is a connection that lets AI assistants work with its systems. Clients could submit documents through their assistant. “No more portals, no more emails.” David pictured an agent finding tax documents in Google Drive, sending them to the accountant, booking an appointment, and paying.

These are future possibilities rather than a current firm setup. David also said he hadn’t connected Muse to his email or calendar because of privacy concerns.

The hosts disagreed about the platform risk. Expensify’s availability in Claude and Xero’s connections with ChatGPT and Claude worry David. He feels like vendors are “training your users to not open your app.” But Blake sees integration as necessary: “If they don’t, somebody else will do it.”

For Blake, AI assistants are becoming the main interface, like an operating system. But a convenient interface can’t replace personal attention.

Better Presentation Is Not Personal Service

After blood work, David received a generic cholesterol message recommending 30 to 60 minutes of daily exercise. His doctor already knows he exercises because they attend Orangetheory classes together. David suspects AI wrote the note, though he couldn’t confirm it.

His concern was that busy accountants would send similarly pointless replies. “Why did I hire this person just to send me a templated email?” Blake asked, capturing the client’s likely reaction.

Presentation still matters. A video Blake shared showed how companies once treated annual reports like carefully designed publications. He recommends firms make reports attractive enough that clients want to open them. David emphasized the experience, not simply making reports fun to look at.

That care should also extend to what AI can change behind the scenes.

Give Agents Limits and Develop Human Reviewers

Blake’s AI, acting through his administrator access, added a “pending” status to the hosts’ advertising database. David fixed it quickly, but said an unnoticed change could have caused calculation errors or overpayments. He reduced Blake’s access afterward.

Blake called it “a good lesson in internal controls.” For his own month-end close, he gives his AI agent a separate Xero login without administrator rights. Its actions appear separately in the audit trail. David agreed agents should have their own inboxes and logins so firms can track activity and control access.

Permissions address one problem. Developing judgment is harder.

Blake described PCAOB chair Jim Logothetis’s distinction between audit’s “science” (transaction work and procedures) and its “art” (skepticism, judgment, and industry knowledge). David wasn’t convinced, suggesting AI is good at those things too.

Blake pictured managers, directors, and partners supervising agents. When David asked where future reviewers would learn judgment, Blake answered, “By doing the work.” He then acknowledged the problem: “How do you make more reviewers if you don’t have preparers, and nobody’s figured that out yet.”

This was a forecast, but both hosts said they haven’t seen meaningful accounting job losses from AI. Blake argued that talent shortages could make AI an opportunity to do more with fewer people.

Even capable teams, though, need a reason for clients to choose them.

Build Something Beyond the Deliverable

Blake discussed Giles Pearson’s Accounting Today op-ed comparing AI in accounting with Spotify in music. Streaming gave musicians global distribution, but competitors gained the same access. Musicians had to build identities, audiences, and experiences beyond recordings.

Pearson warns adopting AI isn’t a strategy by itself. Early adopters may gain an edge, but that advantage fades as tools become widely available.

Blake endorsed Pearson’s advice to build community through seminars, roundtables, and client events. “What musicians today sell is the relationship,” he said. David added: “The experience.”

For firms, the challenge is to pair easier access and faster work with controls, judgment, and service clients recognize as personal.

Listen to Blake Oliver and David Leary discuss these trade-offs in Episode 507 of The Accounting Podcast.

Why Do Nearly Half of Occupational Fraud Cases Never Reach Law Enforcement?

Earmark Team · November 3, 2026 ·

Caleb Newquist opens this episode with a confession. He spent about four hours online researching whether a raccoon could beat a goose in a fight. His verdict is the raccoon would probably win, though one Reddit thread made “a very compelling argument for the goose.” The trouble is that the Association of Certified Fraud Examiners (ACFE) lists “excessive internet browsing” as a behavioral red flag for fraud.

In this solo episode of Oh My Fraud, Caleb works through the ACFE’s 2026 Occupational Fraud Report to the Nations, which comes out every two years. (He and Greg Kyte covered the 2024 edition in Episode 58.) Tips uncover the most fraud, and Caleb suspects luck plays a bigger role than the numbers show. Nearly half of cases never reach law enforcement, so some fraudsters with clean records likely move on to new jobs and do it again.

A huge report about a tiny slice of fraud

The ACFE received more than 10,000 survey responses and used 2,402 of them. Those cases cover 143 countries and $3.4 billion in losses. To make the cut, a fraud had to be detected, investigated by a Certified Fraud Examiner (CFE) and completed, with no open cases. It also had to be the respondent’s single largest case. The report doesn’t include frauds nobody found and frauds a non-CFE handled.

The ACFE estimates worldwide occupational fraud at $5.5 trillion a year. That figure is a best guess, based on the assumption that organizations lose 5% of revenue to fraud. Even if it’s close, the report captures less than one-tenth of 1% of it.

“To say that’s a drop in the bucket is a flagrant disrespect to drops,” Caleb says. Still, the data comes from a credible organization, so it’s worth using. Just remember it describes a sliver of the problem.

Tips, dumb luck, and the 2% auditors

So how does fraud get found? Mostly because someone speaks up. Tips account for 43% of detections, three times the rate of the next method, internal audit. More tips now arrive through web forms or email than by phone. “The hotlines have gone online,” Caleb notes.

Another 4% of cases were caught by accident. Caleb thinks luck plays a bigger role than that. He suspects plenty of internal audit and management review catches involved someone stumbling onto something during their normal duties. Nobody calls that an accident, “but that’s still kind of lucky.”

External auditors caught just 2%. “Greg’s favorite external auditors are two percentage points less smart than fraudsters are dumb,” Caleb says. Auditors say their audits aren’t designed to find fraud. Still, they must obtain reasonable assurance that the financial statements are free of material misstatement “whether caused by fraud or error.”

Materiality means something is important enough that a reasonable investor would make a different decision. Caleb points to the SEC’s Staff Accounting Bulletin 99, which says auditors can’t dismiss an item on its dollar size alone. By that logic, he says, you could argue any fraud is material.

Surveillance and monitoring caught another 2%. That’s strange at a time when employers track mouse movements, badge scans and billable hours. Confession came last at 1%. “I look forward to the day when confessions are tied with external audits in fraud detection,” Caleb says.

Controls shrink losses but don’t stop fraud

The report’s flashiest prevention stat appears on page 39. The mere presence of an anti-fraud control cuts losses by 37%. Caleb isn’t impressed. “If a loss occurs, the control didn’t prevent the fraud.”

Fraud awareness training has a similar problem. “See something, say something” assumes people know what they’re looking at. Fraud doesn’t look like a guy loading fertilizer into a box truck. “Fraud is committed by dorks in frumpy business casual clothes or fast-talking deal makers, or the pastor of a megachurch,” Caleb says.

The basics are often missing too:

A lack of internal controls was the primary weakness in one-third of cases
A quarter of organizations with more than 100 employees have no anti-fraud policy, yet 95% have a code of conduct

Red flags aren’t a reliable backstop either. Sixteen percent of perpetrators showed no behavioral red flags. And gambling appears zero times in the report’s roughly 25,000 words.

The stakes rise with collusion and seniority. Median losses run $55,000 with one perpetrator, $125,000 with two and $324,000 with three or more. Frauds by male owners and executives have a $500,000 median.

Caught, then quietly released

Getting caught often doesn’t mean much. Only 75% of non-owner perpetrators were terminated. Six percent received a written or verbal warning, which Caleb translates as “hey, knock that shit off.” Four percent got no punishment at all.

Owners and executives fare even better. Only 52% were terminated, and 12% faced no punishment. “If you’re an owner of a business, it’s basically a coin flip,” Caleb says.

Some perpetrators simply leave. Jim Hammes from Episode 120 was confronted with evidence of his fraud in a meeting, walked out and never came back. Nathan Mueller, interviewed in Episode 28, excused himself to the bathroom mid-confrontation and didn’t return.

Even lawsuits can backfire. In 13% of civil cases, the result favored the perpetrator. Caleb wonders whether Lionel Hutz represented all the defrauded companies.

Then there’s the biggest gap. Forty-six percent of cases weren’t referred to law enforcement. Of those, 35% cited fear of bad press, and 51% felt internal punishment was sufficient. Caleb compares it to the HBO show, Succession. “If Kendall Roy and a caterer drive into a pond and only the caterer drowns, then that’s totally fine. Logan will clean things up from here.”

Caleb’s bigger worry is what happens next. Eighty-eight percent of perpetrators had no prior record. It’s safe to assume not all the unreported ones retire. Instead, many are “just out there walking around getting a different job, working somewhere else where they could commit fraud again.”

A clean record proves less than you think

A spotless background check tells you little when so many frauds never create a record. The lessons for accountants are:

Invest in tip channels, and make sure people know where to report
Write an explicit anti-fraud policy instead of relying on a code of conduct.
Train staff on what fraud actually looks like, frumpy business casual and all
Refer cases to law enforcement so the next employer has a record to find

Otherwise, as Caleb puts it, “Not good. Really not good.” Listen to the full episode for more of Caleb’s takes, and earn CPE credit through Earmark while you’re at it.