is it fraud? 2825

  • Hello,%0AI have a very strong suspicion that a certain large but not publicly %0Atraded company is engaged in tax fraud.%0AIn a nutshell they are a very very large internet retailer with a %0Abusiness model somewhat similar to, and they have showrooms %0Ain their headquarter state. They need the showrooms so vendors will %0Agive them the competitive pricing they need for their internet %0Awebsites. The showrooms are ‘slow’ due to the economy, and the %0Acompany’s main business is the internet.%0AHere is what I believe is fraud:%0AThe salespeople in those showrooms initially worked for a small salary %0Abase plus commission, which was a significant amount. In 2009, the %0Acompany imposed a new [unwrittten] policy of what they ‘profit %0Asharing.’ Essentially what that that means is that after all the %0Ashowroom expenses are paid for (salaries expense, supplies expense, %0Autilities expense, etc.) the salespeople could ‘share’ any revenue %0Aleft over as ‘commission.’ That never happens, because there is not %0Aenough business to cover all those expenses and salaries, and because %0Athe company also uses the revenue to buy assests for the showroom (new %0Adisplay items, for example). The salespeople have all lost 30% or %0Amore of of their income since they can no longer earn commission.%0AHere is what seems fraudulent:%0AA loss of commission for all the showroom employees could easily add %0Aup to revenue for the company of several hundred thousand dollars. If %0Athe basis of withholding commission is to cover the cost of showroom %0Aexpenses- do you think the corporate accounting department has %0Astopped claiming all the expenses of all the showrooms on their tax %0Areturns?%0AIt seems very unlikely.%0AIt sounds like tax evasion to me.%0ADo you think so?%0AIf so, does SOX cover this?%0AHow could one go about reporting it?%0AI am especially interested in this information because I am an %0Aaccounting student and I am learning about the SOX act, and decided to %0Awrite my research paper on it. I also happen to know of this %0Asituation and I am motivated to go through the process of learning %0Awhat to do.%0AThank you very much.

  • If the company is not publicly-traded, then it may not be subject to SOX rules.
    SOX would not cover improper tax return preparation, only the reporting of tax expense/liability. Assuming that improper tax return preparation was occurring, if the company reported the correct tax expense and liability on their financial statements, then they are OK under SOX.
    It sounds like you are making several huge assumptions as to management actions and intent. I would suggest refraining from making any accusations until you have hard evidence that improper actions are occurring.

  • If the company is basically not paying commissions anymore then they will not have as much expense and they will therefore have more profit to report. I don’t see where this is either a financial statement or tax return fraud issue. I’m sure they are still reporting the cost of materials, as they should. What it is is the company deciding not to pay their employees as much anymore.
    Where there might be some ‘fraud’… or just pushing the envelope… would be with state tax issues, depending on the particular local/state tax/fee structure, by transferring costs from their internet business to the ‘brick and mortar’ business. If you wan’t to find something you might start there.

  • Couldn’t this situation be affected by the contracts or commissions agreements with the sales reps?
    It could end up being unpaid wages if they were supposed be be paid commissions based on a percentage of their actual sales. If this is the case, how does this affect SOX compliance? It is an expense/risk that is not being reported?

  • That sounds like a legal question that needs to be addressed before accounting questions are raised.

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