Blog

Fighting Elder Fraud – Part 1

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

Fraud against Senior Citizens (also known as Elder Fraud) has been increasing in recent years.  Last year, the United States Senate Special Committee on Aging released a report identifying the top 10 frauds targeting seniors.

In this week’s blog, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, will discuss the top three such frauds in detail and offer tips for helping seniors avoid such frauds.  Next week, he will do the same for the next three most frequent frauds perpetrated against the elderly, and the following week, he’ll address the remaining four most frequent frauds targeting seniors.

The top fraud perpetrated against senior citizens is the IRS Impersonation Scam (which has been the subject of several of his blogs over the past few years).  Not only is this fraud complained about by seniors more than twice as much as the next highest fraud, but also it’s the top fraud perpetrated against the elderly in Pennsylvania, New Jersey, and Delaware.

Under the IRS Impersonation Scam, the senior citizen receives a call from a fraudster posing as an IRS agent.  The fraudster falsely accuses the senior citizen of owing back taxes and penalties, and further informs the senior citizen that if these are not paid immediately, the IRS will immediately seize his/her  house, car, and other assets.  In some instances, the fraudster claims the police have been called, and the senior will be arrested if payment is not made immediately.

The senior is told to go to the nearest grocery store or drug store and immediately purchase some type of prepaid card – either a prepaid VISA/Mastercard or gift card (in one instance, the senior was advised to purchase a prepaid iTunes gift card).  After purchasing the prepaid card, the senior is told to immediately call back and provide the card’s information to the “IRS agent”.  In this case, the fraudster relies upon the fear of the senior citizen that he/she did something wrong and must immediately fix the problem to avoid loss of assets or to avoid going to jail.

To help prevent such frauds, senior citizens should be educated that:

  • The IRS never will contact them via phone or e-mail with such threats (similar variations of this scam rely upon e-mails with the same types of threats);
  • The IRS normally contacts people via U. S. mail, and gives them time to address issues regarding back taxes and penalties (weeks, not minutes or hours); and
  • They should, when receiving such a call, immediately hang-up and contact either their tax preparer or a knowledgeable relative or friend to discuss the matter.

The second most frequent elder fraud is robocalls and other targeted unwanted calls. (It is the second most common fraud perpetrated against elderly Pennsylvanians and the fourth most common fraud perpetrated against New Jersey residents.) These calls are made by fraudsters in the hope the senior citizen will answer the phone.  An increasing variation on these types of calls is the use of spoofing to make it seem the call is coming from someone with the same exchange as the senior citizen (the exchange is the set of three numbers immediately following the area code).

Upon answering the phone, the senior citizen is faced with a number of possible scams.  For example:

  • There is a problem with the senior’s bank account that needs to be resolved immediately;
  • There is a problem with the senior’s credit card that needs to be resolved immediately;
  • The caller is from the senior’s credit card company and advises the senior that he/she is eligible for a credit line increase;
  • The warranty on the senior’s car has expired, but the caller can immediately renew it;
  • The caller is from a charity that is experiencing financial problems and needs help to continue (for example, the local animal shelter that, if it doesn’t get financial help, will have to close and euthanize all the dogs and cats).

The purpose of these calls is to obtain personal financial information from the senior which can be used to, among other things: drain bank accounts, make unwanted charges on the senior’s credit cards, or enable identity thieves to open new accounts in the senior’s name.

To help avoid such frauds, senior citizens should be educated that they should never give out personal financial information over the phone to persons they do not know.  For example, if they are advised there is a problem with their bank account, they should immediately hang up and call their local branch to find out if there really is a problem.

Similarly, for credit cards, they should immediately hang up, get their latest credit card statement and call the number listed on their statement.  Another possibility is to have the senior citizen sign up for a service such as Nomorobo which can screen out robocalls.  Although Nomorobo does not work with traditional copper-based land lines, it is free for VOIP landlines and only $1.99 per month for smartphones.  Another similar service is Robokiller ($0.99 per month).

The third most frequent scam perpetrated against seniors is the Sweepstakes Scam (also known as the Jamaican Lottery Scam).  Under this fraud, the fraudster calls the senior and advises him/her that he/she has won a sweepstakes prize – usually something in the neighborhood of $50,000 to $100,000. (In one variation, Anderson was contacted by such a fraudster and advised he had won a top-of-the-line Mercedes Benz, but needed to pay the taxes on the prize before he could receive it.)

In order to claim the prize, the senior is told that he/she must pay a small processing fee or a local tax (usually anywhere from $250 to $1,000).  The senior is advised to pay the fee in a variety of ways:  via wire transfer; via Western Union wire; via use of prepaid VISA/Mastercard or gift card; via purchase and mailing or a money order; or even by sending cash in the mail.  After the fraudster receives the payment, he/she calls the senior citizen back and persuades the senior citizen to pay another small amount; for example, the fraudster claims to have made a mistake in the processing fee amount or states that he/she forgot that there also is a local tax that must be paid, etc.

The fraudsters will continue to call back the senior with requests for additional amounts as long as the senior keeps making payments.  The fraudsters also sell the senior’s information to other fraudsters (which can be quite lucrative since the senior has shown a propensity to pay).  In one variation of this fraud, after the senior had paid over $20,000 and not received the promised prize, the senior was contacted by a person who wanted to help the senior recover the “stolen” funds.  This person offered to do so for just $1,000 (and so began another scam of the senior).

To help seniors avoid being victimized by such scams, they should be educated to never send money to claim such a prize and to hang up the phone and immediately contact a knowledgeable family member or friend. Such assistance also is available from a Certified Fraud Examiner working with an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

Business Valuation Can Be Affected by Personal Goodwill

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

When determining the value of professional services businesses – such as law firms, medical practices or accounting, engineering or consulting operations – it is important, according to a noted Philadelphia forensic accountant and Certified Valuation Analyst, to consider the personal goodwill associated with the professional or business owner.

David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, explains that the Internal Revenue Service defines goodwill as “the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor.”  Recent court decisions, Anderson explained, have recognized a distinction between the goodwill of a business itself and the goodwill attributable to the owners/professionals of that business.  This second type is typically referred to as personal goodwill.

Personal goodwill differs from overall business goodwill in that personal goodwill represents the value stemming from an individual’s personal service to that business, and is an asset owned by the individual, not the business itself, said Anderson, a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley  This value would encompass an individual’s professional reputation, personal relationships with customers or suppliers, technical expertise, or other distinctly personal abilities which provide economic benefit to a business.  Anderson said this economic benefit is in excess of any normal return earned by the company.

An example of this can be seen from one of past cases overseen by Anderson, a Certified Valuation Analyst. This situation involved the divorce of a specialist physician who had a reputation as being one of the top doctors in his field on the East Coast.  As a result, he was sought out by patients up and down the East Coast – a far greater geographic area than most of the practice served.  Because of the larger than normal number of patients that visited the practice to see him and because he performed more expensive and complex procedures than most of the other doctors in his practice, he generated considerably more income for the practice than any of the other doctors.

In order to calculate the personal goodwill of this physician, Anderson – principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley – obtained compensation and productivity data for the “typical” physician in his specialty with the same level of education and experience.  He compared this to the husband’s actual earnings and productivity.

Anderson then capitalized the stream of income arising from differences in revenue generated minus the differences in compensation.  This capitalized amount was the personal goodwill associated with the husband.  He subtracted the personal goodwill from the value of the practice in order to determine the business value of the practice.  It was this value that was used in the marital dissolution proceeding.  In this case, the personal goodwill of the physician represented almost half of the value of the entire practice.

In another case, involving a physician who did not possess such a significant reputation or expertise, Anderson calculated the amount for personal goodwill was less than 5 percent of the value of the entire practice.

If you require the services of a Certified Valuation Analyst in Philadelphia or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.

Beware of E-Commerce Fraud

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

If you sell goods via your website or via other websites (such as Etsy, Amazon, eBay, etc.), you need to be aware of fraud schemes that are perpetrated against sellers such as yourself.  In this week’s blog, I discuss articles about such fraud schemes and how to fight them which have been recently featured on the business website entrepreneur.com.

These fraud schemes include:

  • Classic Fraud: Under this scheme, fraudsters purchase stolen credit card credentials on the dark web, and place orders using the stolen information. The fraudsters arrange for you to ship your product to a P. O. Box or other location from which they can retrieve the product (such as a re-shipper).  They then sell locally the fraudulently obtained items.
  • Triangulation Fraud: The fraudster creates a storefront on Etsy, Amazon or eBay, and offers high demand goods at very low prices. He/she fulfills orders by using the Classic Fraud scheme to purchase these goods from legitimate vendors, and has the goods shipped to the customer who purchased from his/her store. This fraud scheme also allows the fraudster access to the credit card information of the customer who placed an order on his/her website.
  • Interception Fraud: Most common during the winter holidays, fraudsters steal packages from the front porch of houses. Also, if fraudsters have gained access to a victim’s computer, they can monitor for e-commerce orders, and arrange to have the purchases rerouted.
  • Card Testing Fraud: Under this scheme, fraudsters test the validity of credit card numbers by visiting websites which provide information as to why a card purchase was declined (such as exceeds credit limit or incorrect expiration date). They then use this information to make purchases on a different website under the Classic Fraud scheme.
  • Account Takeover Fraud: The fraudster, often using phishing, obtains the logon ID and password of a customer. The fraudster then logs on as the customer, looking to see if credit card information has been stored by the customer for that website.  If so, the fraudster initiates purchases and changes the shipping address (as per the Classic Fraud scheme).
  • Identity Theft: This type of fraud has become prevalent. Under this scheme, the fraudster obtains the personal identification of a person, and either creates credit cards in the victim’s name or opens new credit cards in the victim’s name.
  • Chargeback Fraud: This type of fraud is most often perpetrated by consumers. The consumer makes an online purchase.  He/she then contacts the vendor (after the purchased items have been delivered) and states that his/her credit card was stolen or otherwise misappropriated and that he/she did not make the purchase or receive the items. Alternately, the customer claims that they are a victim of Interception Fraud because they never received the goods ordered.

So, how do you fight such fraud?  Here are three possibilities:

  • Turn On Gateway Fraud Filters: You work with your payment gateway vendor to set up basic fraud prevention rules to block or flag transactions that may be fraudulent (for example, an AVS mismatch – where the billing address entered does not match the billing address on file with the credit card company, or declining all transactions originating from certain countries). However, this can create false declines which could prevent you from certain non-fraudulent transactions.
  • Manual Review: You assign one or more employees to check out every transaction or ones that are above a specified dollar amount or ones for which the items purchased are not shipped to the same address as the billing address. Your employee may use Google and social media to check the legitimacy of the shipping address.  However, this can be very time consuming, and the online research tools available are limited.
  • Use of Third-Party Fraud Prevention Companies: Such companies provide online solutions to reduce or eliminate fraud. They can be very effective and can significantly reduce chargebacks.  However, they can be expensive and may require fraud expertise to set up and maintain.

If you would like the opinions of an expert in the field of fraud prevention, a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help. For details, contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

Preventing Fraud in Cash-Intensive Businesses

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

In today’s age of technology, most sales transactions involve an electronic or paper check payment.  However, there still are numerous businesses that largely deal with cash payments, including cannabis operations, casinos, retailers in low income areas, food trucks, and small food operations (such as water ice or pretzel carts). For such businesses, the risks of fraud due to diversion of cash are much higher than those of businesses that deal primarily with electronic (including credit card) or paper check payments.

Fraud from Moment of Sale to Internal Depository

Cash can be diverted between the moment of sale and the business’s internal depository (typically a safe or locked cabinet) in a variety of ways.  These include:

  • The employee receiving the cash payment from the customer can just pocket the money, and not leave the business with any documentation evidencing the customer’s payment; or
  • The employee receiving the cash payment can prepare a manual receipt for the customer (either not numbered or numbered but not controlled), place the cash receipt in a register drawer, and later remove both the cash and any copy of the cash receipt before the register drawer is removed and counted; or
  • The employee who removes and counts the register drawer can remove both the cash and any copy of the cash receipt before counting and recording the cash in the register drawer and placing it in the internal depository.

Safeguards to protect against the above types of diversion include:

  • Use of video surveillance;
  • Use of point-of-sale systems to record all sales;
  • Use of numbered and controlled manual cash receipt books (with duplicates);
  • Removal and counting of cash register drawers under management supervision;
  • Regular management review of sales transactions.

Fraud Between Internal Depository and Actual Deposit of Cash into a Bank

Cash also can be diverted between the time it is placed in the internal depository and the time it is deposited in the bank.  These diversions can be accomplished by:

  • An employee who can prepare and record bank deposits, and who also performs bank reconciliations, can remove cash from the internal depository, record a bank deposit for the amount removed, and “adjust” the bank reconciliation to hide the fact that no bank deposit was made.
  • Alternatively, an employee who can initiate and record credit memos (and who also has access to the internal depository) can remove cash from the internal depository and process a credit memo against customer sales to “account” for the shortfall in cash.
  • Also, for a business that does not or cannot use bank accounts (such as cannabis operations), an employee with access to the internal depository simply can remove cash from the internal depository.

Safeguards to protect against the above types of diversion include:

  • Use of video surveillance;
  • Separation of duties so that no employee who prepares bank deposits makes bank deposits; that no employee who performs bank reconciliations; and that no employee who initiates credit memos can record deposits or access cash in the internal depository;
  • Regular and timely reconciliation of bank accounts; and
  • Performance of regular (even daily) cash counts of the contents of the internal depository under management supervision.

Fraud Involved with Cash Disbursements

Cash also can be diverted as part of the disbursement process when it is used to pay employees, vendors, and others.  These circumstances occur in businesses that do not or cannot use bank accounts (again, cannabis operations).  These diversions can be accomplished by:

  • An employee in charge of processing cash disbursements creates a non-existent vendor, creates phony invoices, and “pays” himself/herself the amount on the invoices.
  • An employee in charge of processing cash disbursements for inventory or supplies arranges to return certain delivered inventory or supplies to the vendor but “pays” the original vendor invoice to himself/herself. He/she then pays the vendor the revised (lower) vendor invoice amount, keeping the difference between the two vendor invoices.
  • An employee in charge of processing payroll creates a non-existent employee, and “pays” himself/herself the payroll amount.
  • An employee in charge of processing expense reimbursements creates either non-existent expense documentation (such as getting fake receipts from http://salesreceiptstore.com/) or makes copies of previously submitted expense documentation, and “pays” himself/herself.

Safeguards to protect against the above types of diversion include:

  • Use of video surveillance;
  • Separation of duties so no employee who processes cash disbursements can create a vendor or employee or return inventory or supplies. Additionally, such employee cannot hand out payroll payments to employees.
  • Management approval of all vendor invoices, expense reimbursements, and employee payroll.
  • Performance of regular (even daily) cash counts of the contents of the internal depository under management supervision.

The potential cash diversion risks and safeguards discussed above are not all-encompassing but are meant to provide examples.  The actual cash diversion risks and safeguards to prevent them are dependent upon the specific circumstances present in the business.

Additionally, very small businesses (as well as smaller non-profit organizations such as sports league snack stands and smaller houses of worship) may not be able to afford video surveillance and may not have enough staff to facilitate the separation of duties discussed above.  In such cases, more management oversight would be necessary to offset these shortcomings.

If you want to learn more about how to prevent fraud in your cash operations, a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help. For details, contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

Dealing with and Preventing Fraud When Trusted Employees Go Bad – Part 3

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

In Parts 1 and 2 of this three-part series, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, discussed frauds committed by trusted accounting employees, and how these frauds could have been prevented.  This week, he closes the series with a look at frauds by trusted members of management which he has investigated.

Fraud #1: The President (and 1/3 owner) of a family-owned retail business was a gambler.  He could be found at one or more Atlantic City casinos four or more days a week.  However, he ran short of money to support his gambling habit.  He knew the family business generated a lot of cash sales, so he schemed to use the company’s cash to finance his gambling.  He made sure all cash sales were manually recorded on numbered receipt pads.  He then made sure the pads were used in mixed sequence (of the six pads in use at any one time, no two pads were in sequence), so the receipt numbers could not easily be tracked.

Next, he fired the long-time bookkeeper and installed his new girlfriend as the bookkeeper.  She had no accounting background at all, and therefore depended on him to teach her bookkeeping and how to use the accounting system.   Finally, he made himself responsible for reconciling cash received to the receipts.  Then, each day, he took a handful of receipts and threw them in a desk drawer while simultaneously pocketing the cash amount of those receipts.  He gave the remaining receipts and cash to the bookkeeper for entry into the accounting system and deposit in the bank.

Over time, the business began to experience cash-flow problems (due to his fraud).  He hid this by slowing or even stopping payments to vendors, and then blamed the 2008 recession as the cause of their refusal to ship product to the business.  His scheme was discovered when he was out sick one day.  His brother, another 1/3 owner of the business, was looking for a document and, in searching for the document in the President’s desk, discovered the drawer with the hidden receipts.  By then, the President had taken over $750,000 from the business.

Since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight.  Also in this case, the other two business owners should have been suspicious of the President firing the long-time bookkeeper.  They should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures, train the bookkeeper, and produce monthly operating reports.  If this had been done, the President would not have been able to perpetrate his fraud scheme.

Fraud #2: The Vice President /General Manager of a family-owned business was the heir-apparent to run the business as the primary owner began to cut back on his involvement in the business.  However, he had only a minor ownership interest, and was supposed to share the profits of the business with other family members.  Instead, he schemed to keep most, if not all, of the profits for himself.  He began by charging significant amounts of personal expenses on his company credit card.  Since he approved credit card purchases, he was able to have these charged as business expenses of the company.

Next, he began to purchase inventory through this company, but for the benefit of his wife’s retail business.  He alone took control of how much the wife’s business was to reimburse the family-owned business for these purchases.  Over the course of several years, he had the wife’s business reimburse only a fraction of the inventory she used, but which was paid for by the family-owned business.  Next, he closed one of the company stores and installed his wife’s business in the store.  Although he stated his wife’s business would reimburse the family-owned business for the rent, he again only had her business reimburse a fraction of the total rent.

Finally, he set up another business to compete with the family-owned business, and began diverting sales to his new business.  His fraud was discovered after the company began to experience significant cashflow problems.  His attempts to cover-up his fraud caused him to have major disagreements with the primary owner.  Due to these disagreements, the primary owner fired the Vice President /General Manager.  After the primary owner stepped back into the business, he discovered the fraud.

As with the previous fraud, since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight. The primary business owner should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures and produce monthly operating reports.  If this had been done, the Vice President/General Manager would not have been able to perpetrate his fraud scheme.

Fraud #3: The General Manager of an automobile dealership owned only 15 percent of the business, but schemed to keep a greater share of the profits.  He purchased two small nearby businesses – a car wash and a used car lot.  Previously, the automobile dealership had sent each customer car it serviced and each used car it purchased to an auto detailer.  Now, the General Manager started to send each such car to his car wash.  He merely washed each car, but charged the automobile dealership for a full detail.

Next, he schemed to have the automobile dealership sell to his used car lot good quality used cars at large discounts, and to purchase from his used car lot poorer quality used cars at large markups.  His scheme was discovered when an employee overheard the General Manager discussing the huge profits that his car wash and used car lot were making at the expense of the automobile dealership.  The employee reported this to the dealership’s primary owner, and the General Manager was fired.

As with the previous frauds, since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight.   The primary business owner should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures and produce monthly operating reports.  If this had been done, the General Manager would not have been able to perpetrate his fraud scheme.

As can be seen from the frauds discussed above, when a business owner cedes active oversight to internal senior management, it is critical to employ an outside accounting or forensic accounting firm to provide a measure of oversight and independent reporting to the business owner.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help safeguard your company, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

Dealing with and Preventing Fraud When Trusted Employees Go Bad – Part 2

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

Last week, in the first segment of a three-part series, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed payroll frauds committed by trusted accounting employees, and how the frauds could have been prevented.  This week, in Part 2, he looks at non-payroll frauds by committed by trusted accounting employees.

Fraud #1: The Controller of a regional retail chain began using the company’s petty cash fund (over which she had total control) to perpetrate her fraud.  Initially, she “borrowed” money from the $1,000 fund and left a personal check in the petty cash box for the amount borrowed.  After receiving her next paycheck, she repaid the “loan” and retrieved her check.  This went on for several months with the “borrowed” amount regularly increasing until she was taking almost the entire $1,000 amount each pay period.  To further her scheme, she persuaded the owner to increase the petty cash fund to $5,000.

As the scheme continued, her “borrowings” increased to the point that the amount borrowed exceeded her entire paycheck, and she was unable to repay the petty cash fund.  No problem, she then launched her next scheme.  She made copies of other employee’s previously reimbursed expense documents, and submitted these as her own (reimbursing herself through petty cash).  This scheme was discovered only when the Controller was away on vacation and the owner went into the petty cash box to pay the person who watered the plants in the office.  He discovered that less than $100 cash was left in petty cash along with over $4,900 in copies of receipts (one of which he recognized was from his most recent expense reimbursement request).

The owner should have initially been suspicious of the request to increase the petty cash fund to $5,000.  He should have demanded written documentation of why it was necessary for such a large increase.  Additionally, he should have conducted regular random surprise audits of petty cash, particularly on the day before a payday and on the day before a long holiday weekend (these are the most likely times to find petty cash fraud).  Had he done so, he could either have prevented the petty cash fraud or stopped it in its early stages.

Fraud #2: The same Controller as in the above fraud also engaged in an additional fraud scheme involving accounts receivable.  The retail chain had its own branded credit card for customer use in making purchases from the chain.  The Controller had previously been issued such a credit card, and the card balance reached a point where she was unable to pay the amount due.  To solve this problem, she simply issued a credit memo which wiped out the credit card balance (obviously the company had no internal controls over credit memos).

The Controller then expanded this scheme by identifying friends, family, and neighbors who also had the chain’s branded credit cards.  She approached these people with an offer to eliminate their credit card balances in return for cash payments (to her) of a percentage of the amount eliminated.  This scheme was discovered as part of the forensic examination Anderson conducted after the owner found the above petty cash fraud.

Because of the possibility of improper use, credit memos should be tightly controlled.  In this case, either the owner’s approval should have been required for issuance of a credit memo or at least approval by two different managers for such issuance.  Additionally, the owner should have required that a monthly analysis of accounts receivable be produced which included identification of all credit memos applied against accounts receivable.  Had such controls/procedures been in place, the fraud could have either been prevented or stopped in its early stages.

Fraud #3: The long-time bookkeeper for a personal liability law firm was responsible for all accounting activities, including writing checks from the firm’s escrow account and recording all transactions on a manual One-Write accounting system.  She began her fraud by writing checks to herself, but recording them on the One-Write system as having been written to various vendors.  Because of the large number of cases, she was able to spread out the improper payments so no one case would have too many vendor payments.

This fraud continued for years until one week when the bookkeeper was on vacation.  The owner received a call from a vendor complaining an invoice had not been paid (such a call would normally have been transferred to the bookkeeper).  Because the escrow account bank statements had arrived the day before, the owner started going through the paid checks to see if any of them were for this vendor’s invoice.  Instead he found multiple checks paid to the bookkeeper.  Our investigation found that this fraud cost the law firm over $500,000.

As with some of the previous frauds, the easiest way to have prevented this fraud or to have caught it in the early stages would have been for the owner to have had the escrow account bank statements sent by the bank directly to him so that he could spend a few minutes each month reviewing the statement and the cancelled checks.

Many business owners believe installing controls to prevent frauds are time-consuming and expensive.  In each of the above cases, installing relatively easy-to-implement and low-cost, or no-cost, controls could have prevented each of the above non-payroll frauds.

Next week, in the final segment of this three-part series, Anderson will discuss fraud executed by trusted members of management.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help safeguard your company against such fraud schemes, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

Dealing with and Preventing Fraud When Trusted Employees Go Bad – Part 1

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

Fraud is most often committed by employees who have decided to take advantage of their trusted status. They are usually able to commit these frauds because their relationship with the company has caused management to relax its oversight of their activities or because, as members of management, they can override internal controls.

This article is Part 1 of a three-part series addressing frauds investigated by forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia. It will focus on some payroll frauds committed by trusted accounting employees, and how the frauds could have been prevented. 

Payroll Fraud #1: The Controller of a real estate development company noted there was a “bug” in the new payroll software.  The bug caused the cash requirements report (used to determine how much was required to fund the payroll bank account) to show a higher total funding requirement than was necessary.  Rather than reporting the bug to the software company, the Controller funded the payroll bank account with the total shown on the flawed report, and, using out-of-sequence checks, paid himself the overage each pay period.  Because of his trusted status, the company’s owner never noticed the problem until several years later when the company experienced cash flow problems.  The discovered fraud exceeded $3 million.

If the owner had decided to have the payroll bank account statements (and corresponding cancelled checks) delivered directly to him, and spent a few minutes each month reviewing these documents, he would have noticed the large checks written to the Controller and would have discovered the fraud much earlier.  Alternatively, the owner could have required regular analyses of fluctuations in expenses.  In such a case, he would have noticed a sudden and ongoing sizeable jump in payroll costs, and could have investigated the cause.  In either case, the fraud could have either been prevented or discovered in its early stages.

Payroll Fraud #2: The newly hired Director of Finance for a municipal utility learned, among other responsibilities, she was wholly responsible for setting up employees with the utility’s payroll service, and for tracking (via a spreadsheet) employee vacation and sick pay.  Using these trusted capabilities, she started her fraud by informing the payroll service that she had a higher starting salary than she did.  She then based subsequent raises (which were rewarded as percentage increases) on this higher salary.  Additionally, because she alone was responsible for tracking vacations and sick pay, she regularly took additional vacations and sick pay over her actual earned vacation and sick pay.  This was magnified even further because she frequently worked overtime during weeks that she took the unearned vacation and sick pay.  As a result, some of her regular work hours were paid at overtime rates.  This fraud was only discovered when she retired, and, in reconciling her pension entitlement, the new Director of Finance noticed the difference in her original approved starting salary and the salary that was paid to her.

If the municipal utility had instituted certain procedures for handling the payroll, vacation and sick pay for senior executives, this fraud could have been prevented.  Such procedures would require either multiple signoffs for executive salary changes as well as for approvals of vacation and sick pay, or would have designed a specific executive to approve these items for another executive. 

Payroll Fraud #3: The long-time bookkeeper for a small professional services business was given total responsibility for processing payroll.  One of the features of the payroll process was that the company used the payroll system to reimburse employees for business expenses.  The bookkeeper realized this could enable her to receive reimbursements for non-existent expenses.  Experimenting with small amounts at first, she noticed that management was not reviewing payroll, and not picking up on these improper reimbursements.  She eventually increased the reimbursements to herself to many thousands of dollars per pay period (because she was also given total responsibility for the company’s accounting system, she was able to manipulate how the reimbursements were recorded in the company’s system). This fraud encompassed many hundreds of thousands of dollars and was only discovered when the company experienced cash flow problems and hired an outside consultant to help it improve its cash flow.  The outside consultant found the excessive reimbursements and reported them to the company.

Because the company was relatively small, if the owner had taken a few minutes each pay period to review the payroll and payroll funding reports, he would have noticed the increase in payroll costs and the unusual amount of reimbursements going to the bookkeeper.  This would have either prevented the fraud or caught it in its early stages.

You’ll note a common scheme in each of the above frauds.  Because the top executive or owner trusted the accounting employee, he or she failed to take the small amount of time necessary to review payroll activities.  This in turn enabled the perpetrator to execute the fraud.

Next week, Anderson will discuss non-payroll frauds perpetrated by trusted accounting employees who turned to the dark side.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help safeguard your company against such fraud schemes, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

 

Keep an Eye Out for Questionable Expense Deductions on Meals and Entertainment

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

In forensic accounting cases involving marital dissolution or disputes between shareholders or businesses, one of the most-often-abused financial categories – says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley – is meal and entertainment expense deductions.

Anderson often is asked, as a Certified Fraud Examiner, to review the reasonableness of certain expense deductions taken by a business.  Taking improper expense deductions can depress the income and value of a business (affecting the out-spouse in a divorce or a minority shareholder) or inflate the amount to be reimbursed (affecting an employee, contractor or another business), so it is important for a forensic accountant to scrutinize deductions.

Here are some of the most highly questionable meal and entertainment expense deductions/reimbursements he has uncovered in his work:

  • Several thousands of dollars in payments to strip clubs – in this case, the majority shareholder claimed the strip clubs (one in Dallas, TX and one in Washington D.C.) were the only local places that served the kind of quality food befitting his customers. He further indicated the costs were so high (over $1,000 each time) because he was purchasing quality alcoholic beverages for his customers and himself.
  • Having the business pay for overseas vacations for an extended family to countries where the company did not conduct business – in this case, the company paid for overseas vacations for the majority shareholders, their immediate families, their children’s families and their in-laws (none of the minority shareholders or their families enjoyed such privileges). The majority shareholders claimed these vacations were valid business trips because they were considering the potential of conducting business in these countries, and they took along extended family members, including infants and small children, to obtain a variety of viewpoints regarding conducting such business in the future.
  • In another case, having the business pay for a vacation at a resort for the majority shareholder’s wife, college-age children and the family dog – in this case, the majority shareholder explained his wife’s presence by claiming he was meeting a client who would be bringing his own wife, and he felt it would be awkward if his wife were not there. He then explained he brought along his college age children because he did not trust them to be “home alone” in the family house. Finally, he stated the family dog would be traumatized by being sent to a kennel, and since there was no one he could trust to take care of the dog in his family’s absence, he had no choice but to fly the dog out with the rest of his family.
  • A separated but not yet divorced company owner had the company pay for his girlfriend to accompany him on a cruise (and additional three-day stay in the Caribbean). In this case, the cruise was tied to onboard continuing education courses offered to meet the owner’s professional continuing education requirements. The company owner claimed he needed to bring along a “scribe” to record key information from each of the courses he was taking, and his girlfriend offered to be the scribe. He claimed the additional three-day stay in the Caribbean was really a payment to her in lieu of salary because if he had taken someone else as a scribe, he would have had to pay a salary to that person.
  • A Philadelphia-area retail business owner had his company pay for the season’s lift tickets for he, his wife and his three children (the youngest of whom was eight years old) at an expensive Vermont ski resort (near where he owned a vacation home). In this case, he claimed he and his family members often met people from the Philadelphia area at the resort, and his entire family was committed to talking up the family business. Accordingly, he considered the family’s lift tickets to be a reasonable marketing expense.
  • Having the company pay for visits by the majority shareholder and his wife to their children who were away at college – in this case, the majority shareholder claimed each of his children had previously worked in the family business, and these trips were legitimate business expenses because he discussed the family business with each child on each trip.
  • Having the company pay annually for a luxury box rental, food, and alcohol for the majority shareholder’s college fraternity brothers at a professional football game. In this case, the majority shareholder claimed this was a legitimate marketing expense even though not a single attendee had ever conducted business with or referred business to the majority shareholder’s company.
  • Billing the client company for a $10,000 plus end-of-project party the subcontractor threw for his staff – in this case, the subcontractor claimed this was a necessary project expense because of how hard his staff had worked to complete the project on time – even though the contract did not provide for such.

Of course, Anderson said he also has uncovered many smaller questionable meal and entertainment expense deductions in his work.

If you are anticipating, or already are dealing with, a financial situation involving questionable meal and entertainment expenses, you should be working with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. When you need the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

 

(NOTE: David Anderson’s forensic accounting blog will be on hiatus for the holiday season and will return on Monday, January 7, 2019.)

Forensic Accountant Warns: ‘Tis The Season for Gift Card Scam Fraud

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services including business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

According to the international accounting firm, Deloitte Touche Tohmatsu, Limited, 54 percent of Americans plan to buy gift cards this holiday season. David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, states that gift cards have become the number one most popular holiday gift, beating out clothes, toys and games, and books.

Fraudsters love gift cards, too.  According to Certified Fraud Examiner Anderson, a recent research report by the Association of Certified Fraud Examiners (ACFE) lists these schemes as being among the latest trends in gift card scams:

Stealing Gift Card Numbers

In this scheme, the fraudster takes one or more gift cards from the display rack at a retail store or post office, carefully removes the card from its packaging (if any), scratches off the silver sticker on the back of the card (under which is the PIN number), records the PIN and gift card number (usually by taking a photo with his/her phone), puts an identical silver sticker (easily purchased on eBay) on the card to replace the one scratched off, and returns the gift card to the display rack.

The fraudster waits until the gift card is activated, and regularly monitors the card issuer’s website to check the balance.  Once the balance shows up (meaning the card has been activated), the fraudster either uses the relevant gift card information online or sells the gift card online (providing the gift card info and PIN number to the purchaser).

Since the gift card has been activated before the relevant holiday, and because many recipients don’t try to use the card for days, weeks or months after receiving it, this gives the fraudster plenty of time to carry out the scheme.

Other variations of the scheme involved hacking the issuer’s website for gift card information or employing specialized software to test millions of number combinations until an active gift card is identified.

Balance Confirmation Scams

In this scheme, the fraudster contacts a seller who has listed a gift card for sale on eBay, Craigslist or some other site.  The fraudster asks the seller to make a three-way call to the card issuer with the fraudster on the line to confirm the card’s balance.  The purpose of this call is for the fraudster to capture the touch tones the seller enters.  The fraudster can then use these touch tones to determine the card number and the PIN number, and then uses the card information himself/herself.

Other Gift Card Scams 

These schemes include dishonest cashiers who switch the activated gift card for an “empty” gift card at the cash register, and phishing e-mails that offer free gift cards as a way to obtain personal financial information

So, how can you avoid becoming the victim of a gift card scam?  The ACFE suggests you consider some or all of the following:

  • Buying gift cards only from reputable sellers.
  • When possible, buying gift cards online directly from the issuer.
  • Avoiding gift cards that are displayed in easily accessible areas (for example, asking for a gift card stored behind the counter).
  • If buying a gift card from a display rack, choosing a card from the least accessible area of the rack (such as from the bottom row).
  • Choosing a card from the middle of the rack spindle instead of choosing the front card.
  • Carefully inspecting the card’s packaging and PIN sticker for any tampering.
  • Watching the cashier scan and activate the gift card.
  • Matching the card number to the number shown on the receipt (if the card number is shown on the receipt).
  • Using the gift card as soon as possible.
  • Frequently checking gift card balances.
  • When possible, registering the gift card on the issuer’s website.
  • Immediately contacting the card issuer if the gift card balance is lower than expected.

If you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

Forensic Accounting Tips to Help Reduce Expense Reimbursement Fraud

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services including business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

Corporations and organizations of all sizes face myriad threats to their financial stability; however, one of the most devious is one that comes from within: Expense Reimbursement Fraud.

While taken individually, the amount of money undeservedly extracted by each employee on each report is small in comparison to the overall total, if many members of your team are presenting phony receipts, the amount of money you might be losing could be staggering.

“Many employees don’t see padding their expense reports as being immoral or illegal,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley. “They think it is their right, just as much as a paid vacation or a safe work environment.”

“Some see it as a common practice their employer overlooks because the dollar amount stolen is insignificant in the greater scope of things,” said Anderson, a Certified Fraud Examiner.  “Still others see the money they pocket as an unauthorized bonus for putting up with the hassles of business travel.  Employees have all kinds of justifications for padding their expenses, but the bottom line is that when you add it up, companies are dealt a hard blow from expense reimbursement fraud.”

The following types of expense reimbursement schemes have been identified by forensic accounting experts as those most commonly used by employees.  Following each scheme are recommendations companies can use to combat the fraud.

Air Travel

The Scheme:  Some companies allow employees to travel in first or business class or to book coach tickets that allow flight plan changes without incurring an additional change fee.  Fraud occurs when an employee buys a ticket with a personal credit card, submits the cost for reimbursement and then returns the ticket to the airline for reimbursement and replaces it with less expensive travel, according to Anderson, a forensic accountant who also is a Certified Fraud Examiner.  The employee may fly coach instead of first or business class; replace a non-change fee ticket with a less expensive ticket that carries a change fee; use frequent flyer miles; or even travel by train or car instead of plane.

Fraud Deterrence Measures:  Companies should book tickets and pay for them on a company credit card so if a ticket is returned, funds are applied to the company card instead of the employee’s card, Anderson said.  Companies also should require employees to submit boarding passes as documented proof of the expense.  A company manager well versed in boarding passes can verify the pass was used, he said.  And because most airlines require boarding passes be printed within 24 hours of the scheduled flight time, it is harder for employees to print a pass and then change the ticket.

Meal and Entertainment Fraud

The Scheme:  The most common fraud is for an employee to pay for meals or entertainment with cash, obtain a blank receipt from the restaurant/venue and then enter a higher amount on the blank receipt, said Anderson, a forensic accounting expert.  Another scheme involves a group of people dining together and one employee charging the entire bill to a credit card while everyone else pays cash.  The employee pockets the cash but submits the entire bill for reimbursement.  A third method is for an employee to claim a personal meal as a business expense.  Another scheme is for the employee to submit a phony restaurant receipt (available at websites such as www.salesreceiptstore.com) for an amount greater than what the employee spent.

Fraud Deterrence Measures:  These schemes are difficult to detect and validate because it is impossible to know where employees ate or what they paid, Anderson said.  But companies can require employees to use company credit cards for all charges, thereby eliminating the need to reimburse them for meal and entertainment expenses.  Companies must scrutinize credit card charges to make sure employees do not charge personal expenses and must require employees to identify the attendees and business purpose of each charge.  One other alternative that limits a company’s total meal cost is to use the per diem tables issued by the federal government and reimburse employees at the per diem rate regardless of what the actual expenses were, Anderson said.

Taxi, Parking and Tolls Fraud

The Scheme:  An employee reports having paid cash for a taxi, parking or bridge/highway toll and failing to obtain a receipt.  Many companies allow claims up to $20 or $25 for each of these types of expenditures without a receipt.

Fraud Deterrence Measures:  The two most effective means of combating this fraud is to require use of a company credit card or to deny reimbursement without the required receipt for these expenses.  Many taxis, parking venues and toll booths produce receipts electronically now, so it is difficult for employees to claim that a receipt was not available.

The Copy of a Receipt Fraud

The Scheme:  An employee submits a copy of a receipt, keeping the original receipt or another copy of it to be submitted for additional reimbursement later.

Fraud Deterrence Measures:  Companies should require employees to submit original receipts and deny reimbursement for photocopies.

“Some of these fraud schemes are actually easy to prevent,” said Anderson, a forensic accountant who recommends that every organization enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  “But many companies think the loss is so low that it is not worth the effort to combat it.  If they added up the ‘minor’ pilfering for each employee for the full year or multiple years, it would likely no longer be a ‘minor’ loss.”

When was the last time your expense reimbursement procedures were examined by a forensic accountant?  A forensic accounting expert from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can recommend fraud deterrence measures that will strengthen your expense reimbursement measures and help prevent losses, Anderson said.

If you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

The Role of the Forensic Accountant in Alternate Dispute Resolution

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services including business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

Business litigation can be a very expensive proposition.  Generally, opposing attorneys will fight vigorously for their clients.  When forensic accountants are engaged as expert witnesses in business litigation, such fighting can drive up the cost of the expert witnesses and drive down the understanding of the forensic accountant’s work and, therefore, the client’s satisfaction with the forensic accountant

In a typical business litigation scenario, the opposing attorneys may fight against providing information which the forensic accountant has requested in order to calculate damages or to perform a business valuation valuation.  Depending on the amount of rancor between the parties and level of antagonistic determination between the attorneys, Anderson, of David Anderson & Associates, says there are times he may have to perform the damage calculation or business valuation without all the relevant information he believes is necessary.  In the absence of such information, the forensic accountant may have to make reasonable assumptions regarding the missing information.  If there are differing assumptions by each side’s expert witness, significant differences in damage calculation or business valuation amounts may result.

In such situations, the parties often may expend significant time and incur significant costs in using these forensic accounting experts.  Especially when there are significant differences of opinion between the two expert witnesses, the experts’ fees and attorney fees can be even higher.  According to Anderson, both parties also may come away with confusion and misunderstanding regarding how the relevant damage amount or business’s value was determined. This is because they may only speak with the expert retained by their attorney and must rely upon the deposition and/or courtroom testimony of the opposing expert without being able to ask their own questions.

The use of alternate dispute resolution – such as mediation, arbitration, and negotiation – not only can reduce the cost of traditional business litigation, but also can help eliminate the uncertainty that comes from leaving the resolution of the dispute up to the Courts (judge or jury).

Examples of disputes that are prime candidates for alternate dispute resolution include:

  • Business contract disputes
  • Shareholder/partner disputes
  • Employee termination disputes
  • Insurance claims
  • Royalty payment disputes
  • Patent/trademark disputes

So how does the role of the forensic accounting expert differ in alternate dispute resolution?

  • First, the forensic accounting expert can be jointly retained by both parties as opposed to by just one party in traditional business litigation.
  • Next, because of the joint retention of the forensic accounting expert, both parties are more cooperative and better able to share all the necessary information needed by the forensic accounting expert. Thus, there is also usually less of a need to make assumptions.
  • Finally, Anderson explained, the expert witness report can be openly reviewed with both parties. Because this is a joint retention, the forensic accounting expert can be more open and informative with both parties and stand ready to fully answer either party’s questions. This helps to eliminate confusion and lack of understanding regarding the damage calculation or business valuation and the forensic accounting expert’s process.

Additionally, the cost for the forensic accounting expert will be less, because only one expert is retained instead of two, and because the cost of depositions and/or courtroom testimony can be eliminated.

If you need a forensic accounting or business valuation professional in Philadelphia, or if you require any other services of a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.

Don’t Try Hiding Cash Transactions; Forensic Accountants Will Find Them

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, fraud deterrence, litigation support and expert witness testimony services in Philadelphia and the Delaware Valley.

There are several reasons why the owner or principal of a business – typically a retail business – that receives payment in cash for a significant amount of sales might try to hide some or all such cash by pocketing it and not entering the sales into their books and records. These primary motivations are:

  • To pay less in taxes; and/or
  • To show reduced cash flow, profits and business value to divorcing spouses or to shareholders who are not employed in the business (often called non-operating shareholders).

As a firm that offers forensic accounting services in Philadelphia, David Anderson & Associates often is called in to analyze the books, records, and operations of such businesses to determine whether – and, if so, how much – cash sales are not being reported. As part of my fraud investigation, and as a Certified Fraud Examiner, our Philadelphia forensic accounting firm employs many of the same fraud deterrence techniques as the IRS and other taxing authorities to identify non-reported cash sales.

Here is a sampling of some of the techniques that forensic accountants use:

  • Analysis of tax returns and financial statements over a multi-year period: One form of analysis is to compare key operating data over a multi-year period and look for unusual trends. For example, in the case of a retail gardening business, I noted the business had been averaging about $600,000 to $800,000 sales per year with a slight upward trend until the year immediately before the owner commenced divorce proceedings. In that year, sales dropped to about $450,000. The next year, sales recovered to around $600,000, and the following year sales jumped to over $700,000. This was a potential indicator of unreported cash sales.
  • Analysis of tax returns and financial statements in comparison to industry statistics: Forensic accountants have access to industry statistics that can be compared to the financial information reported on a company’s tax returns and financial statements. For example, a pizza restaurant with between $3 million and $5 million in sales will typically have a gross profit in the range of 65 percent to 72 percent of sales. If the pizza restaurant I am investigating has been averaging a gross profit in the range of only 45 percent to 50 percent, this can be a strong indicator of unreported cash sales.
  • Comparison of inventory records with sales records: In the case of a retail beauty products business, I analyzed the inventory records of certain high-value beauty products – including expensive perfumes – and compared those records to the recorded sales of those high-value beauty products. I was only able to trace about 50 percent of the inventory reduction to recorded sales. The owner was unable to explain the other 50 percent inventory reduction. Her initial claim was that her staff must have stolen the other 50 percent, but she then was unable to explain how the staff members obtained access to the locked cage where the products were stored after I determined she was the only one with a key to the locked cage.
  • Analysis of employee time records versus recorded sales: In analyzing the sales of a catering business, I noted multiple instances in which employees were paid for working certain catered events for which no sales were recorded. I then contacted each of the customers for these events and learned that each had paid cash. In this case, I could obtain the actual amount paid from each customer.

As a Certified Fraud Examiner offering forensic accounting services in Philadelphia, some of the other fraud deterrence techniques I have used include observation – in which I have someone observe the number of customers and/or product deliveries that occur during a specific length of time and then compare that information with the number of sales recorded in the company’s accounting system – and interviews with present and former employees, although I have noted that interviews with present employees can be very sensitive because such employees may not want to cooperate for fear of losing their jobs.

Of course, while such techniques can be a strong indicator of unreported cash sales, forensic accountants still must perform other procedures and analyses to validate the amount of such unreported cash sales.  But in the end, if the owner is hiding cash sales, a forensic accountant who also is a Certified Fraud Examiner and is conducting a fraud investigation is very likely to find them.

If you require forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

Determining the Valuation Date is a Key Factor in Business Valuations

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services including business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

When a forensic accountant performs a business valuation, one of the first – and most important – factors that must be determined is the date of the valuation. There are many different bases that can be used to fix this key factor. Here are a few:

  • For a marital dissolution, the valuation date can be the date of marriage (for determining the pre-marital business value) and/or date of separation or date of filing of divorce complaint (for determining marital business value), and/or a current date (for determining ability to pay);
  • For financial statement presentation purposes, the valuation date can be the date of acquisition (for purchase price allocation) or the end of the financial statement year (for determining goodwill impairment or purchase price impairment);
  • For gift taxes, the valuation date can be the date of the gift;
  • For estate taxes, the valuation date can be the date of death or the date six months after the date of death;
  • For insurance claims and damages litigation, the valuation date can be the date of the incident that gave rise to the claim occurred (for determining valuation of total loss value) and/or the date the impact of the damaging incident ceased (for determining period of loss and lost value during that period);
  • For business acquisitions, sales and/or mergers, it can be any mutually agreed-upon date.

The selection of the valuation date is critical because, among other things, a business valuator can only consider factors that were known or knowable as of the valuation date.  This means that certain key subsequent events may or may not be considered in valuing the business.  The following illustrate how this impacts the business value:

  • In the case of Hurricane Sandy which hit New Jersey and New York on October 29, 2012, the selection of a valuation date could have a major impact. For example, if the valuation date of a business affected by Hurricane Sandy was October 29, 2012 or later, then the effects of the hurricane would be considered in valuing a business which was destroyed by Hurricane Sandy. But what if the valuation date was a few days earlier?  If the valuation date was October 28, 2012, it is reasonable to expect that the business would have been affected by Hurricane Sandy only 24 hours later.  But what if the valuation date was October 23, 2012, when all but one of the storm models predicted that the storm would head out to sea?  Or October 24, 2012, when three of the storm models predicted that the storm would hit the East Coast around the Delaware-Maryland-Virginia peninsula and the rest predicted that the storm would head out to sea?  This determination would be critical if the business had been destroyed by Hurricane Sandy.
  • In a divorce, if the spouse’s business was declining, static, or growing slowly as of the valuation date, but three months later landed a large lucrative contract, should the impact of that contract be included in the valuation? In this case, several factors would determine whether it was known or knowable as of the valuation date that the contract would be awarded. For example, if the contract was awarded based on a Request for Proposal that was sent out by the customer ten days after the valuation date and this was the first time that the spouse’s business had ever submitted a bid to this customer, it would tend to point to the award not having been known or knowable as of the valuation date.  Alternatively, if the Request for Proposal and proposal had been submitted several months before the valuation date, if the spouse’s business had been selected as one of two finalists before the valuation date, and if the spouse’s business had previously won one or more contracts from this customer, it could be reasonable to assume that as of the valuation date it was known or knowable that the spouse’s business was likely to win the contract.

These are just examples, of course. The forensic accounting professional acting as the business valuator in such situations must consider all the specific facts surrounding the valuation date to determine whether a critical post-valuation date event was known or knowable as of the valuation date.

If you need a business valuation professional in Philadelphia, or if you require any other services of a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting, and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner, and a Certified Valuation Analyst.