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Fake Vendors Can Steal Real Money from Your Business

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.

A relatively successful and difficult to uncover scheme used by deceptive employees to steal money on the job is creating phony vendors. These non-existent suppliers receive payments for services never rendered or goods never delivered.  There are, however, fraud deterrence steps organizations can take to help find these fictional foes of your business.

“It really is a popular tactic among fraudsters,” 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.  “It’s not easy to root out phony vendors, but there are things you can do to help identify them.  Ultimately, you might need to seek professional help to make sure all your vendors really are legitimate.”

Anderson said it helps your efforts in finding out if you are paying phony vendors if you understand how an employee goes about building this house of cards in the first place.

The first thing a fraudster must do is establish a vendor name, either by creating a new one that has not been entered the accounting system or by using an existing vendor already in the system but for whom there has been no activity for a year or more.  Anderson said savvy fraudsters will invent service or supply vendors because it is more difficult to determine whether the services were performed and because supplies are sometimes expensed and not tracked in a company

Next up, the fraudster sets up a bank account in the name of the phony company, Anderson said.  Because banks require proof that a company exists, fraudsters often use their own home address and phone number or a post office box in their town.  Finally, the fraudster creates and submits invoices from the phony vendor, arranges for the company to pay the invoices, receives and deposits the company’s checks, and withdraws the funds for personal use.

“There are two things you can do to see whether any of your vendors might be bogus,” said Anderson, a Certified Fraud Examiner who encourages companies, non-profits and government offices to enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  “These procedures are not foolproof, but they will uncover most phony vendors.”

First, Anderson said, run a vendor activity report for the past three or four years and identify both new vendors with less than a year of activity, as well as vendors with a gap in activity (for example, a vendor your organization stopped using in 2012 then again started paying in 2014).

Vendors who fit these criteria should be contacted to verify their validity, but the contact should be made by a manager who is not in the accounting department or in the department that purchased from these vendors, or by an independent third party such as a firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

Anderson said the second procedure is to analyze three pieces of vendor information against the same three pieces of employee information:  mailing addresses, phone numbers for both landlines and mobile phones, and for vendors with post office box addresses, zip codes.  In large cities, you also will need to look at the location of the post office box.

If an employee used a home address or phone number on the bank account for the bogus company or on the invoice from the phony company, the accounting system will show a match.

Post office box matches often warrant further analysis.  A payment that goes to a bank-owned post office box usually gets sent to the business center in larger cities.  If you find that the post office box is in a small town or in a non-business section of a large city, you will want to investigate further.

“This step in a fraud investigation can take a lot of time if it is performed manually,” said Anderson, who uses special data analysis software to significantly reduce the time it takes to match addresses, phone numbers or zip codes.

If you already suspect your organization is paying invoices to phony vendors, it is likely in the best interest of your company, non-profit or government office to hire a Certified Fraud Examiner to conduct a comprehensive fraud investigation.

“Don’t wait until you have paid out thousands and thousands of dollars to non-existent vendors,” Anderson said.  “Take the time to make sure every vendor in your system really is a vendor.”

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 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.

An Unprofitable Business Still Can Have Value

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.

Uncovering value in an unprofitable business might seem to make as much sense as wringing water out of a rock, but – by putting forensic accounting principles to work – a knowledgeable business valuation expert can do just that.

“Business valuators look to three primary methods for valuing a business: The Income Method, the Market Method, and the Asset Method. Most primarily rely on the Income Method because a ‘hypothetical’ buyer is looking for value from the profits and cash flows of a business,” said David Anderson, a Certified Valuation Analyst and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley.  “It then stands to reason that if a business isn’t making a profit, it would not be of any value to a potential buyer. That, however, is not necessarily true.”

How can this be?  There are several scenarios under which an unprofitable business can have value.

The first is a startup business.  Typically, the costs of starting up a business and ramping up its sales can take several years, according to information provided by David Anderson & Associates, a business valuation expert providing forensic accounting services in Philadelphia. During this time period, the business usually operates at a loss.  However, because of the future earnings potential, investors are willing to give a business value based upon this potential.  Case in point, as described by the Philadelphia forensic accounting firm David Anderson & Associates, is Square – the financial services, merchant services aggregator, and mobile payment company based in San Francisco, CA.  Founded in 2009, Square has yet to show a profit, but this hasn’t stopped investors from putting hundreds of millions of dollars into the company.  Today, it is publicly traded with a market cap of over $30 billion.

A second example, similar to startup businesses, are those that are in bankruptcy.  Such companies typically have been unable to produce sufficient profits to cover operating costs and debt service (the cost of repaying debt with interest).  Through the bankruptcy process, these companies are able to shed their debt.  That makes them attractive to potential investors who are focusing on the potential future profitability of the debt-free company.  In an example provided by business valuation expert in Philadelphia David Anderson, a Certified Valuation Analyst, iHeart Media (previously known as Clear Channel Communications) filed for bankruptcy last year.  In January, the bankruptcy court approved a reorganization plan to reduce its debt from more than $16 billion to less than $6 billion.  This past week, the company filed an S-1 Registration statement with the Securities & Exchange Commission (SEC) which could result in an IPO in the near future.

A third type of unprofitable business that can have value is one that has assets whose value exceeds the liabilities and debts of the business.  In this case, notes David Anderson & Associates, a business valuation expert in Philadelphia that also serves as a Philadelphia forensic accounting firm, a potential purchaser is less concerned with the profitability of the business it is acquiring because it is focusing primarily on the assets of the business, and the value of incorporating those assets into the purchaser’s business.  Case in point – Sun Pharma, the largest pharmaceutical company in India, has pursued a strategy of buying unprofitable drug makers and merging their operations into its own.  In fact, says David Anderson, a Certified Valuation Analyst offering forensic accounting services in Philadelphia, Sun Pharma has made 10 such acquisitions totaling several billion dollars over the past 15 years.

Unprofitable businesses can have value to the “hypothetical” and real buyer, concludes David Anderson, a business valuation expert in Philadelphia. In each of these scenarios, the purchaser sees the potential for value in the future operations of the business.

If you require the services of a Certified Valuation Analyst, or business valuation expert 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, 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, a Certified Valuation Analyst, and a business valuation expert in Philadelphia.

Technology Startup Fraud – Part Two

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 last week’s blog, I discussed the threat of technology startup fraud and how it occurs.  Additionally, I introduced Theranos and Mozido as two recent examples of technology startup fraud.  This week, I’ll discuss some red flags that could point to technology startup fraud.

The following common issues/red flags pervade these types of frauds:

  • Charismatic but narcissistic personality of the founder – The technology startup is led by a smart, charming person with natural sales ability and a compelling backstory (Elizabeth Holmes founded Theranos at age 19, and dropped out of Stanford to pursue her dream; Michael Liberty of Mozido grew up poor, and was essentially abandoned by his parents at an early age), but that person spends the whole time talking about how great he/she is and how much he/she has accomplished instead of providing specifics of how the technology works. Additionally, when their veracity is challenged, the person turns to bullying (Theranos went after the Wall Street Journal and Tyler Shultz).
  • The company surrounds itself with well-known personalities who possess little, if any, relevant technical expertise – Theranos’s Board of Directors included such well-known names as George Shultz (former US Secretary of State), Henry Kissinger (former US Secretary of State), William Perry (former US Secretary of Defense), James Mattis (General, USMC and future US Secretary of Defense), and Sam Nunn (former US Senator). The Board had been criticized for consisting mainly of directors with diplomatic or military backgrounds.  Mozido’s Board of Directors featured Randi Zuckerberg (Mark Zuckerberg’s sister), the former CEOs of Priceline, First Data, Interpublic. and MasterCard, and, Shaukat Aziz (former Pakistani prime minister who, Mozido later admitted, never actually joined the Board).  Furthermore, in 2014, Mozido hosted a huge charity event that featured such speakers as James Mattis and Vincente Fox (former Mexican president).
  • The company releases little, if any, detailed information about its finances and/or its technical developments – Theranos had to scrap a multi-million advertising campaign after it couldn’t even provide its own ad agency with adequate proof of its claims. Mozido claimed to have signed more than 20 sales deals in July 2016 and to have brought in more than $100 million in revenues between August 2015 and August 2016 but declined to name any of the companies with whom it made sales deals or to provide documentation of its revenue claims. Furthermore, Mozido touted that its customers had approximately 1.5 billion people who could use its mobile payment app but couldn’t say how many used it.  Additionally, neither Mozido or Theranos released detailed financials, leaving it up to the financial press to “guess” as to the companies’ values based upon announced capital raises.
  • The company resorts to “alternative” methods to show the success of its products – Theranos, instead of using its own machines for blood testing, arranged to have blood samples flown to its headquarters by FedEx and tested the blood on machines it purchased from Siemens (all the while claiming that the blood tests were performed onsite using its own machines). Hampton Creek, a vegan-food company that touted itself like a tech company, had its employees and contractors covertly purchase its products from grocery stores in order to boost sales (although the company claimed that the purchases were for quality control testing).  Zenefits, a human resources software startup, created an in-house computer program to help its employees cheat on mandatory compliance training.
  • The company raises huge amounts of capital and spends too lavishly – Mozido raised over $300 million in 2014 and spent it on such things as the charity event and the costly purchase of other technology companies. Yet by 2016, Mozido was missing payroll dates, had stretched out payments to vendors and failed to pay 2015 end-of-year bonuses to its employees (Michael Liberty was accused of diverting funds for his personal use). Skully, maker of a “smart” motorcycle helmet, closed its doors after it was discovered that the founders had diverted funds for personal use instead of for business operations.

Information on fighting and preventing fraud 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.

Technology Startup 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.

Venture capitalists and other investors always are on the lookout for the next hot technology startup, hoping for huge profits from initial investments in companies such as Google, Facebook, Uber, Airbnb, and Lyft.  But they know that for every successful technology startup, they will have potentially invested in a dozen or more startups that fail.

Since everyone is watching for the technology startup that will “hit a home run,” these investors are willing to throw significant money into technology startups that promise to “shake up the industry” with a significant “paradigm shift.” It therefore shouldn’t be surprising that fraud has found its way into technology startups.  I will be discussing various aspects of technology startup fraud over the next two weeks.

Let’s start with Theranos. Founded in 2003 by then 19-year-old Elizabeth Holmes, Theranos was touted as a breakthrough technology company that claimed to have devised a blood test that only needed very small amounts of blood. Theranos raised more than $700 million from venture capitalists and other investors, reaching an estimated value of $10 billion between 2013 and 2014. Theranos persuaded Safeway, Walgreens, GlaxoSmithKline, Pfizer, the Cleveland Clinic, Capital BlueCross, and AmeriHealth Caritas to partner with it in various ventures between 2012 and 2015. Theranos was also awarded the 2015 Bioscience Company of the Year by AzBio.

However, in October 2015, The Wall Street Journal reported that Theranos was using traditional blood testing machines to run its tests instead of the company’s own machines, and that the company’s machines could provide inaccurate results.  This article prompted increased scrutiny and investigation from various Federal and state agencies over the next three years.  By September 2018, Holmes and the company’s former president had been indicted on multiple counts of fraud, and Theranos had become worthless – a loss of approximately $700 million.

Mozido is similar case.  Founded by Michael Liberty in 2004, Mozido and its predecessor companies claimed to offer a mobile payment application that could be used with any mobile phone ever made. These claims allowed Mozido to raise over $300 million from venture capitalists and other investors, reaching an estimated value of over $5.5 billion in 2015.

As with Theranos, Mozido was done in by a media report – in this case, an August 2016 article in Forbes which questioned Mozido’s technology and suggested that significant amounts of investment capital appeared to have been diverted for Michael Liberty’s personal use.  Last month, Michael Liberty was indicted for defrauding investors.

So, what are the characteristics of technology startup fraud?  Let’s turn to the Fraud Triangle as described by the Association of Certified Fraud Examiners (ACFE).  As you may recall from my past blogs, the Fraud Triangle consists of three “sides” – Pressure, Opportunity, and Rationalization – all of which must be present in order to facilitate fraud.

Pressure for technology startups comes from venture capitalists and investors who demand hyper-growth and immediate value.  Additionally, once a startup’s proposition (such as innovative blood testing or a mobile payment app that works seamlessly across multiple mobile phones) becomes attractive, competitors begin to occupy the same space.  This, in turn, creates a race to become the first to actually introduce its product to the marketplace.  The race quickly burns up funding, placing increased pressure on the startup to raise more money.

Opportunity arises from the ability to self-report and promote progress and to issue unaudited financial statements not subject to oversight or verification.  Additionally, startups which can raise large amounts from venture capitalists and other investors are able to stay private longer, and therefore delay transparency.  Finally, the media can become complicit when hot companies provide only self-reported scraps of information which form the basis for further “hype.”

Rationalization comes from founders and entrepreneurs, who are taught they should change the world, move fast and “break things.” This makes them think they should be able to take shortcuts and ignore the rules.  Indeed, a common belief by such fraudsters is “fake it until you make it.”

Next week’s blog will discuss the specifics of how Theranos, Mozido, and others technology startups were able to perpetrate their frauds as well as pointing out some red flags that could indicate a potential technology startup fraud.

Information on fighting and preventing fraud 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.

Adjusting Executive Compensation in Business Valuations

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.

Establishing the fair value of a business requires a business valuation expert to adjust the revenues and expenses of the business to reflect “normal” operations.  Non-recurring and unusual expenses and revenues are eliminated, and recurring expenses and revenues are adjusted to reflect amounts that would be incurred if the owners were “hypothetical” independent investors in the business.

According to David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides business valuation services in Philadelphia and the Delaware Valley, these “normalization” adjustments are not made because the business valuation expert believes anything is wrong with the revenues or expenses but rather that the hypothetical independent investor would not expect the pre-adjusted level of revenues or expenses to occur under his/her stewardship.

One important area for “normalizing” expenses is executive compensation. When business valuation experts analyze executive compensation for potential “normalization” adjustments, they ignore the fact that an executive’s current compensation level may have been adjusted to make up for past underpayments of compensation or that the executive’s current compensation is based on the executive’s past unique or superior contributions to the success of the business.

Instead, business valuation experts generally consider three main issues that can affect the adjustment of executive compensation in business valuations:

  • The actual duties and responsibilities of the executive versus the executive’s title;
  • The amount of time the executive devotes to the business;
  • The executive’s compensation (including base salary, bonuses and other cash compensation, non-cash compensation and fringe benefits) versus the “normal” compensation for such a position.

“When it comes to executive titles,” Anderson said, “I find that some executives hold the title of a much higher position than a title that more closely corresponds to their actual duties, especially in closely held or family businesses.

“In one family-owned business, a Vice President told me his only responsibilities consisted of (1) reading The Wall Street Journal and certain publications to keep current on issues affecting the company’s industry, and (2) entertaining select customers  at golf outings or lunches and dinners,”  said Anderson, a forensic accounting expert in Philadelphia who also is a Certified Valuation Analyst.

“In another business, the CEO position was occupied by a figurehead father who only occasionally even visited the business, and whose duties were primarily to “schmooze” with certain long-time customers,” Anderson said.  “Meanwhile, his son, a Vice President, was responsible for long-term business strategy and planning, as well as for running the daily operations of the business.  In all these instances, I adjusted the position title of the executive to match that of the actual duties and responsibilities.”

The amount of time an executive devotes to the business also is a key element in adjusting executive compensation for a business valuation, explained Anderson, a business valuation expert in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.

“I had one executive who served as CEO for three separate businesses that had a common ownership,” said Anderson, a Certified Valuation Analyst and forensic accounting expert in Philadelphia.  “In valuing each of the three businesses, I extensively interviewed the CEO to determine how much of his time was spent with each business.  Based on this, I divided the CEO’s time ratably between the three businesses, even though the CEO’s salary was paid by only one of the three businesses.”

Once the valuator determines each executive’s appropriate position title and percentage of time devoted to the business, the next step is to calculate a “normal” total compensation for each executive, according to Anderson. Three of the widely accepted databases used by valuators for this task are the Bureau of Labor Statistics National Compensation Survey (from the U. S. Department of Labor), Risk Management Associates, and ERI (Economic Research Institute), which are used to collect information about:

  • Position title, duties and responsibilities
  • Industry
  • Geographic location
  • Company sales
  • Database percentile

Database percentile shows the range of actual compensation data (from 1% to 99%) for the combination of the other factors, explained Anderson, whose company specializes in business valuation services in Philadelphia and the Delaware Valley.  Many valuators compare the company’s performance against similar companies in its industry to determine where the company ranks within the 1 percent to 99 percent range, and apply that same percentile to the executive compensation, Anderson said.  The valuator then adjusts the database-determined compensation for the percentage of time that the executive devotes to the company, he added.

Anderson, a business valuation expert in Philadelphia with expertise in a full range of forensic accounting services in Philadelphia and the Delaware Valley, said the final step in determining the “normalization” adjustment is to compare the calculated compensation for each executive with the actual compensation.  The difference between the two becomes the amount of the “normalization” adjustment.

This adjustment is particularly important when an executive’s actual compensation is much more than or much less than the calculated compensation, said Anderson, for example, when the key executive in a privately held business takes no compensation when the company’s sales are down significantly.

By “normalizing” the executive compensation, the business valuator can more closely reflect the executive compensation that would be paid to the executives by a hypothetical independent investor, said Anderson, an expert in business valuation services in Philadelphia.

If you need a business valuation expert 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.  Anderson also has served as a divorce accountant and marital dissolution accountant in Philadelphia and the Delaware Valley.

Update on Fraud Risks of Cryptocurrencies

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 his October 23, 2017 blog, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed the fraud risks associated with Bitcoin and other cryptocurrencies. Last September, the European Union Agency for Law Enforcement Cooperation (“EUROPOL”) issued its annual report on cyber fraud. The EUROPOL report particularly noted the rise in frauds associated with cryptocurrencies. Anderson will discuss some of the key findings of this report in this week’s blog.

Specifically, the EUROPOL report stated that “A consequence of Bitcoin and other cryptocurrencies becoming more mainstream and a recent spike in value, is that cryptocurrency users and facilitators are subjected to the same attacks aimed at users of traditional financial instruments – attackers now phish for victim’s login credentials for their online exchanger accounts, information stealing malware also hunts for victim’s electronic wallets and private keys, and entities holding stocks of cryptocurrencies, such as exchangers, have become the target for hackers.”

As Anderson noted in the October 2017 blog noted above, these risks are increasing because transactions involving Bitcoin and other cryptocurrencies are anonymous and leave no digital footprint, so once a hacker or other attacker gains access to a victim’s login credentials or the victim’s electronic wallet and private keys, the theft of their cryptocurrency is virtually untraceable.

Furthermore, the EUROPOL report noted that due to significant fluctuations in value over the past three years (Bitcoin, for example, rose from less than $500 in March 2016 to over $13,000 in December 2017, and has since fallen to around $4,000), hedge funds and other investment vehicles are increasingly investing in cryptocurrencies.  This has helped increase investor demand for cryptocurrencies.

The EUROPOL report also noted that the lack of traceability has made cryptocurrencies attractive for money laundering.  This in turn, increases the risk that those who accept payment in cryptocurrencies could be deemed as helping to facilitate criminal activity.

The EUROPOL report concluded that the use of Bitcoin and other cryptocurrencies will continue to increase in the future as will the fraud risks associated with their use.

If you want to learn more about cryptocurrency fraud, advice and assistance 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.

Fighting Elder Fraud – Part Three

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 the last two week’s blogs, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed the top six frauds perpetrated against the elderly (as reported by the United States Senate Special Committee on Aging), and offered tips for helping seniors to avoid such frauds.  In this week’s blog, he discusses the final four entries (numbers seven, eight, nine, and 10) in the top ten most frequent frauds targeting seniors.

The seventh-most-frequent fraud is the Romance Scam. Under the Romance Scam, the scammer uses dating sites, chat rooms, social media, and even e-mail to target their victims.  More women than men fall victim to this type of scam.  The scammer claims to live in either a different part of the United States or abroad.

In one variation of this scam, the scammer claims to be an active duty member of the armed forces and may even copy information from real service members as part of their scam. As the victim and the scammer exchange correspondence/texts/posts/etc., the scammer tells the victim that he/she is falling in love with the victim and wants to meet and even marry. The scammer may even speak on the phone with the victim to reinforce the romance.

Alas, the scammer encounters a problem and needs monetary help from the victim (a medical or legal emergency; problems with visas or passports, etc.).  The scammer feigns embarrassment at asking for this help and promises to never ask again.  However, a short time later the scammer needs more financial help.

In another variation of this scam, the scammer sends a check to the victim, asks him/her to cash it and forward the proceeds back to the scammer (this usually involves money laundering), or asks the victim to deposit the check and forward the funds to the scammer (eventually costing the victim when the check later bounces).

Seniors should be advised to be wary of anyone who claims to be in love without having met them in person.  Furthermore, seniors should be advised to speak with a knowledgeable family member or friend before sending money to an unseen person.

The eighth-most-frequent fraud perpetrated against the elderly is Elder Financial Abuse.  Unlike the other frauds on this list, this fraud primarily is perpetrated by family members or friends of the victim.  Frequently, family members or guardians will obtain control (either legally or emotionally) of a senior’s assets and income because the senior is no longer able to manage the assets or income.

While most family members or guardians generally will use this control in an honest manner, some will use this as an opportunity to defraud the elderly person (and, by extension, the other beneficiaries of the elderly person’s estate).  In 2018, Gloria Byars, a court-appointed guardian for more than 100 elderly people in the Philadelphia area was removed from these guardianships due to her past convictions for fraud as well as other claims of financial exploitation of other elderly clients.

Often, other family members will not become aware of this fraud until after the elderly person has died or suffered from a catastrophic event.  A variation of this fraud involves care givers (such as home health aides, nursing home staff, etc.) who gain access to a victim’s checkbook.  Another variant has recently been reported in the Philadelphia newspapers involving people who fraudulently transfer ownership of an elderly person’s house.

Also, unlike the other frauds on this list, avoiding this fraud cannot be taught to the victim.  Instead it is the family and friends of the victim who must be vigilant and insist on accountability from the person or persons given power of attorney or other control of the senior’s assets and income.

The ninth-most-frequent fraud is Identity Theft.  In addition to the ways discussed above and in the two previous blogs of how an elderly person’s financial information can be fraudulently obtained, care givers can also gain access to the senior’s wallet/purse and its financial information.  One variation of this fraud involves the victim receiving a call from a scammer claiming to be from one of the credit reporting bureaus.  The scammer claims that he/she needs to verify certain financial information in order to update the victim’s credit records.

Along with my recommendations regarding other frauds that seek to obtain a senior’s personal financial information, seniors should consider some type of credit reporting protection or monitoring (for example, www.freecreditreport.com ).  Additionally, seniors should be encouraged to scrutinize their monthly credit card and bank statements for unusual and/or unauthorized activity.  On additional protection can be requesting that each of the three major credit reporting services place a fraud freeze on the senior’s records.

The 10th-most-frequent fraud is the Government Grant Scam.  In this fraud, a scammer calls the victim claiming to be from the non-existent Federal Grants Administration or Federal Grants Department.  The scammer claims the victim has been awarded a free government grant.  Interestingly, on the same day that I wrote this blog, I received a robocall informing me that I had been awarded a $15,000 government grant.  As with the Sweepstakes Scam, the victim merely must pay a small administrative fee (usually $250 to $1,000) for the grant to be processed.  Again, after receiving the payment, the scammer will call the victim back, apologizing but stating that there are additional fees/costs which must be paid before the funds can be released to the victim.

Seniors need to be educated that government grants are not given to individuals, and that they should never pay a fee to someone requesting such.

If you suspect an elderly family member may be the victim of elder financial abuse by a relative, friend, guardian or caregiver or if you’d like to learn more about these types of fraud, advice and assistance 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.

Fighting Elder Fraud – Part Two

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 last week’s blog, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed the top three frauds perpetrated against the elderly (as reported by the United States Senate Special Committee on Aging), and offered tips for helping seniors to avoid such frauds.  This week, he will discuss the next three most frequent frauds perpetrated against the elderly and next week he will address the remaining four most frequent frauds targeting seniors.

The fourth-most-frequent fraud perpetrated against seniors is known as either the “Are You There?” Or “Can You Hear Me?” Fraud.  This relatively new fraud involves the caller asking the answerer either of those two questions in order to get the answerer to say “Yes.” Another variation involves the caller asking for “Bob” or “Cindy”, and upon being told that the such a person is not at this number asks for the answerer’s name. The caller than says, “Did you say that this is (name of answerer)?”, hoping to elicit the “Yes”.

By answering “Yes”, the senior now has provided the caller with a voice print.  Scammers then use the voice print for making unwanted charges to utility bills, phone bills and/or credit cards.  Another variation of this fraud is used to ascertain that a live person is answering the phone, and upon the person saying “Yes”, he/she is transferred to a live telemarketer or scammer.

To help seniors avoid this type of fraud, they should be advised to get caller ID, and not answer any calls from numbers they don’t know.  As with Anderson’s recommendations regarding robocalls, they should also consider getting a robocall blocking service such as Nomorobo or Robokiller.

The fifth-most-frequent fraud perpetrated against the elderly is known as the Grandparent Scam.  The caller pretends to be a family member, usually a grandchild, who has an urgent need for money to cover an emergency, medical care or a legal problem.  The scammer may speak in a quieter voice (or speak away from the receiver) in order to make it hard for the victim to be sure of the caller’s voice.

In a variation of this scam, the caller claims to be a police officer or lawyer calling to tell the grandparent that their grandchild has been arrested and needs money to immediately post bail or else be held overnight in jail. In another variation, the “grandchild” states that he/she has been arrested for drug possession and asks the grandparent to not tell his/her parents.  As with the IRS Impersonation scam, the caller relies upon the fear of the call recipient that something has to be done immediately.

Also, as with the IRS Impersonation scam, the grandparent is told to immediately purchase some type of prepaid card – either a prepaid VISA/Mastercard or gift card.  After purchasing the prepaid card, the senior is told to immediately call back and provide the card’s information to the caller.

To help avoid this type of elder fraud, the senior should be advised to take down the information and phone number provided, and then immediately call a knowledgeable family member to ascertain if this is actually the case.  Seniors should also be advised to never give out credit card information over the phone.

The sixth-most-frequent fraud perpetrated against seniors is the Computer Tech Support Fraud.  Although this scam most frequently occurs online (a warning pops up when the user is on particular websites, informs the user that their computer has become infected with a virus, and advises them to either click on a link to fix their computer or to call a number for help), it also occurs via phone (a call informing you that the scammer is from Microsoft or Apple and that your computer or other device has been compromised).

The scammer asks the victim for permission to take control of his/her computer and informs the victim that they will fix the problem for a fee.  Depending upon the type of scam, one of three things happens here.

  • Under Scam Type One, the scammer charges an exorbitant fee and after a few minutes proclaims that the problem has been fixed.
  • Under Scam Type Two, the scammer does the same thing as under Scam Type One, but also searches the victim’s computer for personal financial information which can be used to: steal funds; make fraudulent charges to credit cards; or open new credit cards in the victim’s name.
  • Under Scam Type Three, the scammer claims the victim’s computer has been hijacked by a third party and informs the victim that the only way to get control of the computer back is to pay a “ransom” to this third party.

If the scammer successfully obtains payments from the victim, the scammer may call back at a later date and inform the victim that he/she was accidentally overcharged and is eligible for a refund, but the refund can only be paid via direct wire to the victim’s bank account.  If the scammer can get access to the victim’s bank account, he/she can then drain the account. As with the IRS Impersonation and Grandparent scams, the Computer Tech Support fraud relies upon the elderly person’s fear that immediate action must be taken.

As with other frauds, the senior needs to be educated about this kind of fraud.  He/she should be told that Microsoft, Apple, and other tech companies will not call them about computer problems.  Furthermore, he/she should be advised that if a warning pops up on his/her computer, the senior should immediately call an informed family member or friend, or at least shut down his/her computer until such a person can be consulted.

Assistance in this area 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.

Fighting Elder Fraud – Part One

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.