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Latest ACFE Study Reveals the State of Fraud in 2022 – 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.

This blog continues my discussion of the Association of Certified Fraud Examiners (ACFE) “Occupational Fraud 2022 – A Report to the Nations.” This week, I discuss the various controls that companies and organizations put in place to prevent fraud, and how effective these controls are:

  • The 2022 Report identified 18 specific anti-fraud controls and noted all 18 were associated with lower fraud losses and quicker detection of the frauds.
  • The most common anti-fraud controls employed by companies and organizations were:
    • Having an external audit of the companies’ and organizations’ financial statements (present in 82 percent of the companies and organizations)
    • Putting in place a code of conduct (present in 82 percent of the companies and organizations)
    • Having an active internal audit department (present in 77 percent of the companies and organizations)
    • Having management certification of the companies’ and organizations’ financial statements (present in 74 percent of the companies and organizations)
    • Having an external audit of the internal controls over the companies’ and organizations’ financial reporting (present in 71 percent of the companies and organizations)
    • Having a confidential tip reporting hotline (present in 70 percent of the companies and organizations)
    • Regular management review of financial reporting (present in 69 percent of the companies and organizations)
    • Having an independent audit committee (present in 67 percent of the companies and organizations)
    • Providing fraud training for employees (present in 61 percent of companies and organizations)
  • The effectiveness of these most common controls (for the seven most effective controls) was:
    • Job rotation and mandatory vacations reduced the median loss by 54 percent and the duration of the fraud by 50 percent
    • Having a confidential tip reporting hotline reduced the median loss by 50 percent and the duration of the fraud by 33 percent
    • Having surprise audits reduced the median loss by 50 percent and the duration of the fraud by 50 percent
    • Performing proactive data monitoring and analysis reduced the median loss by 47 percent and the duration of the fraud by 56 percent
    • Having an anti-fraud policy in place reduced the median loss by 45 percent and the duration of the fraud by 33 percent
    • Providing fraud training for employees reduced the median loss by 45 percent and the duration of the fraud by 33 percent
    • Conducting formal fraud risk assessments performed by outside parties reduced the median loss by 45 percent and the duration of the fraud by 44 percent.
  • It is interesting to note that of the seven most effective anti-fraud controls, only two (a tip hotline and fraud training for employees) were among the most frequently used controls. This points to somewhat of a disconnect from what company executives believe are the most effective controls and those that are effective.
  • Over the past 12 years, four anti-fraud controls have seen significant increases in use:
    • Use of tip hotlines – an increase of 19 percent
    • Implementing an anti-fraud policy – an increase of 17 percent.
    • Providing fraud training for employees – an increase of 17 percent
    • Providing fraud training for managers and executives – an increase of 15 percent
  • Other anti-fraud controls used less frequently by companies and organizations included:
    • Creating employee support programs (especially for those suffering from addictions/dependencies or experiencing depression)
    • Creating a dedicated fraud department, function, or team
    • Providing rewards for whistleblowers

My next blog article will discuss corruption and its impact on companies and organizations.

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.

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.

Latest ACFE Study Reveals the State of Fraud in 2022 – 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.

This blog continues my discussion of the Association of Certified Fraud Examiners (ACFE) “Occupational Fraud 2022 – A Report to the Nations.” This week, I discuss how frauds are detected and the characteristics of the people who commit fraud:

  • Most people believe having a financial audit will detect fraud. However, the 2022 Report, as with the 2020 Report found that only 4 percent of all frauds were detected by external auditors.  The percentage of frauds detected by accident remained at 5 percent – higher than the audit rate.
  • The most frequent method by which frauds were detected came from tips – the 2022 Report found that 42 percent of all frauds were detected from tips. Employees were the source of 55 percent of all tips, followed by customers (18 percent), anonymous tips (16 percent) and vendors (10 percent).  The employee percentage was up from the 50 percent rate in the 2020 report.  This possibly means that more employees are willing to report fraud than in the past.
  • Internal auditors detected 16 percent of all frauds.
  • Management review detected 12 percent of all frauds.
  • The 2022 Report found that, although owners and executives committed only 23 percent of all frauds, the median loss from such frauds was $337,000 (down from $600,000 in 2020). Managers committed 39 percent of all frauds with a median loss of $125,000 (down from $150,000 in 2020), and lower-level employees committed 37 percent of all frauds with a median loss of $50,000 (down from $60,000 in 2020).
  • Tenure with the organization correlated with the amount of fraud loss. The median fraud loss from employees with 5 years or less tenure remained at $100,000.  This grew to $137,000 (down from $190,000 in 2020) for employees with 6 to 10 years tenure, and to $250,000 (up from $200,000 in 2020) for employees with more than 10 years tenure.
  • Men were responsible for 73 percent of all frauds with a median loss of $125,000 (down from $150,000 in 2020). Women were responsible for 27 percent of all frauds with a median loss of $100,000 (up from $85,000 in 2020).  The lower loss level is most likely due to the lower number of women in senior positions.  However, the spread appears to be narrowing as more women move into senior positions.
  • The perpetrator’s age followed a bell curve with 68 percent of all frauds committed by persons between the ages of 30 and 50. The median loss correlated directly with the perpetrator’s age in that the older the person, the higher the median loss.  This is most likely because the older the person, the higher up they are likely to be in the business or organization.
  • 87 percent of all perpetrators had no criminal background.
  • 85 percent of perpetrators displayed at least one behavioral red flag. These included:
    • Living beyond their means
    • Having known financial difficulties
    • Having an unusually close relationship with a customer or vendor
    • Having control issues, including an unwillingness to share duties
    • Known for bullying or intimidation
    • Experiencing divorce or other known family problems
    • Having a “Wheeler-Dealer” attitude
    • Displaying frequent irritability, suspiciousness, or defensiveness
    • Having known addiction problems (drugs, gambling, alcohol, etc.)
    • Frequent complaining about inadequate pay

Given the financial difficulties (loss of wages, furloughs, medical costs, loss of other income, inflation, etc.) that many people continue to face due to the COVID-19 virus, it is likely that the incidence of red flags will continue to increase over the next two years.

My next blog article will discuss the various anti-fraud controls that businesses/organizations employee, and the effectiveness of each of the controls.

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.

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.

Latest ACFE Study Reveals the State of Fraud in 2022 – 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.

Every two years, the Association of Certified Fraud Examiners (ACFE) commissions a survey of fraud in the United States and abroad. The ACFE just released its 2022 study entitled “Occupational Fraud 2022 – A Report to the Nations.”

Over the next several weeks, I will discuss some of the key findings from the 2022 report. Up first, here are some general observations regarding fraud:

  • The ACFE study estimates that the typical business/organization (including non-profit organizations) is losing about 5 percent of revenue each year to fraud.
  • The median loss from fraud is $117,000. This is down 6 percent from the $125,000 median loss identified in the 2020 Report and down 10 percent from the $130,000 median loss identified in the 2018 Report.
  • Twenty-five percent of all frauds result in a loss of over $600,000.
  • The median duration of reported frauds is 12 months, down 14 percent from the median duration of frauds identified in the 2020 Report and down 25 percent from the 2018 Report duration of 16 months.
  • Overall, the 10-year trend shows that frauds are being caught faster and therefore resulting in a smaller overall median loss.
  • Smaller businesses (those with fewer than 100 employees) experienced the highest median loss at $150,000.
  • Asset misappropriation schemes (frauds involving the theft of cash, inventory, supplies, equipment, or other company assets) remained the most common scheme, remaining at 86 percent of all fraud schemes (versus 89 percent in the 2018 Report). Median asset misappropriation losses remained at $100,000 (versus $114,000 in the 2018 Report).
  • Financial statement fraud remains the least common scheme at 9 percent (versus 10 percent in the 2020 Report), but results in the highest losses – $593,000 – down 38 percent from the $954,000 per fraud in the 2020 Report.
  • Internal control weaknesses, including inadequate separation of duties, were responsible for nearly 49 percent of all frauds reported in the 2022 Report (up a whopping 48 percent from the 33 percent shown in the 2020 Report).
  • Eight percent of frauds discussed in the 2022 Report involved cryptocurrency with 48 percent of those frauds involving bribes and/or kickbacks paid in cryptocurrency and 43 percent of those frauds involving misappropriated assets being converted to cryptocurrency.
  • Fifty-two percent of the frauds in the 2022 Report were affected in some way by COVID-19 related factors which resulted in changes in staffing, processes and/or controls.
  • The 2022 Report identified 18 different anti-fraud controls that companies had implemented (These will be discussed in greater detail in a later blog article). It found that every control implemented resulted in a reduction in both the duration and amount of fraud.

The next blog article in this series will discuss how frauds are detected and the characteristics of the people who commit fraud.

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.

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.

Can a Business with No Profits 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 makes sense 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. During that time, 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:  Bright Health Group, which owns and operates medical clinics as well as provides health care insurance, lost over $500 million in 2021. 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 $2 billion.

Similar to startup businesses are those 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 can shed their debt. That makes them attractive to potential investors who are focusing on the potential future profitability of the debt-free company. For example, last year, Luckin Coffee, a Chinese rival to Starbucks, filed for Chapter 15 bankruptcy in the U.S. Today, although it has not yet emerged from bankruptcy, it is still publicly traded with a market cap of over $3 billion.

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.

David Anderson Featured on Philadelphia ACFE Website

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

David Anderson, CPA, CFE, CVA has been featured for March 2022 in the “Member Spotlight” on the website of the Philadelphia Area Chapter of the Association of Certified Fraud Examiners (ACFE).

Click here to go to the ACFE home page. Scroll to the bottom and hit the “Read More” button to see Anderson’s interesting and informative question and answer exchange.

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

Formed in 1991, the Philadelphia Area Chapter of the Association of Certified Fraud Examiners is one of more than 190 worldwide chapters sponsored by the internationally renowned Association of Certified Fraud Examiners (ACFE). The primary mission of the ACFE is to reduce the incidence of fraud and white-collar crime and assist the membership in its detection and deterrence.

Currently, the Chapter has more than 300 members representing a broad range of professions, including accountants, auditors, investigators, federal and state law enforcement personnel, loss prevention specialists, attorneys, prosecutors, managers, executives, academicians, and anti-fraud consultants.

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, 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.

Always Remit Taxes You Collect in a Timely Manner

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

Almost every organization is responsible for collecting and remitting taxes. These taxes, which occur on the Federal, state, county, or local levels, can include payroll taxes – such as income tax, Social Security tax, Medicare tax, and unemployment tax – as well as sales taxes, excise taxes, fuel taxes, and others.

“These taxes belong to the governmental taxing authorities,” said Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates, “and should not be used by the business at any time for any reason.”

He explained these tax types often are referred to as “trust fund taxes,” evoking the concept that the organization is holding the tax monies “in trust” for the government because they have been withheld from taxpayers by the business.

Some organizations that are experiencing cash flow or financial difficulties have used these funds for financing operations, Anderson said, instead of remitting the funds in a timely manner to the governmental taxing authorities.

Their logic, he said, usually is that if they can’t continue to operate, then they will have to lay off employees – which would cost the taxing authorities both payroll taxes and unemployment payments – and they will lose sales – which, similarly, would cost the authorities sales taxes, excise taxes and fuel taxes.

However, taxing authorities believe the taxes become their property the minute the organization withholds them from employees or collects them from customers, said Anderson.

The failure to remit these collected taxes when they should be, he said, can result in penalties and interest being charged to the organization.  In addition, such failure can trigger trust fund penalties of up to 100 percent of the unpaid taxes, a practice commonly known as the “100 percent penalties.”

Under these penalties, Anderson said, not only is the organization responsible for the unpaid taxes, but also any person – termed by the law as “responsible persons” – who can effectively control the finances or determine which bills should or should not be paid and when.

Under the law, he said, the term responsible person is very broad and can include employees and shareholders/partners, as well as others outside of the formal organization – including, potentially, sureties and lenders.  Additionally, taxing authorities don’t have to wait to see if they will be paid by the organization; they can, Anderson said, go after the responsible person at any time.

As if the 100 percent penalties aren’t enough, the fraud deterrence professional said, taxing authorities also can pursue criminal fraud complaints if they view that the owners – or officers, in the case of non-profit organizations – have used the unpaid taxes to benefit themselves.  This includes compensation, fringe benefits, expenses paid on their behalf, distributions or dividends, loan repayments, and retirement plan contributions.

A failure to remit taxes collected on behalf of governmental taxing authorities in a proper and timely fashion, Anderson said, can have significant and dire consequences.  One way to avoid this issue in the case of payroll taxes is to employ a professional payroll service to withhold and pay such taxes.

In addition, many of these same companies offer similar services for sales, excise, and fuel taxes.  Organizations in financial need should consult their professional advisors and other financial companies – such as lenders, factors, floor plan providers, etc. – to find other ways to finance the operations of their organizations without resorting to the improper use of collected and withheld trust fund taxes.

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, 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.

Vigilance Can Stave Off These Common Payroll Fraud Schemes

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.

Payroll fraud, says forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, is one of the most common frauds perpetrated upon businesses and other organizations. This crime can take numerous forms, including:

  • Ghost Employees:In this scheme, the fraudster creates a non-existent employee in the payroll system. The fraudster then enters time for the non-existent employee, resulting in production of a paycheck. The fraudster intercepts the paycheck and either deposits it in an account under his/her control or has a confederate either cash the check or deposit it in an account under the confederate’s control.
  • Terminated Employees:In this scheme, the fraudster works with a terminated employee. The fraudster keeps the terminated employee on the books and enters time for the terminated employee, resulting in production of a paycheck. As with a ghost employee, the fraudster intercepts the paycheck and forwards it to the terminated employee.  The terminated employee either cashes the check or deposits it in an account under the terminated employee’s control (and shares the proceeds with the fraudster).
  • Fraudulent Hours:In this scheme, the fraudster enters a higher number of hours worked either for him/herself or for another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster.  This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Pay Rate:In this scheme, the fraudster adjusts either his/her pay rate or that of another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster. This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Bonus Pay:In this scheme, the fraudster either adds him/herself to the list of employees receiving a bonus; or adjusts his/her bonus amount; adds a confederate to the list of employees receiving a bonus; or adjusts the confederate’s bonus amount. If entered for a confederate, that person shares the increased proceeds with the fraudster. This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Expense Reimbursement:In this scheme (which applies to companies/organizations that reimburse employee business expenses through payroll), the fraudster enters a higher expense reimbursement amount either for him/herself or for another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster.
  • Fraudulent Vacation and/or Sick Leave Hours: In this scheme, the fraudster, who has control over tracking and/or reporting vacation and sick leave hours, takes vacation and/or sick leave, but either doesn’t record the hours taken against the available hours or artificially inflates the number of vacation and/or sick leave hours to which he/she is entitled.  A variant on this scheme has the fraudster doing the same for other employees in return for cash payoffs from the benefiting employee.
  • Fraudulent Diversion of Employee Pay: In this scheme, the fraudster, who has control over/access to payroll records, adds a new bank account (over which the fraudster has control) for an employee, artificially inflates the employee’s pay (via hours or pay rate changes), and diverts the excess pay to the new bank account.  The fraudster counts on the employee not tracking total annual pay (most employees only track their weekly/biweekly pay) and not noticing that the employee’s form W-2 wages are higher than the amount the employee received.

So, how can companies and organizations avoid being victimized by these payroll frauds?  They can take some or all the steps identified below:

  • Separate the hiring and human resources functions from the payroll function.
  • If this is not possible, ensure there is adequate separation of duties so different employees are responsible for different steps in the payroll process. For example, the employee who sets up other employees in the payroll system (including pay rates) should be different from the employee who enters employee time.
  • Require two levels of review and approval for timecards and pay sheets.
  • Maintain a list of terminated employees and periodically check the list against payroll data.
  • Require someone other than the employee’s supervisor to distribute paychecks.
  • Require either multiple signoffs for pay changes (especially for manager and executive salaries) and/or for approvals of vacation and sick pay.
  • Have either a higher-level manager or a third party, such as a forensic accountant, periodically review payroll, including pay rates, hours/time, and total payroll funding amounts.
  • Have either a higher-level manager or a third party, such as a forensic accountant, periodically review accrued and used vacation and sick hours.

Does your company need to enact stronger safeguards against payroll fraud? If so, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. You can do just that by contacting 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.

Tips to Help You Navigate the Cryptic World 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 my 2017 blog on cryptocurrency, I discussed the risks involved with Bitcoin and other cryptocurrencies.  At that time, only a few U.S. companies were accepting cryptocurrency as payment, and there were significant fraud and investment risks in cryptocurrency transactions.  In my 2019 update on the fraud risks of cryptocurrencies, I reiterated these risks along with the increased risks of hacking attacks against digital wallets, private keys, and exchanges.

In the past two plus years, cryptocurrencies have become more popular than ever.  In fact, as of today, cryptocurrency transactions are considered legal in most countries in the world (notable exceptions are Turkey, which banned cryptocurrency transactions in April 2021, and China which banned cryptocurrency transactions in September 2021).  Two countries – El Salvador (June 2021) and Cuba (August 2021) – recognize cryptocurrencies as legal tender, and this is expected to grow in 2022.

Additionally, the financial community is getting on board with cryptocurrencies.  In early 2021, Morgan Stanley announced that they were going to be offering to their wealthier customers funds which invested in cryptocurrencies.  BNY Mellon announced that it would provide custodial services for cryptocurrencies.

Additionally, Ally Bank, Chime Bank, Simple Banks, and USAA allow customers to purchase Bitcoin through their debit cards.  Goldman Sachs has opened a cryptocurrency trading desk.  In April 2021, Venmo added support for customers buying and selling cryptocurrencies.  In October 2021, Mastercard announced it will be building a platform to allow any bank or merchant to offer cryptocurrency services.  Additionally, cryptocurrencies can be used for retirement investments including IRAs, Roth IRAs, and certain 401-Ks.

Currently, the American Red Cross, UNICEF and the UN World Food Program accept donations in cryptocurrency.

Notwithstanding the above, risks still abound with cryptocurrencies.  These include:

  • Cryptocurrencies are still subject to extreme price swings, making them risky investments. For example, in 2021, Bitcoin’s price ranged between a low of $28,722 and a high of $68,789.  Additionally, significant swings can occur instantly due to certain world events.  For example, when China announced its ban on cryptocurrencies in September 2021, Bitcoin immediately fell in value by 9% (it has recovered and more since then).
  • Digital wallets, private keys and exchanges are still subject to hacking attacks.
  • Commissions and fees for investing in and cashing out from cryptocurrencies are still significant. Additionally, there may be withdrawal limits for cashing out.
  • Gains and losses from cryptocurrency transactions must be reported on your Federal and other income tax returns.

Additionally, the recently passed Infrastructure Investment and Jobs Act added certain reporting requirements.  Beginning in 2023, cryptocurrency exchanges and other transaction facilitators will have to track and report on their customer’s cryptocurrency transactions (similar to what your mutual funds and brokers/investment advisers currently do for securities transactions).

Also, starting in 2024, anyone receiving more than $10,000 in cryptocurrency for a product or service will have to report identifying details about the customer (including social security number) just as they currently are required to do for cash transactions over $10,000.  A check box has also been added to Federal income tax returns requiring the taxpayer to declare whether they’ve transacted or had a financial interest in a virtual currency.

Finally, the yet-to-be passed Build Back Better bill may be closing the ‘”wash sale” loophole for cryptocurrencies which currently allows a taxpayer to take a write-off of a loss even if they buy another cryptocurrency within 30 days before or after a sale.

I will continue to monitor cryptocurrencies and keep you updated.

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.

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.

How Forensic Accountants Discover Fraud Schemes: 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.

This week I conclude my two-part series on how certain frauds were discovered and what steps the defrauded companies could have taken to prevent them.

These steps include:

  • Enforce mandatory vacations – Both of the first two cases presented in my previous blog (stolen cash receipts and improperly written checks to the perpetrator) would have been discovered much earlier had the company enforced mandatory vacations. Often, the highly dedicated employee who refuses to take a vacation or even a sick day when sick, needs to be in the office every day to prevent discovery of his/her fraud.  Mandatory vacations (and requiring sick employees to stay home) can help uncover these frauds, and possibly deter the fraudster (who would fear the fraud being discovered while he/she was out).
  • Regularly review bank statements, bank reconciliations, and cancelled checks – in the cases of the improperly written checks to the perpetrator, the duplicate written checks, and the misappropriation of the title insurance company’s escrowed funds, if the owners had regularly reviewed bank statements, bank reconciliations and cancelled checks, the frauds would have been discovered much sooner (because many banks do not provide copies of paid checks, the company may have to incur additional costs to receive copies of the paid checks, but it is worth it in the long run). Because the perpetrators are often trusted employees, the business owner should have company bank statements sent directly to his/her home to prevent the perpetrator from manipulating the bank statement prior to the owner seeing it.
  • Limit the size of the petty cash account and take surprise petty cash counts – The petty cash account should only hold up to a few hundred dollars unless there is a very good reason for the amount to be higher. To protect against misappropriation of petty cash funds, the business owner should take surprise petty cash counts – at least once a month.  The counts should be on different days and at different times.  Such counts are designed to discourage those with access to petty cash from committing fraud.
  • Require senior management approval of either all internal credits or those over a certain dollar amount – such a requirement would have prevented the accounts receivable clerk from misappropriating customer payments and replacing them with internal credits.
  • Require senior management approval and tracking of vacation and sick days for other managers – In the case of the finance director who abused vacation and sick days, the finance director was responsible for tracking of vacation and sick days for others, but no one had approval and tracking responsibility for her vacation and sick days. Since accounting and finance managers are often the ones who perpetrate frauds because of their trusted positions, having such a policy as this will prevent and/or discourage such abuse.
  • Senior management (or in the case of the auto dealership fraud, the owner) should regularly review the inventory, including having aging reports (reports showing how long particular items have been in inventory) – Not only would this have prevented the general manager from perpetrating his fraud, but also could have helped the owner with inventory control in general since review of the aging reports could have helped identify stale inventory.

All these steps require that owners or senior managers to spend additional time reviewing various aspects of their business.  If such review would be burdensome, the owners or senior managers should consider engaging a trusted third party such as a forensic accountant to perform some of the above steps.  The additional cost is likely to be well worth it.

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.

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.

How Forensic Accountants Discover Fraud Schemes: 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.

This week, I begin two-part series that will take us into the new year on how certain frauds are discovered, and what steps the defrauded companies could have taken to prevent them.

Over my many fraud investigations, I have identified the following ways the frauds were discovered:

  • By a supervisor or co-worker when the perpetrator was out of the office:
    • In one case, the perpetrator was out sick one day, and his supervisor went into his office seeking certain documents. When he opened one drawer in the perpetrator’s desk, he found a pile of cash receipt slips.  Upon inquiring of the firm’s bookkeeper, he learned none of the cash receipts slips had been recorded in the company’s accounting system, and none of the amounts received had been deposited into the company’s bank accounts.
    • In another case, the perpetrator was away on vacation. Her supervisor was contacted by a vendor with a question about a missing payment.  The supervisor attempted to locate information about the missing payment and opened the bank statement which had arrived that day.  In examining copies of cancelled checks, he noted that there were some non-payroll checks written to the perpetrator – something that was unexpected since the only checks which should have been written to the perpetrator were payroll checks.
    • Early on a Friday evening, after all the other employees had left for the weekend, the owner of a small company decided to borrow funds from the company’s $5,000 petty cash fund (it was this high an amount at the insistence of the company’s controller). When he opened the petty cash drawer, he saw that it contained no cash, only a piece of paper saying “I owe petty cash $5,000” which was signed by the controller.
  • By vendors or other third parties:
    • A service vendor called to complain that the federal Form 1099 he received was for a much higher amount than he had been paid by the company. An investigation revealed that the bookkeeper had set up a phony company and bank account with a similar name to that of the service vendor and was making payments to herself but recording them as being made to the service vendor.
    • A company’s bank called to report that it had flagged multiple checks with the same check number. An investigation revealed that the bookkeeper had purchased from the company’s check vendor a duplicate set of blank checks and had written payments to herself using the same check numbers and dollar amounts as those paid to company vendors.  She never recorded any of the “duplicate” check payments in the company’s accounting system.
    • A title insurance company held certain funds in escrow from the sale of a commercial building pending the results of a real estate tax appeal by the seller. Once the real estate tax issue was resolved, the seller requested payment of the escrow funds.  However, the check bounced.  It was discovered that the company’s controller had written checks to himself from the escrow account because he expected the tax appeal would take many years to be resolved, and he expected to be long gone before the theft came to light.
    • A customer called his vendor’s controller to advise the vendor that due to problems with cash flow, a check he had issued to the vendor had bounced. He apologized and asked the vendor’s controller to return the bounced check so that he could replace it with a cashier’s check.  Upon researching the customer’s account, the vendor discovered that instead of a payment being processed, an internal credit had been issued for the amount owed.  An investigation revealed that the vendor’s accounts receivable clerk had diverted the customer’s check to a bank account which she controlled (opened in a similar name to that of the vendor) and had issued a credit to the customer to hide the stolen check.
  • By employees who were unhappy with the perpetrator:
    • The finance director of a municipality regularly took more vacation and sick days than she was entitled. She pressured the payroll clerk to not record these days in the payroll system and threatened to fire the clerk if the clerk revealed the scheme.  One day, the payroll clerk had had enough, and reported the scheme to senior management.  The payroll clerk was not fired, but the finance director was.
    • The general manager of an auto dealership purchased three all-terrain vehicles (ATVs) as Christmas gifts for his sons. The only problem was that he used the auto dealership’s funds and listed the three vehicles as part of the auto dealership’s inventory even though the vehicles were not at the dealership.  After a salesperson was fired by the general manager, the salesperson reported the fraud to the owner.  The general manager was fired.

Of course, I could fill a book with descriptions of other fraud schemes which I have investigated.  In part two of this series – scheduled to be published on Monday, January 3, 2022 – I will discuss how each company could have prevented the fraud scheme from occurring in the first place.

Have a happy and healthy holiday season and New Year!

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.

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.

Personal Goodwill Can Play a Role in Divorce-Related 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.

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 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 said, 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 that provide economic benefit to a business.  Anderson said this economic benefit is more than 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.

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 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 level of 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.

Forensic Accountants Help Fight Fraudulent Conveyance Litigation

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.

Facing losses from such occurrences as foreclosures, divorces and other legal proceedings, shady business owners sometimes resort to the fraudulent conveyance or transfer of property or other assets to lessen or eliminate their losses by hiding valuable assets.

When that happens, it is the role of the forensic accountant to uncover the improperly transferred assets and determine their value.

“Black’s Law Dictionary defines fraudulent conveyance or fraudulent transfer as ‘the illegal transfer of property by a debtor to avoid creditors or claims’,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley. “It is a blatant action intended to undermine often legitimate claims filed by creditors, ex-spouses and other parties.

Anderson said the resulting fraudulent conveyance litigation typically involves civil suits bought by creditors or bankruptcy trustees seeking to recover improperly transferred assets or business. Examples of these transfers include:

  • Payments to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends, or business partners of the debtor;
  • Transfer of title of assets from the debtor to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends, or business partners of the debtor;
  • Sales of assets at bargain prices from the debtor to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends, or business partners of the debtor;
  • Transfer of business (sales) to other entities in which the debtor or relatives, friends or business partners of the debtor have an ownership interest; and
  • Gifts made by the debtor during a period of financial stress, including donations to charity.

In cases of fraudulent conveyance litigation, attorneys rely on forensic accountants to document the alleged fraudulent transfer; identify and locate improperly transferred assets and calculate the lost value of improperly transferred assets or business, said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley who has performed forensic work in multiple fraudulent conveyance matters, recalled one such case that later became the basis for his case study, “The Sore Losers.”

He said the case involved business owners who wanted to avoid a creditor’s foreclosure action by draining funds from the company. Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, said the business owners improperly paid themselves special bonuses and distributions, drastically increased rents charged to the business on real estate owned separately by the business owners, and ran personal expenses through the company. Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia, was able to identify each of the transactions and calculate the total amount of the payments, thereby facilitating the creditor’s recovery of the payments.

Anderson, a forensic accounting expert in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, recalled another case in which a husband who planned to divorce his wife sought to reduce the value of his business to decrease the amount of his future divorce settlement.

The husband sold certain assets to his girlfriend at a bargain price and had a friend set up a competing business, to which the husband directed his own customers. After the divorce was completed, the plan was to have the friend sell a majority interest in the new business to the husband at a bargain price, according to Anderson, a Philadelphia forensic accountant.

The fraudulent transactions were discovered after Anderson was engaged by the wife’s counsel to value the husband’s business. “During my investigation, I noted a significant decline in the business as well as the sale of certain assets during the two years preceding the divorce,” he said. “The investigation revealed the transfer schemes, and I was able to value the husband’s business as if these improper transfers had never occurred, thereby increasing the divorce settlement paid to the wife.”

If you need litigation support services or expert witness testimony in Philadelphia or require the 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. Anderson also has provided expert witness testimony in the Greater Philadelphia area and served as a forensic accounting consultant on both civil and criminal cases.

Forensic Accountants Can Help Detect, Prevent Trust and Escrow Fraud – 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.

My previous blog discussed trust and escrow account fraud perpetrated by the Trusted Party who is in control of the account or assets held for the beneficiaries.  This blog will discuss fraud perpetrated by third parties who fraudulently induce the Trusted Party to improperly disburse funds or sign over assets.

As a reminder, a Trusted Party can be appointed to take control of the bank accounts, investment accounts, or other assets of one or more beneficiaries in a variety of ways:

  • A trust document can designate the Trusted Party (“Trustee”);
  • A will can designate the Trusted Party (“Executor/Executrix”);
  • A court can appoint the Trusted Party (“Trustee”, “Guardian” or other);
  • A title insurance company or other party can be designated to hold funds in escrow for a real estate transaction (“Escrowee”);
  • An attorney can be designated to receive, hold, and disburse funds related to legal settlements or court orders.

There are several ways in which the Trusted Party can be induced to improperly disburse funds or sign over asset.  These include:

  • Coercion or improper influence
  • Identity theft or spoofing
  • Counterfeit check scams
  • Forged or fake trust account checks

Coercion or improper influence can occur when a Trusted Party is pressured into improperly disbursing funds.  A recent case in South Jersey highlights this. An elderly, cognitively impaired mother was the trustee for her child’s special needs trust.  An acquaintance convinced her to grant him power of attorney which he then used to gain access to the trust’s bank accounts.  This was compounded by the fact that the notary who notarized the power of attorney never witnessed either the trustee or the acquaintance sign the power of attorney.  The acquaintance then used his access to embezzle more than $350,000 from the trust’s bank accounts.

Identity theft or spoofing can occur in a variety of ways.  If the identity of a beneficiary has been stolen, the fraudster can e-mail the Trusted Party and request that funds be wired or sent to him/her.  Upon receipt the funds, the fraudster drains the receiving bank account.  Spoofing can occur, particularly with real estate transactions, when a fraudster obtains sufficient information to allow him or her to pose as the seller.  He or she then e-mails the escrowee and provides wiring instructions for a bank account under his or her control.  As with identity theft, the fraudster drains the receiving bank account upon receipt of the fund.

Counterfeit check scams typically target attorneys, usually those involved in commercial debt collection.  Under this type of scam, the fraudster e-mails the attorney and engages him or her to collect some type of debt. The fraudster may even provide fraudulent documentation of the alleged debt. The attorney will draft and send a demand letter to the debtor and will then receive a letter and certified bank check from the debtor for some or all the alleged debt. The attorney will deposit the funds into the trust account, and, usually within 24 hours of the deposit, the client will demand payment of the funds via wire. Since the funds were paid via certified bank check, the attorney will usually wire the funds (net of collection costs) immediately. Several days later, the attorney’s bank will contact him or her, advise that the check was counterfeit, and remove the funds from the attorney’s trust account.  Of course, the fraudster has already drained the wired funds from his or her bank account and disappeared.

Fraudsters also can obtain trust account information (account number and routing number) via fraudulent means and use the information to create fake checks payable to cash.  In one instance, an executor was notified by phone that the estate was due a security deposit refund by a fraudster posing as the employee of a local utility. The fraudster stated that the utility was required to send the funds via ACH (Automated Clearing House) and persuaded the executor to give him the estate account’s number and routing number.  The fraudster then used the information to create a fake check, forged the executor’s signature and cashed the check at a local check cashing service. Although the executor eventually recovered the stolen funds from the bank, the estate had to open a new estate bank account, and deal with the fund shortage until the funds were received from the bank.

None of the above frauds resulted from Trusted Party misconduct or knowing breach of fiduciary duty, but rather because sophisticated fraudsters were able to exploit the trust of the Trusted Parties.  The solutions to deterring or preventing fraud in these cases depend on the specifics of each case:

  • In the case of potential coercion or improper influence, there may have been other family members or professionals who may have noticed that something improper was occurring and could have acted to at least question it. For example, the accountant who prepared the trust’s tax returns, and could have noticed the unusual account activity.  Or the bank relationship manager who could have noticed the unusual account activity.
  • In the case of identity theft or spoofing, the Trusted Party should refuse to rely just upon e-mail but should seek to contact the beneficiary or the seller using the phone information in the Trusted Party’s files. This should also apply if the Trusted Party is contacted via phone by someone claiming to be the beneficiary or the seller. The Trusted Party should at least confirm that the contacting phone number matches that in his/her files.
  • Attorneys can reduce the likelihood of losses from counterfeit check scams by adding one or more of the following procedures:
    • Verifying the identity of the client and the debtor before accepting the engagement;
    • Establishing a policy of holding payments for at least some period (within the bounds of regulations) to allow sufficient time for the certified check to clear the bank process (and informing the client of this policy); and/or
    • Contacting the issuing bank to verify the validity of the certified check.
  • Trusted parties can minimize the likelihood of being victimized by forged or fake trust account checks by more carefully guarding bank account information and by frequently reviewing bank account transactions. In the example presented above, the executor should have asked the phone caller to provide a phone number so that he could call back.  He should then have compared that phone number with the one shown on the utility bill.  If they were not the same number, he should then have called the utility at the number shown on the bill and inquired about the refund.  He would then have found out that the original caller was a fraudster.

Forensic accountants can help Trusted Parties establish policies and procedures that can reduce or eliminate the likelihood of them being victimized by fraudsters. If you require 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.