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Tips for Fighting Non-Digital Identity Theft

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

When most people hear the words “Identity Theft,” they think about spam and/or phishing e-mails, malware and computer viruses, or suspicious websites as the source of the identity theft.

Yet, according to David Anderson, of David Anderson & Associates – a Philadelphia forensic accounting firm that provides a full range of fraud deterrence and other forensic accounting services in Philadelphia and the Delaware Valley –53 percent of all identity theft (according to the Center for Identity at the University of Texas at Austin) either doesn’t involve or didn’t start with any of these on-line exploits; instead they involve non-digital means of exploitation.

Non-digital identity theft includes such actions as:

  • Theft of Delivered Packages and U. S. Mail
  • “Dumpster Diving”
  • Theft of Laptops and Smartphones
  • Insider Theft by Family Members, Fellow Employees and/or Visitors

Anderson offers a closer look at each of these actions:

Theft of Delivered Packages and U. S. Mail: This is perhaps the simplest and easiest way for identity thieves to obtain your personal information.  Identity thieves look for and steal packages and U. S. Mail that is not secured – for example, left on a front doorstep, in an unlocked mailbox or, for some apartment buildings or condominiums, on a shelf or table in the mailroom.  Using the information contained in or on the packages or mail, the identity thieves go to work changing delivery addresses, opening new credit cards, etc.  In many cases, the identity thieves use the information from the stolen packages and mail to deliver a change of address card to the U. S. Post Office redirecting your mail to themselves.

Anderson said individuals can fight such theft by opening a post office box at either the local post office or a third-party mail service and have mail delivered there; by having packages delivered to either your office (if your employer permits it) or to a neighbor who is always home.  Additionally, if you live in a building with a front desk, you can ask the front desk to hold packages for you.

“Dumpster Diving:” Identity thieves go through your garbage seeking credit card statements, tax returns and other documents that you or your business have thrown out.  Then, as with stolen packages and U. S. mail, the identity thieves change delivery addresses, open new credit cards, etc.

Individuals should, Anderson suggests, shred all documents containing sensitive information. Many communities have annual or semi-annual shredding days.  Additionally, places like Staples and Office Depot (for a fee) will shred documents for you.  Some people go so far as to remove address information from discarded magazines and junk mail to thwart identity thieves.

Theft of Laptops and Smartphones: Under this scenario, thieves steal laptops, smartphones and other portable devices (such as tablets, iPads, smart watches, etc.).  If the device is not password protected, thieves have ready access to its applications (especially those for which the user ID and password have been saved on a website – such as for your bank account(s) or credit card account(s)).  Additionally, identity thieves have access to texts, e-mails and address books – treasure troves of personal information.  Thieves can also use text, e-mail, and address book information to launch digital identity theft attacks on your friends, family and business associates.

Identity thieves can be thwarted by using password-protected devices.  You should also consider not saving user IDs and passwords for websites.  Additionally, you should consider using locking cables for laptops and tablets to prevent their removal from the premises.  Also, to the extent that you must leave such devices in your car, you should lock them in the trunk instead of leaving them visible to passersby.

Insider Theft by Family Members, Fellow Employees and/or Visitors: Sometimes identity thieves operate right under your nose.  For example, your children, relatives, friends or other visitors to your home (think delivery people, home services people, etc.) may have access to mail or other documents left out in the open.  Furthermore, if you leave home computers or other devices on and logged in, they may have access to all the information on those devices.

Similar problems arise at work.  People often leave their computers logged in while away from their desks for meetings, lunch, etc.  Other employees and/or visitors can easily access information on those computers (and, many people also store personal information on their work computers).  Anderson said he often has observed such unattended logged in computers in the accounting departments of clients he was visiting.  Additionally, people often leave sensitive documents in the open when away from their desks at work.

Avoid leaving sensitive documents lying around at both home and work.  Children and other family members who use family computers should be provided with separate profiles and log-ins to prevent access to sensitive data and applications on shared computers.  Additionally, timed logouts should be set up on all home and work computers to prevent their staying on when the user is away.  Sensitive documents should also be stored in locked filing cabinets.

As can be seen from the above discussion, you not only have to be alert for digital attacks by identity thieves, by also for non-digital attacks. Working with an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help you prevent such nefarious activities.

If you 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 fraud deterrence, fraud investigation, forensic accounting, business valuation, 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.

Close the Door on Business Fraud Before Your Money Has Disappeared

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

“Don’t shut the stable door after the horse has bolted.”

This idiom can be traced to the 1390 English poem “The Lover’s Confession” by John Gower, however – says David Anderson, of David Anderson & Associates – a Philadelphia forensic accounting firm that provides a full range of fraud deterrence and other forensic accounting services in Philadelphia and the Delaware Valley – the message is just as timely today.

It begs the question, he said, why don’t more businesses, non-profits, and government offices implement fraud deterrence procedures before fraudsters infiltrate their finances?

“There are two main reasons more organizations don’t have fraud deterrence programs,” said Anderson, a Certified Fraud Examiner, “and they boil down to management not understanding how easily fraud occurs or how easily and cost effectively it can be prevented.”

Anderson said the initial issue is that business leaders don’t believe fraud ever could occur in their organization. Most managers feel their employees are trustworthy and loyal and because they believe that they would inherently somehow “know” if fraud was occurring.  Secondly, he said, owners and executives think, incorrectly, that fraud deterrence programs are expensive and time-consuming, making the cost outweigh the benefit.

“Given the appropriate opportunity, even the most trustworthy and loyal employees can find themselves under pressure to commit fraud,” said Anderson.  “In fact, it often is the most highly trusted employee who turns out to be the fraudster.”

He said management is generally so focused on running its business that it has neither the time nor the inclination to examine financial details that might reveal evidence that fraud is occurring.

On the cost issue, Certified Fraud Examiner Anderson said organizations need to understand that the median loss due to fraud has been determined by the Association of Certified Fraud Examiners to be approximately $130,000 for each occurrence.  But basic fraud deterrence procedures – such as management review of financial reports; a fraud hotline; a code of conduct; mandatory vacations; job rotation, and surprise audits – cost significantly less than that.  Even with the addition of fraud deterrence training for managers and employees, the cost remains significantly lower than the median loss from just one case of fraud, he said.

“We all take preventative measures to forestall bad things from happening,” Anderson said.  “We brush with fluoride to prevent tooth decay.  If a faucet or pipe starts to leak, we call the plumber before it worsens.  And we spend $40 to change the oil and oil filter on our car to avoid paying hundreds or thousands of dollars in engine repair bills down the road.

“Establishing anti-fraud controls is the same thing,” Anderson said.  “If you engage a Certified Fraud Examiner to design a cost-effective fraud deterrence program for your organization now, you are greatly lessening the chances that you will be the victim of a more expensive fraud in the future.”

Anderson recommends any business owners, non-profit leaders, or government officials who suspect fraudulent activity already is occurring in their business to immediately request a comprehensive fraud investigation. Such an examination is best conducted, he said, by a professional from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  The longer you postpone a fraud investigation, Anderson said, the greater your losses are likely to be.

If you need a Certified Fraud Examiner 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 fraud deterrence, fraud investigation, forensic accounting, business valuation, 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.

Two Valuation Issues to Consider Regarding Privately Held Businesses

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

Under what conditions does $4 million divided by four NOT equal $1 million? When you are a 25 percent owner of a privately held business, sometimes the math just doesn’t work out they way you’d like it to.

According to David Anderson, 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 – experts who are asked to determine the worth of individual shareholder stakes in such a privately held operation consider factors that can significantly reduce the value of an individual’s holdings.

“There are two key factors that can impact the value of a privately held business — lack of marketability and lack of control,” Certified Valuation Expert Anderson said. “Depending on the circumstances, they can pull the value down by as little as 10 percent or less to as much as 90 percent or more.  This is definitely something you want to consider if you own shares in a privately held company or are thinking about buying or selling this type of shares.”

Anderson said lack of marketability refers to the difficulty of selling shares in a privately owned business.  While it is easy to sell shares in a publicly traded company simply by contacting a stockbroker to handle the transaction, the same is not true for a privately held company, he said.

“There is no ready market for the shares of a privately held company,” said Anderson, a business valuation expert in Philadelphia.  “Selling these shares usually requires the services of a business broker and even using a broker takes time.  Of course, the longer it takes to sell the shares, the less the value they hold because they are tying up your money.  If the shares could be sold immediately, you would have the option to reinvest the proceeds immediately.”

In addition, Anderson explained, unless the privately held business pays regular distributions or dividends, the shareholder does not receive interest or dividends on the investment while the stocks are being sold.

A business broker also is likely to require a greater commission or fee to sell shares of a privately held company than a stockbroker would charge for selling shares of a publicly held company, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley.  Finally, he said, if the ownership stake is subject to a shareholder’s agreement, the agreement may contain additional restrictions on the sale of shares.

“A Certified Valuation Analyst must consider each of these issues to determine the amount of discount that will be applied to the shares due to the lack of marketability,” Anderson said.

Lack of control — the other key factor a business valuation expert must consider in determining the worth of a privately held business — refers to the inability of a minority shareholder to make key decisions affecting the company, Anderson said.  For example, he said, a majority shareholder can set salaries, benefits and bonuses or decide to sell part or all the company.  A minority shareholder lacks the power to make those decisions and usually lacks the ability to compel or influence others to make them.

Because of this lack of control, the business valuation expert will further discount the pro-rata value of the interest to satisfy the expectations of potential buyers.

“A business valuation expert must analyze the lack of marketability, the lack of control and many other factors to determine a reasonable discount and, consequently, the true value of your shares,” Anderson said.

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

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia 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.

Report on Fraud 2018, Part Five: You’ve Been Defrauded, Now What?

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.

This blog – the last in a series of five articles by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – continues Anderson’s discussion of the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.

This final installment focuses on how companies and organizations react after a fraud has been discovered and what their experiences are in attempting to recover fraud losses:

  • Sixty-five percent of victim companies and organizations terminated the perpetrator while another 10 percent permitted the perpetrator to resign.
  • However, 14 percent of companies and organizations allowed the perpetrator to remain with the organization either with probation or on suspension (8 percent) or no punishment at all (6 percent).
  • Only 44 percent of all owners and executives were terminated by the victim company or organization. Thirty-one percent were permitted to leave or resign without being terminated, and 19 percent remained with the organization.
  • Fifth-eight percent of victim companies and organizations referred the matter to law enforcement. This percentage has steadily declined from 69 percent of companies and organizations which did so in 2008.
  • Twenty-three percent of victim companies and organizations filed civil suit against the perpetrator. This has remained steady over the past ten years.
  • Fifty-three percent of perpetrators referred to law enforcement pled guilty or no contest while another 20 percent of perpetrators were convicted at trial.
  • In 18 percent of cases referred to law enforcement, the authorities declined to prosecute (most likely due to either the size of the loss not being large enough or because the company or organization could not produce sufficient documentation and other evidence for the authorities to be confident that they could obtain a conviction).
  • Only 1 percent of cases referred to law enforcement resulted in the perpetrator being acquitted.
  • Fifty-three percent of companies and organizations that filed civil suits received a judgment in their favor while another 27 percent of such suits were settled before a verdict was reached.
  • Perpetrators obtained a favorable judgment in 15 percent of civil cases (most likely because the company or organization could not produce sufficient documentation and other evidence to convince the trier of fact of the perpetrator’s guilt).
  • Victim companies and organizations which decided not to refer cases to law enforcement cited the following reasons for their decision:
    • Fear of bad publicity (38 percent of non-referred cases)
    • A belief that internal discipline was sufficient (33 percent of non-referred cases)
    • The belief that pursuing a conviction would be too costly (24 percent of non-referred cases)
    • The company or organization reached a private settlement with the perpetrator (21 percent of non-referred cases)
    • The lack of sufficient evidence to persuade law enforcement to pursue the matter (12 percent of non-referred cases)
  • Fifty-three percent of victim companies and organizations recovered nothing from either the perpetrator or other sources (such as insurance).
  • Thirty -two percent of victim companies and organizations made a partial recovery and another 15 percent made a full recovery.
  • The larger the loss, the less the likelihood that the victim company or organization will make a full recovery:
    • For losses under $10,000, 30 percent of victim companies and organizations made a full recovery.
    • For losses between $10,000 and $100,000, 16 percent of victim companies and organizations made a full recovery.
    • For losses between $100,000 and $1,000,000, 13 percent of victim companies and organizations made a full recovery.
    • For losses over $1,000,000, 8 percent of victim companies and organizations made a full recovery.

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.

Focus on Fraud in 2018, Part Four: Corralling Corruption

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.

This blog – the fourth of a five-part series by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – continues Anderson’s look at the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.

In this week’s installment, Anderson explores the significant role corruption plays in corporate and organizational fraud.

  • Transparency International, the global coalition against corruption (transparency.org) defines corruption as:

“The abuse of entrusted power for private gain. It can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.”

  • The 2018 Report shows that 38 percent of all frauds involve some form of corruption with the median loss from corruption being $250,000, and the fraud lasting an average of 22 months.
  • The 2018 Report identifies four main types of corruption:
    • Conflicts of interest, including purchasing schemes and sales schemes
    • Bribery, including invoice kickbacks and bid rigging
    • Illegal gratuities
    • Economic extortion
  • Corruption is the most pervasive form of fraud worldwide.
  • Seventy percent of corruption cases were perpetrated by someone in a position of authority (32 percent by owners or executives and 38 percent by managers)
  • The industries with the highest proportion of corruption cases are:
    • The Energy Sector (53 percent)
    • Manufacturing (51 percent)
    • Government and Public Administration (50 percent)
  • Corruption is the most likely fraud committed by employees of companies and organizations with fewer than 100 employees.
  • Fifty percent of all corruption cases are detected by a tip.
  • Conflict of interest cases principally involve:
    • Purchases from favored parties, regardless of whether the party provides the best quality and/or lowest prices.
    • Sales to favored parties at bargain prices. Often these sales are lower than those offered to other parties (or at a price usually reserved for larger customers).
    • Favored parties are often friends, relatives or parties in which the purchaser has a financial interest.
  • Bribery cases principally involve:
    • Kickbacks to the purchaser for purchasing either more goods or services than would be normally purchased or at higher prices than would normally be paid.
    • Bid rigging whereby the purchaser provides inside information to a favored vendor in return for payments or kickbacks.
    • Bid rigging can also be achieved by working with the favored vendor to write the request for proposal (RFP) in such a way that only the favored vendor can meet the RFP’s requirements.
  • The most common red flags identified in corruption cases were:
    • Living beyond one’s means (identified in 43 percent of corruption cases)
    • Unusually close association with a vendor or customer (identified in 34 percent of corruption cases)
    • Known personal financial difficulties (identified in 23 percent of corruption cases)
    • “Wheeler-dealer” attitude (identified in 21 percent of corruption cases).

Next week’s blog article will look at how companies and organizations react after a fraud has been discovered and what their experiences are in attempting to recover fraud losses.

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.

Focus on Fraudsters, Part Three: Which Controls Work, and Which Don’t

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.

This blog – the third of a multi-part series by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – continues Anderson’s look at the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.

In this week’s installment, Anderson discusses the various controls that companies and organizations put in place to prevent fraud and how effective these controls are.

The 2018 Report to the Nations identified 18 specific anti-fraud controls and noted that all 18 were associated with lower fraud losses and quicker detection of the frauds.

  • The most-common anti-fraud controls employed by companies/organizations were:
    • Putting in place a code of conduct (present in 80 percent of the companies/organizations)
    • Having an external audit of the company’s/organization’s financial statements (present in 80 percent of the companies/organizations)
    • Having an active internal audit department (present in 73 percent of the companies/organizations)
    • Having management certification of the company’s/organization’s financial statements (present in 72 percent of the companies/organizations)
    • Having an external audit of the internal controls over the company’s/organization’s financial reporting (present in 67 percent of the companies/organizations)
    • Performing regular management review of financial reporting (present in 66 percent of the companies/organizations)
    • Having a confidential tip reporting hotline (present in 63 percent of the companies/organizations)
    • Having an independent audit committee (present in 61 percent of the companies/organizations)
  • The effectiveness of these most common controls were:
    • Putting in place a code of conduct reduced the median loss by 56 percent and the duration of the fraud by 46 percent
    • Having an external audit of the company’s/organization’s financial statements reduced the median loss by 29 percent and the duration of the fraud by 38 percent
    • Having an active internal audit department reduced the median loss by 46 percent and the duration of the fraud by 50 percent
    • Having management certification of the company’s/organization’s financial statements reduced the median loss by 43 percent and the duration of the fraud by 50 percent
    • Having an external audit of the internal controls over the company’s/organization’s financial reporting reduced the median loss by 50 percent and the duration of the fraud by 50 percent
    • Performing regular management review of financial reporting reduced the median loss by 50 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 50 percent
    • Having an independent audit committee reduced the median loss by 20 percent and the duration of the fraud by 48 percent

As can be seen from these statistics – despite the heavy reliance on external audits to prevent or reduce fraud – the procedure was considerably less effective than other controls.

Interestingly, two of the lesser-used anti-fraud controls – the use of proactive data monitoring/analysis and surprise audits (each used by only 37 percent of companies and organizations) – were the most effective controls.  These two techniques reduced the median loss by 52 percent and 51 percent, respectively, and they reduced the duration of the frauds by 58 percent and 54 percent, respectively.

Other anti-fraud controls used less frequently by companies/organizations included:

  • Creating employee support programs (especially for those suffering from addictions/dependencies or experiencing depression)
  • Creating and implementing an anti-fraud policy
  • Providing fraud training for managers/executives and employees
  • Having formal fraud risk assessments performed by outside parties
  • Implementing job rotation and/or mandatory vacations
  • Providing rewards for whistleblowers

Next week’s blog article will discuss corruption and its impact on companies and organizations.

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.

A Closer Look at Fraudsters, Part Two: How They Are Caught and Who They Are

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.

This blog continues the discussion started last week by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia. Over the next few weeks, Anderson will be looking at the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.  This week, Anderson examines how frauds are detected and the characteristics of the people who commit fraud:

  • Most people believe that having a financial audit will detect fraud. However, the 2018 Report found that only 4 percent of all frauds were detected by external auditors.  The percentage of frauds detected by accident was 7 percent – nearly double the audit rate.
  • The most frequent method by which frauds were detected came from tips – the 2018 Report found that 40 percent of all frauds were detected from tips. Employees were the source of 53 percent of all tips, followed by customers (21 percent), vendors (8 percent) and competitors (3 percent).
  • Internal auditors detected 15 percent of all frauds.
  • Management review detected 13 percent of all frauds.
  • The 2018 Report found that although owners and executives committed only 19 percent of all frauds, the median loss from such frauds was $850,000. Managers committed 34 percent of all frauds with a median loss of $150,000, and lower level employees committed 44 percent of all frauds with a median loss of $50,000.
  • Tenure with the organization correlated with the amount of fraud loss. The median fraud loss from employees with 5 years or less tenure was about $100,000.  This grew to $173,000 for employees with 6 to 10 years tenure, and to $241,000 for employees with more than 10 years tenure.
  • Men were responsible for 69 percent of all frauds with a median loss of $156,000. Women were responsible for 31 percent of all frauds with a median loss of $89,000.  The lower loss level is most likely due to the lower number of women in senior positions.
  • The perpetrator’s age followed a bell curve with 67 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.
  • Ninety-six percent of all perpetrators had no criminal background.
  • Eighty-five 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
    • 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

Next week’s blog article will discuss the various anti-fraud controls that businesses/organizations employ, and the effectiveness of each of the controls.

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.

A Snapshot of the State of Fraud in America and Beyond in 2018

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.

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 2018 study entitled “Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.” Over the next several weeks, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, will discuss some of the key findings from the 2018 report.

Up first, some general observations regarding fraud:

  • The median loss from fraud is $130,000. This is down 13 percent from the $150,000 median loss identified in the 2016 Report;
  • Twenty-two percent of all frauds result in a loss of over $1 million;
  • The median duration of reported frauds is 16 months, down 11 percent from the 2016 Report duration of 18 months;
  • Smaller businesses (those with fewer than 100 employees) lost nearly twice as much to fraud as larger businesses ($200,000 versus $104,000). This disparity is significantly higher than that of the 2016 Report, which indicated that smaller and larger businesses averaged about the same amount of loss;
  • Asset misappropriation schemes (frauds involving the theft of cash, inventory, supplies, equipment or other company assets) remained the most common scheme, rising to 89 percent of all fraud schemes (versus 83 percent in the 2016 Report). Median asset misappropriation losses fell from $125,000 in the 2016 Report to $114,000 in the 2018 Report;
  • Financial statement fraud remains the least common scheme at 10 percent, but results in the highest losses – $800,000 per fraud in the 2018 Report. The loss amount is down 18 percent from the $975,000 median loss shown in the 2016 Report;
  • Internal control weaknesses, including inadequate separation of duties, were responsible for nearly one-half of all frauds reported in the 2018 Report;
  • The 2018 Report identified 18 different anti-fraud controls that companies had implemented (Anderson will discuss these in greater detail in an upcoming blog article). It found that every control implemented resulted in a reduction in both the duration and amount of fraud.

Next week’s blog article will discuss how frauds are detected and the characteristics of the people who commit fraud.

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.

Keep an Eye Out for 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 a number of 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.

So, how can companies and organizations avoid being victimized by these payroll frauds?  They can take some or all of 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 time cards 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) as well as 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.

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.

Anderson to Speak on the Role of the Business Valuation Expert in Collaborative Divorce

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

On Tuesday, April 24, David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley, will be speaking about the role of the business valuation expert in a collaborative divorce at the Make Divorce Healthier 2018 Symposium.

The symposium, being held at the Normandy Farm Hotel and Conference Center in Blue Bell, PA, is an energizing day for professionals to come together around respectful, mindful, and more affordable divorce. Changemakers will gather to remove the shame, blame, and fear associated with divorce.

Anderson’s presentation will address such issues as:

  • Having a properly credentialed business valuation expert
  • Comparing and contrasting the role of the business valuation expert in a traditional divorce vs. a collaborative divorce
  • Understanding the business valuation process
  • Understanding key issues in valuing a business

He will be presenting to therapists, mediators, collaborative attorneys, financial planners, divorce coaches, graduate students, and clients-turned-advocates.  His co-presenter will be Joseph Barbagallo, CPA, CFF, CVA, CFD, CFS, CFE, CFI, ABV, FCPA, CGMA.

The Symposium begins at 8:30 a.m. on Tuesday the 24th with the keynote address “Managing the Negotiation Within – For Our Clients and Ourselves” by David A. Hoffman, Esq. from the Boston Law Collaborative, LLC. That speech will be followed by a series of hour-long breakout and roundtable sessions.

Anderson and Barbagallo are scheduled to speak in the 2:30 p.m. slot on the topic “The Role of The Business Valuation Expert in Collaborative Divorce.”

For more information about the Make Divorce Healthier 2018 Symposium, please visit www.makedivorcehealthier.org.

For more information on marital dissolution, business valuation, 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 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 or marital dissolution accountant in Philadelphia and the Delaware Valley.

Separation of Duties: A Critical Element of Fraud Prevention

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.

Many of the frauds investigated by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, share a common element: The fraudster was able to perpetrate and hide the fraud for an extended period due to the lack of separation of duties.

Separation of duties requires more than one person be involved in the processing and reporting of financial transactions to eliminate the possibility of that person alone committing a fraud. If a fraud were to occur in a situation in which there was adequate separation of duties, it would have to be due to the collusion of two or more people involved in the processing or reporting.

For example, Anderson said, if you look at a sales transaction from start – entry of the customer purchase order/request – to finish – receipt, deposit and recording of the customer’s payment for the sold item(s) or services – you could expect to see the following steps:

  • Receipt and entry into the business system of the customer’s purchase order/request
  • Fulfillment of the customer purchase order via product shipment/delivery, manufacture and shipment/delivery, or provision of services
  • Creation, entry, and sending of customer invoice
  • Receipt and entry of payment
  • Application of credits, if any – usually for returns or errors in the customer invoice
  • Deposit of customer payment
  • Periodic reconciliation of an operating bank account into which the deposit is made.

Proper separation of duties would prevent a single person from processing the customer invoice; receiving, entering, and depositing the payment; applying credits; and performing the bank reconciliation.  If those duties are not separated, the person could potentially divert the payment received to a bank account under control of that person or, if the payment is made in cash, to that person’s own pockets, while hiding the diversion by:

  • Not recording the sale or customer invoice in the accounting system to hide diversion of the customer’s payment; or
  • Recording in the accounting system the receipt of the payment and hiding the failure to deposit the customer payment when performing the bank reconciliation; or
  • Applying credits against the customer’s account so that the balance in the bank equals the balance on the books, as adjusted through the bank reconciliation process.

Similarly, if you were to look at a purchase transaction from start – setup of the vendor and entry of purchase order/request – to finish – preparation and recording of vendor check for goods or services purchased – you could expect to see the following steps:

  • Receipt and entry into the business system of internal purchase order/request
  • Setup of the vendor, if not already in the system)
  • Fulfillment by the vendor of the purchase order via product shipment/delivery, manufacture and shipment/delivery, or provision of services
  • Receipt and entry of vendor invoice
  • Preparation and recording of vendor check
  • Sending of vendor check
  • Periodic reconciliation of an operating bank account from which the check was written
  • Interfacing with the vendor regarding amounts due to the vendor.

Proper separation of duties would prevent a single person from setting up the vendor in the business system, making changes to the vendor information, entry of the internal purchase order/request, receiving and entering the vendor invoice, preparing and recording the vendor check, and sending the vendor check and performing the bank reconciliation.  If those duties are not separated, the person could potentially:

  • Divert the vendor’s check to an account under control of that person, in which case the person would tell the vendor that there were problems with processing their payment or would refuse to pay the vendor; or
  • Create a phony vendor, or change the mailing address of an existing inactive vendor, and cause payment to be made for non-existent products – typically office supplies and other items that are expensed rather than being recorded as inventory – or services; and
  • Hide the diversion when reconciling the operating bank account.

Note that failure to adequately separate duties for payroll could be similarly exploited for payments to either a terminated employee or a non-existent employee.

Based on the description above, it is easy to see the need to properly separate duties as part of a fraud prevention program. However, many businesses and other organizations – including governmental and non-profit entities – do not possess a staff large enough to facilitate adequate separation of duties.  So, what are some alternative steps that can be employed?

In such circumstances, some alternatives these businesses and organizations should consider are:

  • Engaging an outside party such as a forensic accountant to provide periodic oversight and review of financial transactions and bank reconciliations;
  • Arranging for all bank statements to be sent directly to the owner or a designated executive, at an address outside the business, so the bank statements and cancelled checks can be briefly reviewed for unusual or missing items prior to being given to the person performing the bank reconciliation;
  • For deposits, requesting that the bank provides a separate machine-printed deposit receipt matching the in-house prepared deposit slip;
  • For checks, requiring two separate approvals and signatures for all checks above a designated amount, or requiring a separate management approval for all checks, i.e. someone separate from the check signer;
  • For payroll prepared by a third-party company, arranging for a periodic list of active employees be sent directly to the owner or a designated executive, at an address outside the business, so the list may be scrutinized for unknown employees or terminated employees still receiving pay.

The costs of these alternatives, either financial – for the outside review – or time – for internal review – are low relative to the potential cost of undiscovered fraud.

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.

Key Issues Regarding Marital vs. Non-Marital Assets in a Divorce

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

One of the key tasks in a divorce is identifying the marital versus the non-marital assets of the divorcing couple.

To obtain a better understanding of the key issues involved regarding marital versus non-marital assets, David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley, interviewed Kathy Bloom, Esquire. Ms. Bloom is an attorney-mediator who is the Managing Partner of the family law firm of Bloom Peters, LLC; the firm has offices in Horsham, PA and Mount Laurel, NJ.

Ms. Bloom began by stating that Pennsylvania, New Jersey and Delaware are “equitable distribution” states (as opposed to states like California which are community property states).  This means that the courts decide what they consider to be an equitable or fair distribution of the marital assets between the divorcing spouses (whereas in community property states the parties are generally entitled to a 50/50 distribution of marital assets).

As a result, it is very important to distinguish between marital and non-marital assets.  Such assets include homes and other real estate, vehicles (including cars, trucks, boats and planes), personal property (including art, collectibles, antiques, jewelry, furnishings, clothing, etc.), investment accounts, bank accounts and investments in businesses.  In Pennsylvania, 529 education accounts not held in trust are also considered marital assets regardless of the source of the contributions.

Ms. Bloom stated that the delineation between marital and non-marital assets is not based upon the name in which the assets are held, but rather when the assets were acquired.  If the assets were acquired prior to the marriage or after the date of separation (or date of filing for divorce, depending upon the state of residence), they are generally considered non-marital assets.  Assets acquired during the marriage as well as the increase in value of non-marital assets during the marriage are marital assets.

Of course, there are always exceptions to the above.  If there is a pre-nuptial agreement providing for segregation of certain non-marital assets and their subsequent earnings or increase in value, these can remain non-marital assets.  Another exception can occur for non-marital assets acquired by inheritance or gift during the marriage.  If those assets are segregated from marital assets, they can retain their non-marital status (although any earnings or increase in value during the marriage will still be considered as marital assets).

If non-marital assets are “comingled” with marital assets, these non-marital assets can become marital assets.  This can happen when one or both spouses put non-marital assets into a common marital asset.  For example, if both spouses contribute non-marital assets to a common joint account (such as a checking account or investment account) or to a commonly owned asset (such as a home, car, or real estate), over time the non-marital asset may become indistinguishable from the marital asset.

There are even exceptions to some of these exceptions.  Some Pennsylvania counties (such as Bucks County) employ the concept of “vanishing or diminishing credit”.  This credit is applied ratably over a twenty-year period.   For example, if a spouse contributed $20,000 of non-marital funds towards the purchase of a jointly owned home, and the couple divorces fifteen years later, the contributing spouse may claim a diminishing credit and be considered to still retain a 25% non-marital interest in the original $20,000 contribution.  While Bucks County commonly applies a diminishing credit, in other Pennsylvania counties, it is generally up to the judge to determine whether any credit remains in similar circumstances.

Issues can also arise if one or both spouses withdraw funds, marital or separate, before final distribution.  If any of those funds are invested (such as in a house, real estate or investment account), the increase in value of such investment may or may not be considered a marital asset.  As a result, Ms. Bloom recommended that any such distribution prior to the final divorce decree be subject to an agreement between the parties regarding any increase in value.

As can be seen from the above, there are many key issues involved in determining marital versus non-marital property.   Very often, the parties will need to engage a forensic accountant to trace both marital and non-marital assets throughout a marriage, particularly if some of the non-marital assets have been comingled with marital assets.

If you need of a marital dissolution accountant 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 or marital dissolution accountant in Philadelphia and the Delaware Valley.

Understanding the Three Most Commonly Used Approaches to Valuing a Business

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.

The three most commonly used approaches to valuing a business are: The Income Approach, the Asset-based Approach, and the Market Approach.

Professional business valuators are required to consider all three approaches.  In the end, a business valuation expert must use his or her judgment to determine the best approach or combination of approaches to arrive at a business valuation that is as fair and accurate as possible.

These three most common approaches which a business valuation expert will consider are:

  • The Income Approach, which values a business by using one or more methods to convert anticipated economic benefits (earnings or cash flow) into a single present amount.  There are two primary methods under this approach:
    • Capitalization of Earnings/Cash Flows Method, which is used when there has been a steady level of historical growth; and the
    • Discounted Earnings/Cash Flow Method, which is used when there have been fluctuations in historical growth and when the company can reasonably project earnings for the next five or more years.
  • The Asset-based Approach, which values a business by calculating the value of net assets, (the difference between total assets and total liabilities).  There also are two primary methods under this approach:
    • The Book Value Method, which calculates the net asset value as shown on the books of the business – typically at historical cost, and the
    • Adjusted Net Asset Method, which adjusts the value of assets and liabilities of the fair market value as of the valuation date.
  • The Market Approach, which values a business by comparing it to sales of similar businesses.  There are four primary methods under the Market Approach:
    • Transactions of comparable publicly held companies;
    • Transactions of comparable privately held companies;
    • Prior transactions involving shares of the company itself, and lastly,
    • The ability of the company to pay shareholder dividends as compared to dividends paid by comparable companies.

The specific methods used depend on the facts and circumstances surrounding the business being valued.  For example, if there are no comparable market transactions or an insufficient number to be meaningful, the Market Approach may not be useful.

Once the value of the business has been set under each of the approaches, the business valuation expert must determine whether one of the values is the best representation of the true value of the business or if a weighted blend of the values provides a more accurate final business value, he said.

Typically, the Asset-based Approach yields the lowest value, and is usually relied upon by the valuator to establish a floor value for the business.  However, if the business has had recent operating losses and no comparable market transactions are available, the Asset-based Approach may well be the basis for the valuation.

If the valuation expert is valuing a startup business with little or no operating history and/or profitability, the Income Approach might yield a very low value. However, the Market Approach might result in a considerably higher value based on the sale of comparable businesses.

Under this scenario, some valuators would select the Market Approach as being most indicative of value and others might choose a blend of the Income Approach and Market Approach with a higher weight on the Market Approach.

It all comes down to the professional judgment of the business valuator, based on his or her experience and knowledge about the business being valued.

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

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia 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.