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Cash Transactions Can Complicate a Business Valuation During a Divorce

Posted by & filed under Blog Articles, Business Valuation, Company News, Forensic Accounting, Marital Dissolution.

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.

The decision to end a marriage is a messy affair that becomes undoubtedly more complicated when the division of property includes a business that must be valued; the situation becomes even trickier when claims of unreported cash transactions taking place in that business are involved.

In these cases, determining a fair value for the business is best left in the hands of a forensic accounting expert who has experience serving as a marital dissolution accountant and a business valuation expert.

“The issues that have to be considered in a business valuation during divorce proceedings are complex and numerous,” said 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. Such issues can be particularly thorny, he emphasized, when the business in question may or may not have had unreported cash sales.

The overall valuation process, he said, “usually begins in an educational vein as the forensic accountant explains to the spouses and their attorneys how a forensic accounting expert addresses valuation issues in a divorce.”

One key business valuation issue which arises repeatedly in marital dissolutions, said Anderson, a Certified Valuation Analyst and marital dissolution accountant in Philadelphia and the Delaware Valley is the presence and impact of unreported cash sales.

During divorce proceedings, an out-spouse often will tell the divorce accountant the in-spouse’s business has unreported cash sales, explained Anderson, a divorce accountant and business valuation expert who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The forensic accountant must then determine if the claim is true, and, if so, uncover the amount of the unreported sales.

This task is accomplished by performing a variety of analyses, including:

  • Investigating deposits into the in-spouse’s bank and investment accounts to determine how many of the deposits were cash;
  • Analyzing the gross margin of the business (sales less the cost of sales) and comparing that gross margin to industry averages; and
  • Searching for missing invoice or receipt numbers (very often the in-spouse will complete an invoice or receipt for a cash sale, but not record it on the books of the business).

Other specific analyses also may be required depending on the type of business, said Anderson, a Certified Valuation Analyst forensic accounting expert in Philadelphia and the Delaware Valley. These analyses will allow a forensic accountant to confirm or deny the out-spouse’s claim, and, if confirmed, estimate the amount of the unrecorded cash sales that need to be added to the business’ revenues, he said.

“I once had a case in which the out-spouse told me her husband kept cash from unrecorded sales in his dresser at home,” recalled Anderson, a business valuation expert whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley. “I actually went to the home and counted the cash in the dresser as part of my forensic investigation.”

If you need 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.

Forensic Accountants Make Cash Transaction Fraud More Difficult

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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

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

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

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

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

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

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

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

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

About David Anderson & Associates

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

Effective Oversight of Petty Cash Operations Can Cut Down on Fraud

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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.

While a company’s petty cash account is designed to provide reimbursement quickly and easily for such small expenditures as office supplies, mileage, and snacks for meetings, these minor amounts can add up to major problems unless your organization has effective fraud deterrence measures in place.

It might be surprising to learn fraud investigations have uncovered cases of petty cash fraud that resulted in major losses, according to forensic accountant David Anderson. It is, however, not the amount of money available in petty cash at any moment, but the cumulative amount in the account over weeks, months, or years.

“Nearly every business keeps an amount of cash on hand to pay unexpected cash expenses, reimburse employees for small expenditures, or provide cash advances to employees who will be traveling,” said David Anderson, a forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.

“I have seen petty cash funds as low as $50 and as high as $10,000,” he said. “While this might not seem significant, consider that companies with multiple locations usually have petty cash at each location. In addition, the petty cash fund can be replenished as often as several times a week. This means a company with a single petty cash fund of $1,000 that is replenished twice a week could have petty cash expenditures of as much as $100,000 per year.”

Anderson, a forensic accountant who also is a Certified Fraud Examiner in Philadelphia, notes that management usually looks at only the petty cash available at a given time (for example, $1,000) and not the amount of cash passing through the petty cash fund over time. As a result, he said, the amount of cash at risk is considered insignificant and the petty cash fund is usually maintained by a single “trusted” employee who is responsible for disbursing the funds, obtaining receipts for expenditures, and requesting that the petty cash fund be replenished when needed.

“There seldom is any oversight or control over the employee’s management of the petty cash fund, and therein lies the potential for fraud,” said Anderson, a forensic accounting expert in Philadelphia who recommends every company enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

The petty cash fund can be the starting point for an employee to commit fraud, Anderson said. It often starts off small as the employee simply “borrows” a few dollars for the weekend or until the next pay date. Initially, the employee may even leave an “IOU” note in the petty cash box or a check made payable to the company, and the employee usually returns the “borrowed” money as soon as possible, he explained.

But as time goes on and the employee realizes no one is watching, the dollar amounts “borrowed” get larger and the time it takes to return the money gets longer until the employee eventually stops returning the money at all, according to Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations. When the amount of “borrowed” money approaches the petty cash fund limit, he said, the employee will manufacture reimbursable expenses so that the petty cash fund can be replenished.

I recall one fraud investigation in which I discovered that the perpetrator had submitted multiple photocopies of the same receipt in the petty cash replenishment requests,” said Anderson, a Certified Fraud Examiner in Philadelphia. “In another case, I found handwritten “receipts” from service vendors for cash payments. Handwriting analysis showed that the signatures of the individuals who signed each receipt call came from the same person – the perpetrator.”

So, how do you combat petty cash fraud? There are several fraud deterrence measures that companies can implement to lessen the chance that petty cash fraud will occur in their business, explained Anderson, a forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

First, he said, management should conduct irregular “surprise” checks of the petty cash fund at least once a month during the year. These mini audits should occur at various times and different intervals. The day before pay day, late on a Friday and the day before a holiday are all times when the trusted employee might not expect anyone to be looking, Anderson said. In addition, these checks should be conducted two weeks apart, four weeks apart, or maybe two checks close together. It is important that checks be conducted randomly to prevent the trusted employee from anticipating when they will occur, he said.

Next, someone at a higher level than the trusted employee should randomly and irregularly scrutinize petty cash replenishment requests, including comparing the latest request with several earlier requests, said Anderson, a forensic accounting expert in Philadelphia.

These two measures will go a long way toward ensuring that petty cash fraud is not occurring at your company, and that the petty cash employee knows that you are watching even this seemingly insignificant fund.

If you require the services of a Certified Fraud Examiner 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.

Always Remit Taxes You Collect in a Timely Manner

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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.

Forensic Accounting Tips to Help Avoid Costly Revenue Recognition Fraud

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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.

As noted in my recent six-part series on the state of fraud in 2024 based on the Association of Certified Fraud Examiners’ (ACFE) “Occupational Fraud 2024 – A Report to the Nations,” most fraud losses come from financial statement fraud. One of the most significant causes of such fraud is the overstatement of revenues or revenue recognition fraud.

Recently, the AICPA (Association of International Certified Professional Accountants, formerly American Institute of Certified Professional Accountants) published an article discussing types of revenue recognition fraud and red flags which would identify potential revenue recognition fraud. This blog will discuss key takeaways from that article.

The article identified several types of revenue recognition fraud. These included:

  • Improper timing: This type of revenue recognition fraud usually occurs when a company prematurely records revenues to create the appearance that it is hitting revenue targets (announced either internally or publicly) and therefore making its financial statements appear stronger than they really are. Recent SEC actions against Under Armor and Belden (as well as Sunbeam in the 1990s) were based on the use of improper timing.
  • Delayed revenue recognition: This less-common fraud scheme is the opposite of improper timing. This type of revenue recognition fraud occurs when a company, already having met certain revenue targets, improperly shifts revenue to the future to ensure revenue targets are met in upcoming time periods. One key result of such revenue shifting is to increase executive bonuses based upon meeting certain revenue targets. This type of revenue recognition fraud was the basis for certain recent SEC actions against American Rental Associates.
  • Fictitious revenue: This type of revenue recognition fraud results from a company inflating its revenues and earnings by recognizing revenue related to fake contracts, fake customers, or other non-existent sales. This type of fraud may be harder to commit because it requires overriding key internal controls. Two well-known SEC cases involving fictitious revenue were Satyam Computer Services Limited (2011) and Anicom Holdings (2002).
  • Channel stuffing: This revenue recognition fraud scheme involves companies sending excessive amounts of products to their distributors, wholesalers, or customers over and above demand. This usually occurs near the end of a reporting period for which the companies realize they will miss their targets. To induce the recipients to accept the excess inventory, companies will offer kickbacks, excessive discounts, or other incentives. Well-known SEC cases involving channel stuffing were Bristol-Myers Squibb (2004) and Symbol Technologies (2004).

The article also identified certain red flags which can indicate the potential for revenue recognition fraud. These include:

  • An aggressive sales culture and poor tone at the top.
  • Hitting revenue targets due to sales booked in the last few days (or even the last day) of a sales reporting period.
  • Journal entries, especially manual ones, that can’t be explained or have no support. Such entries include topside adjustments at the end of the sales reporting period.
  • Anomalies or large balances within accounts receivable aging and unusual fluctuations in bad debt reserves.
  • Re-aging of invoices (such as due to a change in payment terms) or canceling and reissuing invoices.
  • Unusual fluctuations or patterns of returns from period to period.
  • Holding the books open beyond the accounting period.
  • Loss of major customers.
  • Pressure from executive management to hit sales targets without any mention or reminder of acting ethically or following company policies or procedures.
  • Distributors or wholesalers with higher-than-normal inventory levels at the end of a reporting period.

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.

Adjusting Executive Compensation in Business Valuations

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Latest ACFE Study Reveals the State of Fraud in 2024 – Part Six

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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, the last in my series of six blogs, concludes my discussion of the Association of Certified Fraud Examiners (ACFE) “Occupational Fraud 2024 – A Report to the Nations.”

This blog focuses on how perpetrators concealed their frauds:

  • The top seven concealment methods used by fraudsters were:
    • Creating fraudulent physical documents (41 percent of all frauds)
    • Altering physical documents (37 percent of all frauds)
    • Creating fraudulent electronic documents or files (31 percent of all frauds)
    • Altering electronic documents or files (28 percent of all frauds)
    • Destroying or withholding physical documents (23 percent of all frauds)
    • Creating fraudulent transactions in the accounting system (19 percent of all frauds)
    • Deleting or withholding electronic documents or files (19 percent of all frauds)
      • (These methods total more than 100 percent because some fraudsters used more than one method of concealing their fraudulent activities.)
    • Ninety-one percent of all cases involved the creation of fraudulent evidence and/or fraudulent transactions in the accounting system.
    • In 11 percent of frauds, the fraudster made no attempt to conceal the fraud.

The above concealment data point to the importance of such anti-fraud controls as:

  • Job rotation/mandatory vacation (to prevent ongoing concealment by the perpetrator)
  • Surprise audits (to potentially catch activity before it can be concealed)
  • Proactive data monitoring/analysis (to potentially catch activity before it can be concealed and to identify trends or data that seems to be “out of sync” due to the concealment)
  • Formal fraud risk assessments by outside parties (to identify areas which could be subject to concealment)

I hope you enjoyed reading this six-blog series about the current state of fraud.  If I can be of assistance in helping your business/organization in fighting fraud, please let me know.

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 2024 – Part Five

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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 2024 – A Report to the Nations”. In this blog, I focus on how companies and organizations react after a fraud has been discovered, and what their experiences are in attempting to recover fraud losses:

  • Sixty-seven percent (up from 61 percent in 2022) of victim companies or organizations terminated the perpetrator while another 9 percent permitted the perpetrator to resign.
  • However, 16 percent (down from 19 percent in 2022) of companies or organizations allowed the perpetrator to remain with the organization either with probation or suspension (11 percent) or no punishment at all (5 percent).
  • Fifty-three percent (up from 40 percent in 2022) of all owners or executives were terminated by the victim companies or organizations.
  • Fifty-seven percent of victim companies or organizations referred the matter to law enforcement. This percentage has steadily declined from 69 percent of companies or organizations which did so in 2008.
  • Twenty-seven percent of victim companies or organizations filed civil suits against the perpetrator. This increased over the 20-to-25 percent average during the past ten years.
  • Forty-five percent (up from 44 percent in 2022) of perpetrators referred to law enforcement pled guilty or no contest while another 27 percent of perpetrators were convicted at trial.
  • In 14 percent (down from 17 percent in 2022) 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 companies or organizations could not produce sufficient documentation and other evidence for the authorities to be confident that they could obtain a conviction).
  • Only 3 percent (down from 10 percent in 2022) of cases referred to law enforcement resulted in the perpetrator being acquitted.
  • Thirty-seven percent (up from 27 percent in 2022) of companies/organizations that filed civil suits received a judgment in their favor while another 37 percent of such suits were settled before a verdict was reached.
  • Perpetrators obtained a favorable judgment in 20 percent (down from 29 percent in 2022) of civil cases (most likely because the companies or organizations could not produce sufficient documentation and other evidence to convince the trier of fact of the perpetrator’s guilt).
  • The overall trend over the last four years is that more perpetrators are fighting either criminal or civil fraud charges in court.
  • Victim companies or organizations which decided not to refer cases to law enforcement cited the following reasons for their decision:
    • A belief that internal discipline was sufficient (49 percent of non-referred cases)
    • Fear of bad publicity (34 percent of non-referred cases)
    • The companies or organizations reached a private settlement with the perpetrator (24 percent of non-referred cases)
  • The median loss for companies or organizations which chose not to pursue the perpetrators was $63,000 for those which chose to not refer to law enforcement and $95,000 for those who chose to not pursue a civil action.
  • The median loss for companies or organizations which chose to refer the perpetrators to law enforcement was $250,000 and was $300,000 for those which chose to pursue a civil action.

The sixth and final blog in this series will focus on how perpetrators of fraud conceal their actions.

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 2024 – Part Four

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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 2024 – A Report to the Nations”. This week I focus on corruption:

  • 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 2024 Report shows that 48 percent of all frauds involve some form of corruption (down from 50 percent in the 2022 Report) with the median loss from corruption being $200,000 (up from $150,000 in 2022), and the fraud lasting an average of 13 months (up from 12 months in 2022).
  • Seventy-eight percent of the corruption frauds included at least one additional fraud type – either asset misappropriation or financial statement fraud or both.
  • The 2024 Report identifies four main types of corruption:
    • Conflicts of interest, including purchasing schemes and sales schemes
    • Bribery, include invoice kickbacks and bid rigging.
    • Illegal gratuities
    • Economic extortion
  • Corruption is the most pervasive form of fraud worldwide.
  • The Purchasing Department is the department most at risk for corruption. Seventy-nine percent of cases involved Purchasing Department fraud.
  • The industries with the highest proportion of corruption cases are:
    • Technology (65 percent)
    • Information Services (62 percent)
    • The Energy Sector (60 percent)
    • Manufacturing (55 percent)
  • Corruption is the most likely fraud committed by employees of any size companies/organizations (those with fewer than 100 employees and those with 100+ employees). 52 percent of organizations with 100+ employees reported corruption fraud in the 2024 Report.
  • 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 unusually 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/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.

My next blog article will discuss how companies/organizations react after a fraud has been discovered and what their experiences are in attempting to recover fraud losses.

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 2024 – Part Three

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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 2024 – A Report to the Nations.” This week, I discuss the various controls that companies/organizations put in place to prevent fraud and how effective these controls are:

  • The 2024 Report 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 85 percent of the companies/organizations)
    • Having an external audit of the company’s/organization’s financial statements (present in 84 percent of the companies/organizations)
    • Having an active internal audit department (present in 80 percent of the companies/organizations)
    • Having management certification of the company’s/organization’s financial statements (present in 77 percent of the companies/organizations)
    • Having an external audit of the internal controls over the company’s/organization’s financial reporting (present in 72 percent of the companies/organizations)
    • Regular management review of financial reporting (present in 72 percent of the companies/organizations)
    • Having a confidential tip reporting hotline (present in 71 percent of the companies/organizations)
    • Having an independent audit committee (present in 68 percent of the companies/organizations)
    • Providing fraud training for employees (present in 63 percent of companies/organizations)
  • The effectiveness of these most common controls (for the seven most effective controls) were:
    • Having surprise audits reduced the median loss by 63 percent and the duration of the fraud by 50 percent
    • Having regular management review of financial reporting reduced the median loss by 60 percent and the duration of the fraud by 48 percent
    • Having an external audit of the company’s/organization’s financial statements reduced the median loss by 52 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
    • Providing fraud training for managers and executives reduced the median loss by 50 percent and the duration of the fraud by 37 percent
    • Having an anti-fraud policy in place reduced the median loss by 50 percent and the duration of the fraud by 33 percent
    • Performing proactive data monitoring and analysis reduced the median loss by 50 percent and the duration of the fraud by 50 percent.
  • It is interesting to note that of the seven most effective anti-fraud controls, only three (regular management review of financials, having an external audit of the financial statements, and having a hotline) 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 actually are.
  • Over the past 8 years, two anti-fraud controls have seen significant increases in use:
    • Providing fraud training for employees – an increase of 11 percent
    • Providing fraud training for managers/executives – an increase of 11 percent
  • 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)
    • Having an independent audit committee
    • Providing rewards for whistleblowers
    • Job rotation and mandatory vacations

My next blog article will discuss corruption and its impact on companies/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 2024 – Part Two

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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 2024 – 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 that having a financial audit will detect fraud. However, the 2024 Report, down slightly from the 2022 Report, found that only 3% of all frauds were detected by external auditors. The percentage of frauds detected by accident remained at 5% – higher than the audit rate.
  • The most frequent method by which frauds were detected came from tips – the 2024 Report found that 43% of all frauds were detected from tips. Employees were the source of 52% of all tips, followed by customers (21%), anonymous tips (15%) and vendors (11%). The employee percentage was nearly the same as in the 2022 report. This possibly means that more employees are willing to report fraud than in the past.
  • Internal auditors detected 14% of all frauds.
  • Management review detected 13% of all frauds.
  • The 2022 Report found that although owners and executives committed only 19% of all frauds, the median loss from such frauds was $500,000 (up from $337,000 in 2022). Managers committed 41% of all frauds with a median loss of $184,000 (up from $125,000 in 2022), and lower-level employees committed 37% of all frauds with a median loss of $60,000 (up from $50,000 in 2022).
  • Tenure with the organization correlated with the amount of fraud loss. The median fraud loss from employees with 1 to 5 years tenure remained at $100,000. This grew to $200,000 (up from $137,000 in 2022) for employees with 6 to 10 years tenure, and to $250,000 (the same as in 2022) for employees with more than 10 years tenure.
  • Men were responsible for 74% of all frauds with a median loss of $158,000 (up from $125,000 in 2022). Women were responsible for 25% of all frauds with a median loss of $100,000 (the same as in 2022). The lower loss level for women is most likely due to the lower number of women in senior positions.
  • The perpetrator’s age followed a bell curve with 69% of all frauds committed by persons between the ages of 31 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 due to the fact that the older the person, the higher up they are likely to be in the business or organization.
  • 87% of all perpetrators had no criminal background, meaning that they had never been charged or convicted.
  • 84% 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

The 2024 Report noted that in 53% of the frauds perpetrated between 2021 and 2023, at least one COVID-19 related factor contributed to the occurrence of the fraud.

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 2024 – Part One

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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 recently released its 2024 study entitled “Occupational Fraud 2024 – A Report to the Nations”.

Over the next several weeks, I will discuss some of the key findings from the 2024 report. Up first, 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 $145,000. This is up 24 percent from the $117,000 median loss identified in the 2022 Report and up 16 percent from the $125,000 median loss identified in the 2020 Report;
  • Twenty-five percent of all frauds result in a loss of over $750,000;
  • The median duration of reported frauds is 12 months, the same as in 2022 and down 14 percent from the median duration of frauds identified in the 2020 Report;
  • Overall, the 10-year trend which had shown frauds were being caught faster and resulting in smaller overall median losses, appears to have levelled out – resulting in higher overall median losses versus the last two reports;
  • Smaller businesses (those with fewer than 100 employees) experienced a median loss of $141,000, surpassed only by very large businesses (those with more than 10,000 employees) whose median losses of $200,000 were influenced by financial statement fraud which often results in very large losses;
  • Asset misappropriation schemes (frauds involving the theft of cash, inventory, supplies, equipment, or other company assets) remained the most common scheme and rose to 89 percent of all fraud schemes (versus 86 percent in the 2022 and 2020 Reports). Median asset misappropriation losses rose to $120,000 (versus $100,000 in the 2022 and 2020 Reports);
  • Financial statement fraud remains the least common scheme at 5 percent (versus 9 percent in the 2022 Report and 10 percent in the 2020 Report) but results in the highest losses – $766,000 (up 29 percent from the $593,000 loss per fraud in the 2022 Report).
  • Internal control weaknesses, including inadequate separation of duties, were responsible for nearly 51 percent of all frauds reported in the 2024 Report (versus 49 percent in the 2022 Report and 33 percent in the 2020 Report);
  • Four percent of frauds discussed in the 2024 Report involved cryptocurrency (down 50 percent from the 2022 Report) with 33 percent of those frauds involving bribes and/or kickbacks paid in cryptocurrency and 47 percent of those frauds involving misappropriated assets being converted to cryptocurrency.
  • The 2024 Report identified 18 different anti-fraud controls that companies had implemented (I’ll discuss these 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.

My next blog article 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.

Tricks of the Trade: Unearthing the Fraud Buried Beneath the Numbers

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Fraud, Fraud Deterrence.

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, fraud deterrence, business valuation, and marital dissolution in Philadelphia and the Delaware Valley.

This blog is the final in a series of four posts that are examining the so-called “Tricks of the Trade” forensic accountants use when conducting fraud investigations.

In part of the normal procedure of analyzing financial and accounting information, a forensic accountant will look closely at the numbers themselves.

Such tight scrutiny can help unearth potential fraud or other abuse of financial information, according to David Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.

A prime example that proves the value of this practice, Anderson said, is the analysis of auto mileage claimed on small business tax returns, typically Schedule C. In one marital dissolution case, the husband was a physician who operated out of two offices located eight miles apart and regularly claimed over 20,000 miles per year in deductible auto mileage, explained Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia. (NOTE: The IRS allows deductions for mileage between offices when both are visited on the same day).

“If I assumed the physician visited both offices every day, and worked six days per week with no vacations or holidays, the maximum mileage he would have had in any year would be eight miles a day times six days per week times 52 weeks per year = 2,496 miles, which is considerably fewer than the 20,000-plus miles claimed each year,” said Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley.

In another instance, Anderson said the husband claimed to have driven exactly 30,000 miles each year. Statistically, he noted, it is very unlikely that someone can hit the same exact round number of miles each year. For each of the previous four years, explained Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, the husband claimed to have driven this number of business miles in his four-year-old Chrysler, in addition to normal commuting mileage which he estimated to be about 20,000 miles per year.

“When I visited his office, I asked to check the odometer in his car, which he still had at the time, and the odometer showed fewer than 70,000 miles,” Anderson said. “Based on his claims, the total mileage should have exceeded 200,000 miles.”

Another area that Anderson, a Certified Fraud Examiner in Philadelphia, said a forensic accountant can analyze is the numbers associated with non-descriptive general ledger accounts. These can include such accounts as:

  • Exchange
  • Transfer
  • Reserve
  • Miscellaneous Expenses
  • Other Expenses
  • Other Services
  • Cash Over
  • Short

Depending on the name of the account, Anderson said a forensic accountant will analyze the transaction detail and period-ending balance.

For example, the first three accounts – “Exchange,” “Transfer” and “Reserve” – typically are used to temporarily balance a transaction entry which requires further research to determine the correct account to be used, explained Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.

This means a forensic accountant will expect to see amounts come into these accounts from other transactions, and corresponding amounts come out of the account as the company determines the correct account to use, said Certified Fraud Examiner and forensic accounting expert Anderson. If a forensic accountant sees significant balances at the end of the year, or significant differences in amounts going into and out of the account, he said it could indicate fraud.

Accounts with “Miscellaneous” or “Other” in their title should typically be used for relatively small amounts that cannot reasonably fit any other expense category. Again, explained Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, if a forensic accountant sees significant balances in these accounts, it merits further detailed analysis because of the potential for fraud or abuse.

The categories “Cash Over” and “Short” are used by retail businesses, said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia, to account for the difference between the cash in cash registers versus what the point-of-sale accounting system says the cash balance should be. It is not unusual, Anderson said, to have small differences.

In one marital dissolution case, however, a restaurant regularly experienced large cash shortages (over $100 each time) two to three times a week. By the end of the year, total cash shortages exceeded $20,000. The husband, who owned this business, did not seem particularly alarmed by this shortage. Further investigation by Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley, revealed the husband regularly took cash out of the register and pocketed it to reduce his profits and, by extension, the value of his business.

If you have questions about any finance or fraud issues, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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