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Regular Review of Financial Statements Can Help in Fraud Deterrence

Financial statements issued by companies, government entities or organizations – when reviewed on a regular basis – can help in fraud deterrence.  In many situations, though, executive officers rarely check these statements and, in cases where they do, they often do not understand what they are reading.

Knowing your financial statements, and understanding what to look for, are important components both in fraud identification and fraud deterrence.

“The only time officials in most organizations, government entities and companies actually look at the financial statements is after year-end,” said David Anderson, a Certified Fraud Examiner and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, including fraud investigation and fraud deterrence programs.  “They are doing themselves a major disservice.  Financial statements can have red flags that can alert you to potential fraudulent activity.”

A full forensic accounting analysis of your financial statements can help point out the warning signs of fraud, Anderson said.  There are a number of things to consider in analyzing the statement, he said.

If your business is growing, do your financial statements indicate regular increases in sales or do they show relatively flat sales?  If it’s the latter, you’ll want to know why.  In one recent fraud case, a dishonest employee was diverting sales and cash receipts.  Had the business owner checked the company’s financial statements regularly, the fraud could have been detected sooner, Anderson noted.

If your business is not growing and sales are down and your financial statement is showing an increase in inventory purchases, there may be an issue. Someone could be fraudulently diverting inventory.

If the difference between your sales and the cost of sales or cost of goods sold – also known as your gross margins – are decreasing, there could be a reason why. If certain operating expenses — such as office supplies/expense, travel and entertainment expense, etc. — are rising faster than expected, look into it.  If the cash balance on your financial statements doesn’t approximately equal the balances on the corresponding bank statements (allowing for some outstanding checks), look for missing funds.

The reason behind any of these “red flags” may be completely legitimate, Anderson said, but they also indicate a fraud investigation to find illicit activity.  At the very least, a consistent examination of your financial statements may identify business inefficiencies that can be resolved.

Lastly, regular financial statement analysis shows your workers you care about the company, government entity or organization, and that you are watching the flow of money to assure operating efficiency and to identify potential fraud.  It’s one of the strongest fraud deterrence messages you can send, Anderson advises.

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.

Strong Business Planning Can Help You Survive a Disaster

Natural and man-made disasters happen every day.  At some point, somewhere in the world, there is a major fire, flood, storm, sinkhole or other event that can threaten to you put out of business, temporarily or permanently.

What would you do if that happened?

You certainly have homeowners insurance, auto insurance, health insurance, life insurance and even business insurance, but do you have an up-to-date, comprehensive disaster recovery plan? Experts in the insurance industry say as many as 80 percent of business shuttered by a disaster either never reopen or financially fail in the first two years after they reopen.

“The businesses that do survive are the ones who prepared in advance for something they fervently hoped would never happen,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. “Creating a business continuity plan is just smart business.  It greatly enhances the chances that your business will survive the disaster and that your livelihood — and that of your employees — will be protected.”

Anderson, whose company specializes the development, implementation and management of comprehensive contingency and disaster recovery plans, said some business owners think they are covered as long as they have purchased insurance and backed up their computer files.  But a comprehensive contingency and disaster recovery plan covers myriad details of a business’ operations, some of them not always obvious.  And every business, no matter how big or small, needs to have a business continuity plan in place, Anderson said.

Can your business survive a disaster?  Ask yourself these questions:

  • Have you protected your electronic and your paper business records? Is this important data routinely backed up to ensure against computer hard drive crashes?
  • If single, or multiple, offices or production facilities are severely damaged or destroyed, do you know where you will go to get started up again?
  • Do you know exactly what must be done, and in what order, when it’s time to resume operations.
  • Can you estimate to customers how quickly you’ll be in business again?
  • Do your employees know where to go and what to do?
  • Is there enough insurance coverage to rebuild your business?
  • How do you assure your customers will keep paying you?
  • Will your vendors continue to extend credit to you?
  • Is there a process in place to quickly and efficiently replace key employees injured or killed by the disaster?
  • Are you prepared with step-by-step procedures to react to different types and severities of disasters?

If you have a consistently updated and comprehensive contingency and disaster recovery plan (business continuity plan), you can minimize your financial loss and greatly improve your chances of disaster survival.

When you require comprehensive contingency and disaster recovery plan or need 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.

Anderson Speaks to Bucks County Estate Planning Council

David Anderson, CPA, CFE, CVA, addressed the Bucks County (Pa.) Estate Planning Council in February on the topic of forensic accounting services in Philadelphia and business valuation in a divorce.

Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, discussed the role of a forensic accountant and a certified business valuation expert in valuing the spouses’ business interests as well as how forensic accountants can find hidden assets, hidden income and manipulation of business earnings.

The Bucks County Estate Planning Council is a non-profit organization dedicated to the advancement of estate planning. Our members are accountants, attorneys, financial planners, life underwriters, trust officers and other professionals involved in estate planning.

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, outsourced CFO services and can serve as a certified business valuation expert in legal proceedings.

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.

If you require the services of a certified business valuation expert with experience providing forensic accounting services in Philadelphia, please contact the Philadelphia forensic accounting firm of David Anderson & Associates today by calling 267-207-3597 or emailing david@davidandersonassociates.com.

The Person at the Top Can Best Stop Fraud

As a smart and competent proprietor of a business who has a number of smart and competent people working in key positions, you probably think you might not need to take steps to deter fraud. Everyone knows stealing is bad, correct?

It’s also true, you might believe, that you – as the owner, the man or woman at the top – can bend or break the rules as you see fit while your workers are expected to toe the line. That’s just the way things are, correct?

Wrong and wrong.

“Your actions determine the message you are sending to your employees about fraud,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.  “If you don’t have a strong fraud deterrence program in place, and if you engage in questionable activities yourself, then you’re sending an incorrect message.”

Anderson notes two recent cases of fraud where employees said company management created an environment where fraud was deemed acceptable. In one case, a defendant said her employer never said fraud was wrong. This, to her, was unspoken approval of the illegal acts. In another case, the defendant said when he saw the company president fraudulently running personal expenses through the business and claiming them as business deductions, he felt it was okay for him to defraud the company as well.

“Whether you are a business owner, a corporate executive or an elected or appointed official, your employees look to you for cues regarding what is and what is not acceptable behavior regarding fraud,” Anderson said.  “What kind of messages are you sending?”

Anderson said corporate leaders must make fraud deterrence a key objective by sending employees a strong message that fraud is unacceptable. Those leaders then need to practice what they preach.

Among the steps Anderson outlines are that companies should establish a clear fraud prevention policy and publicize it to employees through employee handbooks, manuals, training, memos, etc.  Employees must be told that fraud investigation is an ever-present aspect of your business and that steps always are underway to unearth fraud.

If you suspect your business has fallen victim to fraud, Anderson recommends you contact a Certified Fraud Examiner to conduct a comprehensive fraud investigation and determine the extent of your losses.  A Certified Fraud Examiner from a firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help you establish a fraud deterrence program to help protect your company in the future.  Always remember the message you send by the example you set can be a powerful deterrent.

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.

General Observations from Interviews with Fraudsters

A key part of any fraud investigation involves interviewing employees, customers, vendors and others.  These interviews, explain a leading Philadelphia forensic accountant and Certified Fraud Examiner, can help provide an understanding of the business, uncover potential fraud, frame the size and scope of the fraud and identify potential fraudsters.

However – according to David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley – the suspected fraudster(s) typically are the last to be interviewed because the certified fraud examiner wants to be able to confront the suspected fraudster(s) with all or most of the facts and other information order to elicit an admission.

Based upon his experience with such interviews, Philadelphia forensic accountant Anderson said he has observed some significant differences between fraudsters and non-fraudsters.  Some of these observations are:

  • Non-fraudsters, said Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley, are typically eager to provide information as part of the interview process. For example, Anderson said that when he has asked about areas of weakness that could permit someone to commit fraud, non-fraudsters will usually provide such information (of which they are aware), and even try to speculate about areas of potential weakness of which they have little or no knowledge.  Fraudsters will typically claim that they are not aware of any such weaknesses, and that it is impossible for someone to commit fraud at the company.
  • Non-fraudsters are typically emphatic about how a potential fraudster should be punished. For example, they will state that the person should be fired immediately.  Fraudsters will be significantly less emphatic.  Certified Fraud Examiner Anderson said they will often suggest that there might have been an acceptable reason as to why the potential fraudster would have committed the fraud.  They will also typically suggest that the company should be lenient with such a person, including giving that person a second chance.
  • Non-fraudsters do not typically hesitate in their answers to questions. As 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 – explained, fraudsters will be hesitant and may even repeat the interviewer’s question (in order to buy time to think about their answer), especially when the question starts to touch on areas related to their fraud.
  • Non-fraudsters, Anderson said, are also typically emphatic when asked if they have ever done anything improper. For example, the typically non-fraudster will immediately and forcefully say “No!”  Fraudsters are typically less emphatic and may even deflect.  In one case, the fraudster responded (earlier in the interview):  “Well, to be honest, I have taken home paper clips, pens and paper a few times.  And, I remember that once, there was a fifty-cent error on my expense reimbursement which I never told anyone about”.  (It was only much later in the interview that the fraudster admitted to having taken tens of thousands of dollars in a billing scheme).

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.

What Is Your Business Worth? Get a Formal Business Valuation

You read in the paper that a local business just sold for $15 million. You feel your company is about one-third the size of that operation. Does that mean you have a $5 million business?

A friend said she heard you can determine the worth of a business by multiplying its income by six and suggests you do so. Is that the way it’s done?

Both examples, a local expert on the subject says, are incorrect.

“Neither of those business valuation methods are reliable,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley.  “For example, a small software company named WhatsApp would have valued itself at between $50 and $60 million using the six-times-income method.  But last year, they sold themselves to Facebook for $19 billion — more than 300 times higher.”

If you want to learn what your business actually is worth, Anderson says, you need the assistance of a highly qualified and experienced business valuation expert.

There are myriad reasons a company may want to know its actual value. These can include shareholder or partner disputes; gifting a portion of the business; sales, mergers and acquisitions; divorce settlements; estate and trust matters; insolvency and many more.

Acknowledging each case is different, Anderson said there are two basic types of business valuations.  A calculation of value is a less formal process that provides a reliable approximation of the worth of your business while a full-blown formal business valuation is important for estate planning, gifting and litigation.

A Certified Valuation Analyst will calculate your business’s true income by examining salaries, expenses, profits, losses and other information.  Are you paying yourself or your family members more or less than what outside managers would cost?  Do you have company cars or any deferred compensation programs for family members or are there any other expenses a third party would not incur?  Do you have one-time expenses related a lawsuit or losses from a natural disaster?

In calculating your business’s worth, a professional business valuation expert also considers industry, geographic and economic factors, as well as recent sales of businesses like yours.

Determining the value of your business is not a process for psychics or soothsayers, and guessing or ballpark estimating won’t do. Be safe and smart and count on a Certified Valuation Analyst to figure out just what your business is worth.

If you require the services of a certified business valuation expert, please contact the Philadelphia forensic accounting firm of David Anderson & Associates today 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.

Trusted Employees Often At the Root of Corporate Fraud

Check any online or print news source almost any day; you’ll probably find articles reporting on fraud investigations involving hundreds of thousands and even millions of dollars being pilfered from small and large businesses, governmental entities and charity groups. Far too often, the blame falls to the feet of a trusted employee with years of valued service.

“The person responsible for defrauding the company frequently is the last person the business owner ever would have suspected,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that conducts fraud investigations and offers fraud deterrence programs and fraud deterrence training. “Our fraud investigations often point to the most loyal, trustworthy and reliable employee, someone the boss can’t even imagine running the business without.”

Sadly, it’s this seemingly positive relationship that permits the fraud to continue for unimaginably long periods of time before anyone suspects there’s a problem.

“Business owners are always shocked that fraud has occurred and stunned by the dollar amount stolen,” said Anderson, a Certified Fraud Examiner. “Most of them are busy focusing on their core jobs and necessarily delegate important financial duties to these most trusted employees. As long as things run smoothly and the owners and employees get paid, there is no reason to suspect theft.”

How can you make sure your business is not caught up such a scheme?

One excellent first step you can take is to have your bank statements (originals or copies) mailed to your home instead of to your business. Then, take 15 minutes each month to examine the statements and cancelled checks to see if anything unusual is happening. Anderson said you should look for unknown vendors receiving regular payments, strange check numbers, lower cash receipts or bank balances than expected, or any red flags that indicate you need the expertise of a Certified Fraud Examiner, a highly specialized forensic accountant who can conduct a thorough fraud investigation to determine your company’s exposure.

Fraud investigations from David Anderson & Associates can determine your company’s susceptibility to internal or external fraud, quantify the extent of economic damages if fraud has occurred, uncover missing assets, and provide economic damages expert witness testimony and litigation support in resulting prosecutions.

David Anderson & Associates also can help companies who want to be more proactive in preventing fraud by assisting with risk assessment, fraud deterrence programs and fraud deterrence training.

If you need the services of a Certified Fraud Examiner, please contact the Philadelphia forensic accounting firm of David Anderson & Associates today by calling David Anderson at 267-207-3597 or emailing him.

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the surrounding communities. 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.

How Personal Goodwill Affects Business Valuations

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

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

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

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

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

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

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

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

About David Anderson & Associates

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

Protecting Charities and Non-Profits from Fraud

Given the nature of their organizations and missions, people would think that houses of worship, charities and other non-profit organizations would be free of financial fraud issues.

However, most people – says a noted Philadelphia forensic accountant and Certified Fraud Examiner – would be wrong.

According to David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, small- to medium-sized houses of worship, charities and other non-profit organizations (such as condominium or homeowners associations, volunteer fire companies, youth sports groups, etc.) often are at higher risk of fraud than most other organizations.

Why is this?  Most heads of these organizations (priests, ministers, rabbis, etc.), said Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley, tend to focus on the mission of their organization and leave the financial operations to staff or volunteers.

However, since many volunteers have other commitments, Certified Fraud Examiner Anderson said they generally are able to devote only a limited amount of time towards these duties. Furthermore, most organizations such as these are often unable to afford an audit or other external examination of their books and records.

As a result, the organizations, said Anderson, must rely upon a few trusted employees and volunteers to oversee their operations and to handle their finances. With such limited resources, 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, most small to medium-sized non-profits are not able to effectively implement the necessary internal financial and accounting controls to adequately protect against fraud.

The result is that certain employees and volunteers can take advantage of these weaknesses and embezzle funds.  Here are just three examples:

  • A 45-year non-paid member of a Chester County, Pennsylvania, volunteer fire company was convicted of embezzling more than $300,000 from the fire company.
  • The bookkeeper for a Montgomery County, Pa., church was convicted of embezzling more than $150,000 from the church.
  • The volunteer treasurer of a Little League organization in Montgomery County, Pennsylvania, who was a Certified Public Accountant, was convicted of stealing.

So, what can a small to medium-sized non-profit organization do in order to protect itself from fraud?  Here are a few suggestions:

  • Solicit the assistance of volunteers who are attorneys or are from government or law enforcement, to conduct background checks for new and existing employees (in accordance with the law);
  • Form an internal financial review committee of three or more knowledgeable people (with backgrounds in forensic accounting, accounting and/or business finance) to regularly review the finances of the organization (such as on a quarterly or semi-annual basis);
  • Whenever significant amounts of cash are collected (for example, weekly offerings collection or concession stand sales), require two or more people to jointly oversee the counting of the cash and preparation of deposit slips;
  • Arrange for at least two members of the internal financial review committee to receive copies of the organization’s bank statements directly from the bank (and prior to any bank reconciliation being performed);
  • Make sure that all checks require two signatures;
  • After they resign/leave their position, promptly remove employees and volunteers from computer system access and from bank signatory cards/credit cards/debit cards, etc.;
  • If fraud is suspected, immediately engage outside counsel. Such counsel can best advise the organization as to the steps to take to protect itself from potential litigation and to properly investigate the suspected fraud, which may include retaining a forensic accountant to conduct the investigation.

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.

Three More Common Mistakes Made When Valuing a Business – Part Two of Two

Our study of the most significant mistakes made while setting a business valuation concludes as a well-respected Philadelphia forensic accountant and Certified Valuation Analyst takes a closer look at three additional issues that often are encountered in this process.

Relying on outdated business transactions and industry growth rates: According to David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, recent business cycles saw peak transactions prices paid around 2000 and 2006.  However, due to more recent economic history, including the “great recession,” Anderson said prospective buyers would not expect to see comparable prices in the present.  Similarly, economic growth rates around those same time periods were much higher than currently expected growth rates, said Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley. Relying on this outdated transaction and growth rate information, he said, results in overstated business values.

Failing to add back in the value of non-operating assets: Many businesses have assets on their books that, said Anderson – a Certified Valuation Analyst in Philadelphia – are not used in current business operations.  Examples include: Cash and/or marketable securities in excess of that needed to meet working capital requirements, vacant land, investments in outside businesses, artwork (unless the business is a gallery) and antique vehicles.  Professional valuation standards as explained by Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, call for identifying such non-operating assets, valuing them separately and adding them back to the value of the business (the logic being that a prospective buyer could purchase the business, operate it without these assets, sell these non-operating assets and pocket the proceeds).

Ignoring the capital structure of the business: Equity investors typically require a greater rate of return in order to accommodate the risks they take investing in a business, Anderson explained. However, many businesses are able to borrow from banks and other lenders at considerably lower rates.  The company being valued may already have long-term debt at such a rate or it may be the norm for companies in the same industry to have a capital structure that includes long-term debt.  In such cases, said Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, the valuator must consider the overall capital structure of the company in order to determine the blended (or weighted average) expected rate of return (which will be lower than the equity rate of return alone).  Considering such a lower overall rate of return is likely to result in a higher equity value for the business than would be determined if the capital structure of the business were ignored, Certified Valuation Analyst in Philadelphia Anderson noted.

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.

Five Frequently Made Mistakes in Valuing a Business – Part One of Two

While most business valuations properly follow applicable professional standards, some have fallen short when the financial professional makes one or more significant mistakes.  Here, from a noted Philadelphia forensic accountant and Certified Valuation Analyst, are two of the five most frequently made business valuations miscues. The three other top mistakes will be detailed in our next blog.

Concentrating on just one approach (the income approach) for valuing a business:  David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, explains that valuation standards require a valuation professional to consider three different approaches for valuing the business – income approach, market approach and asset approach.

Although the income approach is often the easiest and least expensive approach to consider (the market approach requires researching public company transactions and utilizing costly databases; and the cost approach frequently requires the use of real estate, fixed asset and/or inventory appraisals as well as potentially requiring additional valuation analysis for intangible assets), Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley says it is not always the most reliable approach for all companies and all circumstances.

For example, a company with operating losses in some years may be deemed to have no value under the income approach, but it could have positive value under the asset approach and/or market approach.  Additionally, says Anderson, a Certified Valuation Analyst in Philadelphia, a relatively new company or start-up (particularly a technology company) may not have sufficient operating history in order to effectively apply the income approach, but may have a significant value as determined under the market approach.

Ignoring normalization adjustments: The unadjusted earnings of many privately held companies, according to Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, may not be comparable to other similar companies because they may be paying more or less than market-level compensation and benefits to their owner-officers.

Additionally, said Anderson, the owners may have had the business pay certain non-business costs, or the business may have received certain one-time revenues or incurred certain one-time costs that would not have to be experienced by a future owner.  As a result, Certified Valuation Analyst in Philadelphia Anderson noted, it is necessary to make adjustments to these revenues and expenses in order to make the business comparable to that of similar companies.

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.

Fighting Vendor Billing Fraud

Businesses and other organizations can fall victim to vendor billing fraud perpetrated by outside parties just as easily as they can be by unscrupulous employees or managers, explains a noted Philadelphia forensic accountant and Certified Fraud Examiner.

An example of this, according to David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, can be seen in news reports from earlier this year about a New Jersey man who sent more than 70,000 invoices from a phony company to school districts for school books.  No such books were ever delivered, but this didn’t stop hundreds of school districts in 36 states from paying $325,000 worth of the fake invoices.

Another common scheme, says Certified Fraud Examiner Anderson, is for a fraudster to send invoices from a phony company to businesses and other organizations for copy paper and office supplies.  No such supplies are ever delivered, but again, the wrong-doer expects a certain number of businesses will pay the invoice without checking.

Even real vendors can engage in fraudulent billing schemes.  One such scheme, as delineated by Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley, involves a vendor who quotes special discounted prices such as for office supplies, food, beverages, shop supplies or for janitorial or maintenance services. After a customer begins using the vendor, the discounted prices quickly change on subsequent orders to more normal or even inflated prices.  The vendor relies on your being inattentive to the price changes.

An alternative scheme, said Anderson, has the vendor keeping the same prices, but substituting cheaper products (for example, the vendor offers a discounted price on name-brand, high-quality copy paper, but on subsequent orders switches to shipping lower-quality, off-brand paper).

So, how can such fraud be combatted? 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, recommends business owners consider the following procedures:

  • Require that a purchase order, signed by an authorized employee or manager, be matched to the vendor invoice. The purchase order and invoice should each show the detailed item description, the price per unit and quantities ordered for each item.
    • For services, the purchase order and invoice should each show the detailed service description, expected number of hours (if known), and billing rate per hour (if known).
  • Also, for item purchases, require that a receiving document (as prepared by the employee receiving the items and detailing the actual items received – quantities and description) be matched to the purchase order and vendor invoice.
    • For services, an employee can also prepare an equivalent document to confirm that the services were actually performed.
  • Any discrepancies between the signed purchase order, the receiving document and the vendor invoice must be resolved by the authorized employee or manager who originally signed the purchase order. In many companies, if that resolution results in a payment amount that exceeds the original purchase order amount, a higher level manager must approve the change.

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.

What is a Song Worth?

When valuing a business – or part of a business, a financial professional must take into account such intangible assets as patents, trademarks, trade names, goodwill, literary works, and even songs, according to a leading Philadelphia forensic accountant and Certified Valuation Analyst.

“Although the phrase ‘I got it for a song,’ meaning for practically no cost or value, might be applicable if I wrote or sang the song,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, “the result would be very different if the song came from Bruce Springsteen, Taylor Swift or U-2.”

Usually, Anderson said, entire catalogs of songs are assigned a value – such as when the Beatles songs were purchased by Michael Jackson in 1985 or when Michael Jackson’s songs were part of the damages in his wrongful death suit against AEG Live in 2013. Individual songs, however, also can be valued. For an example of this approach, one only needs to look at this year’s lawsuit by Marvin Gaye’s estate against Robin Thicke and Pharrell for Blurred Lines as well as Sam Smith’s settlement with Tom Petty over the song Stay With Me.

So how do professional business valuators value songs?  This can be done, said Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley – by following the same principles for valuing a business . . . by considering the income, market and asset approaches.

Under the income approach, Anderson – a Certified Valuation Analyst in Philadelphia – said the valuator would consider the historical and projected cash flows for the song or catalog.  Revenues typically flow from royalty and license fee agreements.  The valuator would have to consider all of the pre-existing sources of such revenues along with reasonable projections for future revenue sources. An example of this, Anderson said, would be the new music streaming service, Apple Music.

The valuator also must consider a variety of factors regarding the song or catalog when analyzing projections of future revenue, said Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. These factors can include the artist’s reputation, both current and trending; the genre of the song or catalog; trends regarding past and future sales from each revenue source, and music industry trends for royalties and license fees.  The valuator, forensic accountant Anderson continued, also will consider historical and projected costs for marketing/promoting and distributing the song or catalog.

Under the market approach, the valuator would consider recent historical transactions involving songs and catalogs, explained Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley. As with the income method, the valuator must consider such factors as the artist’s reputation, both current and trending, and the genre of the song or catalog.  Obviously, other recent transactions or valuations of this artist’s songs or catalogs of songs within the same genre will have the most weight in determining the song or catalog’s value.

Under the asset approach, Certified Valuation Analyst in Philadelphia Anderson said, the valuator would have to consider the costs incurred in writing, producing and releasing the song or catalog.  As with many business valuations, the asset approach generally results in the lowest value (of the three approaches), and usually serves as a floor to potential value.

So, how much is a song worth?  In the case of Blurred Lines, the jury decided that just the songwriting value alone (it did not include any additional value for performance rights, which was not a part of the case) was $7.4 million, said Anderson – a forensic accounting expert in Philadelphia with experience in conducting business valuation services in the Delaware Valley. In the case of the Beatles catalog which Michael Jackson purchased in 1985 for $47.5 million, Forbes in 2014 estimated that it was worth more than $2 billion.

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.