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Tip Hotlines Enhance 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.

Performing a formal financial audit annually is thought by many to be the most effective means of fraud detection and fraud deterrence.

It isn’t.

Less than four percent of all fraud is detected by a formal financial audit.  In fact, nearly twice as many frauds are discovered by accident than by formal audit.

So what is the best way to detect and prevent fraud?  You might be surprised.

The 2016 Report to the Nations from the Association of Certified Fraud Examiners (ACFE) shows tips are responsible for uncovering fraud more so than any other method.  More than 39 percent of all frauds were exposed as the result of information provided by tipsters.

And who were the main source of these tips?  By far, it is a company’s own employees, the ACFE report said.  A surprisingly high 52 percent of all frauds reported via tips came from company employees.

“Employees can be your first line of defense against fraud,” said David Anderson, of David Anderson & Associates. “Employees may see fraudulent or suspicious activity, but may be reluctant to be identified as the source of a tip, either because they fear retribution from other employees or because they’re not absolutely sure that fraud is occurring.”

So how do you encourage employees to come forward?  The best way is through the use of an anonymous tip hotline.

“Employees are far more willing to report illicit activity if their anonymity is protected,” said Anderson, a Certified Fraud Examiner and an ACFE member.  “The anonymous tip hotline provides them with the vehicle they need to do the right thing and bring the fraud to the attention of people in charge.”

Companies do not have to set up the tip hotline themselves, Anderson said. Third-party companies will step into set up and operate the hotline for a reasonable fee and will maintain the employee’s confidentially.  In fact, having an outside party manage the hotline further assures employees their identity will not be revealed by something they say or by speaking with someone who recognizes their voice.

In addition to tip hotlines, the 2016 ACFE Report shows many companies also are providing mechanisms for receiving tips through e-mail and/or through their websites.

Companies that provide tip hotlines for their employees typically find both the duration of fraudulent activity and amount of the losses are reduced by 50 percent.

A tip hotline is an important component of a comprehensive fraud deterrence program that, Anderson said, can be created by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley. Anderson also said he urges organizations to protect themselves by contacting a Certified Fraud Examiner to conduct a thorough fraud investigation at the first sign of suspicious activity.

In the coming weeks, Anderson will continue to share findings from ACFE’s 2016 Report to the Nations, the results of a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud.  The Association of Certified Fraud Examiners is the world’s largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

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.

Prosecution: The Ultimate Step in 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.

So you’ve been the victim of fraud.

You knew something was amiss.  You hired a Certified Fraud Examiner.  A thorough fraud investigation uncovered the fraud and identified the perpetrator.  You fired the fraudster — or punished them internally — and implemented stronger anti-fraud controls and forensic accounting measures as part of your overall fraud deterrence program.

So it’s over, right?

Not quite.

“You really need to refer the matter to law enforcement,” said Anderson. “Simply ridding your organization of the offending employee isn’t the answer.  You are effectively letting him or her off the hook, and allowing that employee to move on to potentially victimize another unsuspecting organization.”

While the majority of organizations victimized by fraud do refer the matter to law enforcement, the number may be lower than you might think.

In its 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) – the world’s largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide – found that only 58 percent of fraud cases were referred to law enforcement.  The remaining 42 percent were not.  This finding represents a downward trend from each of the previous two Reports.

Of the cases referred for prosecution, more than 76 percent resulted in a guilty plea or a conviction.  Only about two percent resulted in an acquittal.  In most of the other cases, law enforcement declined to prosecute.

With such a high percentage of convictions and guilty pleas, why did so many companies decline to seek prosecution?  The ACFE survey – a biennial global survey on the costs, schemes, perpetrators and victims of fraud – identified the top four reasons:

  • Nearly 39 percent said fear of bad publicity kept them from referring the case to law enforcement;
  • More than 35 percent thought internal punishment was sufficient;
  • More than 23 percent reached a private settlement with the fraudster, and
  • Almost 19 percent thought that referring the case to law enforcement and helping with prosecution would be too costly.

Anderson, a Certified Fraud Examiner and an ACFE member, strongly encourages companies, non-profits and government offices to refer fraud cases to law enforcement.  He said he is particularly reluctant to advocate for internal punishment without criminal consequence.

“Internal punishment alone means the fraudster not only evades criminal prosecution, but also gets to keep his or her job,” Anderson said.  “Now, you have an employee who not only is skilled at committing fraud, but also has learned from the mistakes he or she made that led to the discovery of the fraud.  The result is that the person often ends up further defrauding the organization.”

He recalled a case in which a company controller who committed fraud was allowed to remain in his job by agreeing to repay the stolen money through regular payroll deductions.

After some time passed, Anderson was retained by the company to conduct another fraud investigation, which found that the controller was again defrauding the company in a variety of ways, including having instructed the payroll department to stop the payroll deductions designed to repay the previous fraud.  The company terminated the fraudster, but again declined to prosecute.

“I have no doubt that today the employee is working at another company and perpetrating a fraud there,” he said.

There also is a key benefit to your fraud deterrence efforts that comes from referring fraud cases to law enforcement, Anderson said.

“Seeking prosecution of a fraudster is one of the strongest fraud deterrence messages you can send,” he said.  “It tells every other employee that fraud will not be tolerated and, in fact, will be prosecuted to the fullest extent of the law.”

Anderson recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

If you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia the and 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.

Understanding Your Employees Is Key to 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.

Do you know your employees?

Do you understand how they function on the job or the scope of their interpersonal relationships at work?

Do you know what personal challenges or difficulties they face at home?

If these questions are raising concern for you and the financial health of your organization, then maybe it’s time to learn more. Understanding your employees is a key component to an effective fraud deterrence program.

“There are certain behavioral signs and personal situations that are red flags for fraudulent activity,” said Anderson. “They are signs something might be wrong.  Understanding them is another fraud deterrence tool that can protect your organization.”

In its 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) identified some of the more frequently occurring behavioral signs and personal situations that should raise red flags at companies, non-profits and government offices.

The report, a biennial global survey on the costs, schemes, perpetrators and victims of fraud, found that a key red flag is employees who live beyond their means, Anderson said.

Look, he said, for a significant change in lifestyle – a lower-level employee who suddenly starts driving a luxury car, wearing designer clothes or taking expensive vacations.  In more than 45 percent of fraud cases, the survey said, coworkers and others noticed the fraudster had adopted a more extravagant lifestyle.

Another off-the-job red flag is employees who are experiencing financial difficulties, Anderson said.  Perhaps a family member or close relative is suffering through an expensive illness.  Or, maybe the family’s primary breadwinner is unemployed.  Look also for an employee who complains about mounting debts or foreclosure proceedings on his or her house — or might actually have lost the home. In 30 percent of frauds, the perpetrator was struggling with personal financial difficulties.

On the job, look for employees, particularly those in purchasing or operations, who are unusually close to a vendor or customer, he said.  Perhaps they regularly socialize with that person or receive tickets to baseball games, the theater or other events.  Look for a salesperson who spends an inordinate amount of time with a customer’s employee.  Fraud investigations found this type of activity in 20 percent of fraud cases.

Another on-the-job red flag is employees with control issues, Anderson said. Perhaps the employee insists on being the only one to perform certain duties or gets overly defensive when a coworker tries to get involved in his or her job.  In one case he investigated, Anderson said the fraudster was the only employee in the company who could process payroll.  The employee actually had to be taken from the hospital in an ambulance in order to run payroll on one occasion, Anderson said.  The ACFE report found that nearly 15 percent of frauds involved an employee with these types of control issues.

Other important behavioral red flags identified in the report, he said, include a “wheeler-dealer” attitude; divorce or other family problems; substance or gambling addictions; and constant complaints about inadequate pay or lack of authority.

“This is not to say that every employee who displays one of these signs is intent on defrauding the company,” said Anderson, a Certified Fraud Examiner and an ACFE member.   “They may be suffering through a difficult personal situation, but managing it nonetheless.

“Or,” he continued, “they may have hit it off really well with their customer or vendor and developed a mutually beneficial, but perfectly above-board, relationship.  But it would benefit you to know whether that is the case or not.  You could end up helping your company, your employee or both.”

In upcoming posts, Anderson will continue to share results from the ACFE’s 2016 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

Anderson said he believes the most effective protection for every organization comes from a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

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.

Updated Report on Fraud Investigations Pinpoints Characteristics of Fraudsters

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

The perpetrators of fraud come in all shapes and sizes, demographically speaking.  But fraud investigations throughout the years have been able to pinpoint the more typical characteristics of a fraudster, and some of the results are surprising. The Association of Certified Fraud Examiners (ACFE) collected extensive data about the people who commit fraud during the association’s biennial international survey to study the costs, schemes, perpetrators and victims of fraud.

“Understanding the traits of the average fraudsters isn’t going to allow you to look at your employees and pick out who is and who isn’t going to steal from your organization,” said Anderson, an ACFE member.  “But understanding who these people are is another important component of a comprehensive fraud deterrence program.”

Although most people believe fraudsters are career criminals, Anderson said, latest findings from the ACFE’s 2016 Report to the Nations showed more than 88 percent of fraud perpetrators never had been charged or convicted of a fraud; another six percent had been charged but not convicted.  Almost 83 percent of fraudsters never had been punished or terminated by a previous employer for fraud-related conduct, and an additional eight percent had been terminated but never punished.

Another surprise involved the tenure of the employee committing the fraud, Anderson said.  More than 42 percent of fraud perpetrators had been with their company between one and five years – neither a very short time nor a very long time.  Less than eight percent had tenure of under a year, while 23% had tenure of more than 10 years.

Not surprisingly, Anderson said, was the finding that the higher the position the employee held, the greater the loss.  Frauds carried out by a regular employees caused a median loss of $65,000, while those carried out by a managers caused a median loss of $173,000 and those carried out by owners/executives caused a median loss of $703,000.

Fraud investigations have found 55 percent of all fraud perpetrators were between the ages of 31 and 45 and that men were more than twice as likely to be the perpetrator as women.  Also, the older or the more educated the perpetrator, the higher the loss tended to be, usually because these people were higher up in the organization.

“It definitely helps to understand the portrait of a typical fraudster,” said Anderson, a Certified Fraud Examiner.  “But remember, in reality, frauds are committed by all kinds of employees — men and women; young and old; low-level and high-level; well-educated and less-educated; long-time and short-time, and those with and those without a history of committing fraud.  You need to be sure you have adequate anti-fraud controls in place to protect your organization from perpetrators of any type.”

Anderson said he believes the most effective protection for every organization comes from a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

Over the next several weeks, Anderson will share findings from ACFE’s 2016 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

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.

An Update On the Three Main Types of Fraud

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.

Fraud investigations worldwide reveal that asset misappropriation, corruption and financial statement fraud are the three main types of fraud, according to the Association of Certified Fraud Examiners (ACFE).

The ACFE has identified these three key types of fraud in its biannual Reports to the Nations, the results of global surveys conducted biennially to study the costs, schemes, perpetrators and victims of fraud.  The recently released 2016 Report confirms these three types remain the most frequently conducted frauds.

“Asset misappropriation is by far the most common type of fraud, but financial statement fraud, while not nearly as common, is a far more costly type of fraudulent activity,” said Anderson, an ACFE member.

According to the ACFE, asset misappropriation — or the theft of cash or other assets such as inventory, supplies or company equipment — occurs in more than 80 percent of reported fraud cases. Because some fraud investigations find that more than one type of fraud is committed within the same incident, the total of the three types exceeds 100 percent. The median dollar loss reported from asset misappropriation is $125,000, the 2016 ACFE study noted.

Corruption occurs in more than 35 percent of the reported fraud cases, the report found.  Fraud by corruption involves misusing one’s influence (such as persuading someone to use a particular vendor or hire a particular person) or violating one’s duty to one’s employer (such as purchasing from a vendor whose price is more expensive or whose product is inferior, or hiring a less qualified employee). The ACFE said the median dollar loss from corruption is $200,000.

Financial statement fraud represents only 10 percent of the reported cases of fraud, but the median dollar loss from this type of fraud is $975,000, the ACFE report says.  Fraud investigations have shown that financial statement fraud occurs when a person intentionally misstates or omits material information from an organization’s financial statements, according to the ACFE.

The report explained that financial statement fraud can be perpetrated against a lender (by overstating a company’s sales, profits or assets in order to get a loan); an acquirer (by overstating a company’s sales, profits or assets in order to get a higher acquisition price); or shareholders/the public (by overstating a company’s sales, profits or assets in order to boost a company’s share price).

“Regardless of the type of fraud, it is clear that organizations today are at high risk of loss due to fraud and that every business, government entity and organization must have a strong fraud deterrence program in place to combat it,” said Anderson.

A comprehensive fraud deterrence program developed by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help protect your organization, Anderson said.  At the first hint of suspicious activity, Anderson urges organizations to contact a Certified Fraud Examiner to conduct a thorough fraud investigation and end the fraudulent activity.

During the coming weeks, Anderson will share more findings from ACFE’s 2016 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

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.

The Latest Trends in Anti-Fraud Controls

David Anderson is 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.

As a Certified Fraud Examiner, I belong to the Association of Certified Fraud Examiners (“ACFE”).  This international organization has more than 75,000 members in more than 150 countries throughout the world dedicated to fighting fraud through rigorous fraud investigation and fraud deterrence programs.

Every two years, the ACFE conducts a global fraud survey to study the costs, schemes, perpetrators and victims of fraud.  This month, the ACFE released its 2016 Report to the Nations, detailing the results of its latest survey.  In the next several blog articles, I will present updates to previous articles which were based upon the 2014 Report to the Nations.  First up, the latest trends in anti-fraud controls installed by businesses and other organizations.

The 2016 Report identified the fastest growing anti-fraud control as use of confidential hotlines for reporting fraud.  The implementation rate grew by almost nine percent in the past two years to more than 60 percent – meaning that more than 60 percent of businesses and other organizations currently use these hotlines.  What also is new is that more businesses are using not just telephone-based hotlines but also are providing for confidential reporting of fraud via their websites and/or e-mail.

The next fastest growing anti-fraud control is the implementation of fraud training for employees.  Approximately 52 percent of all businesses and other organizations provide this to their employees – an increase of nearly 8 percent from the 2014 survey.

Other anti-fraud controls whose implementation has increased by more than 5 percent during the past two years include:

  • Adoption of an anti-fraud policy
  • Adoption of a code of conduct
  • Increased management review of operating results
  • Surprise audits
  • Fraud training for managers and executives

What all of these anti-fraud controls have in common is that they show a “tone at the top” which says management does not condone fraud and is committed to fighting it.  None of these anti-fraud controls is overly expensive, especially in light of the continuing fact that the cost of fraud to the typical company is approximately 5 percent of revenues.

Look for more details on these and other findings from the ACFE 2016 Report to the Nations in my next series of blogs.

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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.

Revisiting the Fraud Triangle – A Closer Look at Rationalization

The Fraud Triangle is a troika of troublesome tendencies – Opportunity, Pressure and Rationalization – that often are present when fraud is taking place. 

In previous posts, David Anderson of David Anderson and Associates, a Certified Fraud Examiner offering forensic accounting services in Philadelphia, has mentioned that if at least one of the three factors can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away. 

In this article, Anderson takes a closer look at the final leg of the triangle – Rationalization.

Rationalization is the mental process that a potential fraudster goes through to justify committing the fraud.

“Without being able to rationalize to oneself why it is OK to commit the fraud,” said Anderson, who provides forensic accounting services in Philadelphia, “a potential fraudster with the opportunity and pressure will not proceed. “

Anderson said examples of rationalization can include:

  • I’m only temporarily “borrowing” the money to meet my financial obligations, and I intend to pay back the “loan” in full;
  • I’m not being paid what I am worth, so I’m making up the difference through fraud;
  • The company makes a lot of money, so it won’t be missed/ be affected by the small amount I am taking;
  • The owner/management is committing fraud, so why shouldn’t I?
  • I have been “wronged” by the company/owner/management, so this is how I can get back at them.

Owners/managers can influence the rationalization process and discourage the rationalization to commit fraud by taking several anti-fraud steps:

  • Provide anti-fraud training to all employees which, among other things, includes specific statements that committing fraud is wrong and unacceptable; that management is dedicated to preventing fraud; and that encourages employees to be on the lookout for fraud;
  • Establishing a “hotline” which allows employees to confidentially report suspected fraud;
  • Establishing a “tone at the top” that demonstrates that management is committed to fighting/preventing fraud (and not merely paying lip service to the fraud);
  • Establishing policies and procedures which allow an employee to pursue complaints about being “wronged” (real or imagined);
  • Letting employees know that management is watching and is implementing such anti-fraud measures as surprise audits and regular management reviews.

Taking these steps as well as steps discussed in the previous two articles (establishing strong internal controls and getting to know one’s employees better) are all part of dismantling the three legs of the fraud triangle.

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.

Socially Engineered Fraud Is Nothing to LOL About

We are constantly reminded to create difficult-to-guess passwords, change our passwords frequently, install security hardware and software and regularly update our software to protect against cyber-based fraud.

However, according to 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, some of the most effective and costly frauds – socially engineered frauds – are capable of completely ignoring and bypassing such safeguards.

“Socially-engineered frauds are accomplished primarily through phone calls or emails,” Anderson said, “which seek to persuade the recipient to voluntarily provide the caller or emailer with either passwords and other login information or sensitive personal financial information.”

Anderson, whose firm conducts fraud investigation and installs fraud deterrence programs, said this information can include, but does not have to be limited to, social security numbers, birthdates and bank account numbers.

To illustrate the pervasiveness of socially engineered fraud, Anderson provided several examples that could be underway today right in front of our fraud-detection-sensitive noses:

First, he said, is “The IRS Scam.” This involves, in its most common form, phone calls or, less commonly, email messages coming from the Internal Revenue Service.

The caller informs the recipient past taxes and penalties are owed, and if the recipient doesn’t immediately pay these amounts, IRS agents are poised to haul the person off to jail, or seize the recipient’s house or cars. The recipient is told to purchase a prepaid debit card for the amount owed and to call back with the debit card information.

This year, a variant of The IRS Scam has appeared, Anderson said. The caller informs the recipient that there is a problem with the recipient’s tax refund, and the caller must verify certain information including names, wage amounts and social security numbers for the recipients and their dependents. The fraudster then uses this information to file phony tax returns which seek large refunds that, of course, are to be mailed to the fraudster.

Please note that while the IRS regularly informs taxpayers of tax issues or problems, it does not phone or email them. Despite this, a significant number of people fall prey each year to this scam.

The second socially engineered fraud issue detailed by Anderson is the “Bank-Amazon-eBay-PayPal Scam.” This one occurs via email, making it a “phishing” variety of fraud. The recipient is informed that either there is a problem with his or her online account, or that password information has expired and must be updated.

The email contains a “convenient” link for the recipient to log in to his or her account.  The link is designed to appear to be from the recipient’s bank or Amazon or eBay or PayPal. For example, it would have a URL address similar to “update.amazon.partnerresults.com.” Because the name of the service or firm appears in the link, the recipient believes the link will take him and her to the named site.

Instead, the link takes the recipient to a dummy site where the recipient unwittingly provides the fraudster with a user ID, password and other personal information.  This enables the fraudster to access the recipient’s actual account and to improperly withdraw funds or to order merchandise paid for from the recipient’s credit card or bank account, if that information previously had been stored in the recipient’s account profile.

As with the IRS, most banks, Amazon, eBay and PayPal advise their customers they do not communicate such matters via email. These services advise clients they should go to their corporate site directly to log in and update information rather than clicking on any email links. Again, despite such alerts and warnings, this remains a popular and effective scam.

Finally, Anderson tells of the “You Have Won!” scam. In this cyber subterfuge, the recipient receives a phone call informing him or her that he or she has won an expensive car or vacation in the caller’s sweepstakes.  The caller informs the recipient that before the prize can be awarded, the recipient must pay taxes on the prize.

The recipient is given the option of having the funds withdrawn from his or her bank account – by providing the bank account information to the caller – or by paying via credit card – again, by providing credit card information. In either case – bank account or credit card – the recipient who provides such information either has his or her bank account “cleaned out” or his or her credit card charged to up to the credit limit for fraudulent purchases.

“We should all be aware,” Anderson said, “that we not only are subject to potential hacking of our sensitive personal security and financial information, but also that we are also at risk from socially-engineered attacks via phone or email.”

He said everyone should be cautious about responding to such “attacks” and never should give out sensitive personal security and financial information unless there is absolute certainty that the entity on the other end of such a transaction is the actual organization we think it is and not a social-engineering-savvy fraudster.

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.

Revisiting the Fraud Triangle – A Closer Look at Pressure

The Fraud Triangle is a triumvirate of factors – Opportunity, Pressure and Rationalization – that must be present in order for a fraud to occur. 

In previous posts, David Anderson of David Anderson and Associates, a Certified Fraud Examiner offering forensic accounting services in Philadelphia, has mentioned that if at least one of the three factors can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away. 

In this article, Anderson takes a closer look at the second leg of the triangle – Pressure.  In the third article of this series, he will zero in on Rationalization.

Pressure refers to the personal situation of the potential fraudster that can induce the person to commit the fraud.  Even if the opportunity to commit fraud is present, if the person feels no pressure to commit the fraud, he or she won’t.

“Eliminating such pressures,” said Anderson, who provides forensic accounting services in Philadelphia, “can be key to a successful fraud deterrence program.”

The primary pressure the potential fraudster experiences is the need for money.  Other potential pressures (which are significantly less likely to occur) include revenge (the fraudster feels wronged by the business, its owners or management) and thrill (the fraudster has no need for money, but wants the thrill of committing and getting away with the fraud).

Examples of the need for money include:

  • The potential fraudster’s spouse becomes unemployed or unable to work, and, as a result, the family’s household income has dropped significantly;
  • The potential fraudster has previously lost a higher paying job, and the current job pays significantly less;
  • A member of the potential fraudster’s family has become ill or was injured, and the family is unable to pay the resulting medical bills;
  • The potential fraudster has a drug or gambling problem, and needs additional money to support the problem;
  • The potential fraudster (and/or family) has adopted a lifestyle that requires more money than is currently being earned;
  • The potential fraudster is going through a divorce or other family problems that require more money than is currently being earned.

Although the specific circumstances experienced by the potential fraudster are generally beyond the control of a business’s owners and/or management, the owners and managers should be on the lookout for these types of problems.  It is often as simple as getting to know better the employees who could have the opportunity to commit fraud.

For example:

  • Has the owner or manager noticed whether an employee is driving a more expensive car or wearing more expensive jewelry and/or clothing than would be expected?
  • Has the owner or manager heard (or has it been reported to the owner or manager by another employee) an employee discussing expensive vacations, the purchase of an expensive home or vacation home or the purchase of an expensive boat that would appear to be more than the employee would be capable of handling?
  • Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee discussing family problems, a family member’s illness or injury or a family member’s loss of employment?
  • Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee discussing gambling winnings or losses?
  • Has the owner or manager noticed (or has it been reported to the owner or manager by another employee) an employee exhibiting signs of a drug problem?
  • Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee complaining about being underpaid or passed up for a deserved raise, bonus or promotion?

If the answer to any of these questions is “yes”, the next step would be to consult with the company’s attorney before taking any action (including confronting the employee or questioning other employees).

By being proactive with getting to know one’s employees better, the owner or manager can help identify when an employee is facing a pressure which could potentially turn the employee into a fraudster.

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.

Revisiting the Fraud Triangle – A Closer Look at Opportunity

The Fraud Triangle is a combination of three factors – Opportunity, Pressure and Rationalization – that must be present in order for a fraud to occur. 

In previous posts, David Anderson of David Anderson and Associates, a Certified Fraud Examiner offering forensic accounting services in Philadelphia, has mentioned that if at least one of the three factors can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away. 

In this article, Anderson takes a closer look at the first leg of the triangle – Opportunity.  In subsequent articles, he will examine the other two legs.

Businesses will install a set of policies and procedures as part of their fraud deterrence programs that are designed to protect systems and safeguard assets.  These policies and procedures are often referred to as “internal controls”.  If such internal controls are lacking, are poorly designed, or are easily overridden, it presents the potential fraudster with the opportunity to commit fraud.

“Let’s look at two common businesses situations,” said Anderson, who provides forensic accounting services in Philadelphia, “and how internal controls should be designed to prevent or significantly reduce the potential for fraud.”

The first, he said, is for handling payments made by customers.  In a well-designed internal control system structured with fraud deterrence in mind, the person who opens the mail will be different from the person who prepares the deposit slip for the bank.  Furthermore, neither of these people will actually make the bank deposit or record the receipt of funds and bank deposit in the company’s accounting system.  In addition, the entire process would be overseen by a manager or supervisor.  This step helps in fraud deterrence and lessens the need for a fraud investigation.

However, as this example indicates, these controls require that there be at least five different people involved.  Many smaller businesses don’t have enough staff to separate these functions.  As a result, some employees end up performing more than one of these functions.  This creates an opportunity for the employee to commit fraud.

For example, the employee who opens the mail could also prepare the deposit slip and record the receipt of funds and bank deposit in the company’s accounting system.  If that employee is trusted by the manager/supervisor, the manager/supervisor might not actively review the employee’s activities.  This creates the opportunity for the employee to divert certain customer payments.

A second common business situation is for processing vendor invoices.  In a well-designed internal control system, the person who sets up the vendor in the company’s accounting system is different from the person who approves the vendor invoice.  Furthermore, neither of these people actually enter the invoice in the company’s accounting system, process the payment or sign the payment check.

As with the previous example, the entire process would be overseen by a manager or supervisor.  If a company is unable to separate these duties, it creates an opportunity to commit fraud.  If the employee who sets up vendor in the company’s accounting system can also enter vendor invoices and process payments, that employee would have the opportunity to create a phony vendor (or change the address of an actual vendor), process phony invoices and produce payments that the employee could divert for his/her own use.

Well-designed internal control systems help prevent the opportunity for the fraudster to commit fraud.  This, in turn, “knocks out” one leg of the fraud triangle, thereby preventing or significantly reducing the potential for fraud.

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

About David Anderson & Associates

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

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.