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

In his October 23, 2017 blog, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed the fraud risks associated with Bitcoin and other cryptocurrencies. Last September, the European Union Agency for Law Enforcement Cooperation (“EUROPOL”) issued its annual report on cyber fraud. The EUROPOL report particularly noted the rise in frauds associated with cryptocurrencies. Anderson will discuss some of the key findings of this report in this week’s blog.

Specifically, the EUROPOL report stated that “A consequence of Bitcoin and other cryptocurrencies becoming more mainstream and a recent spike in value, is that cryptocurrency users and facilitators are subjected to the same attacks aimed at users of traditional financial instruments – attackers now phish for victim’s login credentials for their online exchanger accounts, information stealing malware also hunts for victim’s electronic wallets and private keys, and entities holding stocks of cryptocurrencies, such as exchangers, have become the target for hackers.”

As Anderson noted in the October 2017 blog noted above, these risks are increasing because transactions involving Bitcoin and other cryptocurrencies are anonymous and leave no digital footprint, so once a hacker or other attacker gains access to a victim’s login credentials or the victim’s electronic wallet and private keys, the theft of their cryptocurrency is virtually untraceable.

Furthermore, the EUROPOL report noted that due to significant fluctuations in value over the past three years (Bitcoin, for example, rose from less than $500 in March 2016 to over $13,000 in December 2017, and has since fallen to around $4,000), hedge funds and other investment vehicles are increasingly investing in cryptocurrencies.  This has helped increase investor demand for cryptocurrencies.

The EUROPOL report also noted that the lack of traceability has made cryptocurrencies attractive for money laundering.  This in turn, increases the risk that those who accept payment in cryptocurrencies could be deemed as helping to facilitate criminal activity.

The EUROPOL report concluded that the use of Bitcoin and other cryptocurrencies will continue to increase in the future as will the fraud risks associated with their use.

If you want to learn more about cryptocurrency fraud, advice and assistance is available from a Certified Fraud Examiner working with an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

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

In last week’s blog, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed the top three frauds perpetrated against the elderly (as reported by the United States Senate Special Committee on Aging), and offered tips for helping seniors to avoid such frauds.  This week, he will discuss the next three most frequent frauds perpetrated against the elderly and next week he will address the remaining four most frequent frauds targeting seniors.

The fourth-most-frequent fraud perpetrated against seniors is known as either the “Are You There?” Or “Can You Hear Me?” Fraud.  This relatively new fraud involves the caller asking the answerer either of those two questions in order to get the answerer to say “Yes.” Another variation involves the caller asking for “Bob” or “Cindy”, and upon being told that the such a person is not at this number asks for the answerer’s name. The caller than says, “Did you say that this is (name of answerer)?”, hoping to elicit the “Yes”.

By answering “Yes”, the senior now has provided the caller with a voice print.  Scammers then use the voice print for making unwanted charges to utility bills, phone bills and/or credit cards.  Another variation of this fraud is used to ascertain that a live person is answering the phone, and upon the person saying “Yes”, he/she is transferred to a live telemarketer or scammer.

To help seniors avoid this type of fraud, they should be advised to get caller ID, and not answer any calls from numbers they don’t know.  As with Anderson’s recommendations regarding robocalls, they should also consider getting a robocall blocking service such as Nomorobo or Robokiller.

The fifth-most-frequent fraud perpetrated against the elderly is known as the Grandparent Scam.  The caller pretends to be a family member, usually a grandchild, who has an urgent need for money to cover an emergency, medical care or a legal problem.  The scammer may speak in a quieter voice (or speak away from the receiver) in order to make it hard for the victim to be sure of the caller’s voice.

In a variation of this scam, the caller claims to be a police officer or lawyer calling to tell the grandparent that their grandchild has been arrested and needs money to immediately post bail or else be held overnight in jail. In another variation, the “grandchild” states that he/she has been arrested for drug possession and asks the grandparent to not tell his/her parents.  As with the IRS Impersonation scam, the caller relies upon the fear of the call recipient that something has to be done immediately.

Also, as with the IRS Impersonation scam, the grandparent is told to immediately purchase some type of prepaid card – either a prepaid VISA/Mastercard or gift card.  After purchasing the prepaid card, the senior is told to immediately call back and provide the card’s information to the caller.

To help avoid this type of elder fraud, the senior should be advised to take down the information and phone number provided, and then immediately call a knowledgeable family member to ascertain if this is actually the case.  Seniors should also be advised to never give out credit card information over the phone.

The sixth-most-frequent fraud perpetrated against seniors is the Computer Tech Support Fraud.  Although this scam most frequently occurs online (a warning pops up when the user is on particular websites, informs the user that their computer has become infected with a virus, and advises them to either click on a link to fix their computer or to call a number for help), it also occurs via phone (a call informing you that the scammer is from Microsoft or Apple and that your computer or other device has been compromised).

The scammer asks the victim for permission to take control of his/her computer and informs the victim that they will fix the problem for a fee.  Depending upon the type of scam, one of three things happens here.

• Under Scam Type One, the scammer charges an exorbitant fee and after a few minutes proclaims that the problem has been fixed.
• Under Scam Type Two, the scammer does the same thing as under Scam Type One, but also searches the victim’s computer for personal financial information which can be used to: steal funds; make fraudulent charges to credit cards; or open new credit cards in the victim’s name.
• Under Scam Type Three, the scammer claims the victim’s computer has been hijacked by a third party and informs the victim that the only way to get control of the computer back is to pay a “ransom” to this third party.

If the scammer successfully obtains payments from the victim, the scammer may call back at a later date and inform the victim that he/she was accidentally overcharged and is eligible for a refund, but the refund can only be paid via direct wire to the victim’s bank account.  If the scammer can get access to the victim’s bank account, he/she can then drain the account. As with the IRS Impersonation and Grandparent scams, the Computer Tech Support fraud relies upon the elderly person’s fear that immediate action must be taken.

As with other frauds, the senior needs to be educated about this kind of fraud.  He/she should be told that Microsoft, Apple, and other tech companies will not call them about computer problems.  Furthermore, he/she should be advised that if a warning pops up on his/her computer, the senior should immediately call an informed family member or friend, or at least shut down his/her computer until such a person can be consulted.

Assistance in this area also is available from a Certified Fraud Examiner working with an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

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

Fraud against Senior Citizens (also known as Elder Fraud) has been increasing in recent years.  Last year, the United States Senate Special Committee on Aging released a report identifying the top 10 frauds targeting seniors.

In this week’s blog, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, will discuss the top three such frauds in detail and offer tips for helping seniors avoid such frauds.  Next week, he will do the same for the next three most frequent frauds perpetrated against the elderly, and the following week, he’ll address the remaining four most frequent frauds targeting seniors.

The top fraud perpetrated against senior citizens is the IRS Impersonation Scam (which has been the subject of several of his blogs over the past few years).  Not only is this fraud complained about by seniors more than twice as much as the next highest fraud, but also it’s the top fraud perpetrated against the elderly in Pennsylvania, New Jersey, and Delaware.

Under the IRS Impersonation Scam, the senior citizen receives a call from a fraudster posing as an IRS agent.  The fraudster falsely accuses the senior citizen of owing back taxes and penalties, and further informs the senior citizen that if these are not paid immediately, the IRS will immediately seize his/her  house, car, and other assets.  In some instances, the fraudster claims the police have been called, and the senior will be arrested if payment is not made immediately.

The senior is told to go to the nearest grocery store or drug store and immediately purchase some type of prepaid card – either a prepaid VISA/Mastercard or gift card (in one instance, the senior was advised to purchase a prepaid iTunes gift card).  After purchasing the prepaid card, the senior is told to immediately call back and provide the card’s information to the “IRS agent”.  In this case, the fraudster relies upon the fear of the senior citizen that he/she did something wrong and must immediately fix the problem to avoid loss of assets or to avoid going to jail.

To help prevent such frauds, senior citizens should be educated that:

• The IRS never will contact them via phone or e-mail with such threats (similar variations of this scam rely upon e-mails with the same types of threats);
• The IRS normally contacts people via U. S. mail, and gives them time to address issues regarding back taxes and penalties (weeks, not minutes or hours); and
• They should, when receiving such a call, immediately hang-up and contact either their tax preparer or a knowledgeable relative or friend to discuss the matter.

The second most frequent elder fraud is robocalls and other targeted unwanted calls. (It is the second most common fraud perpetrated against elderly Pennsylvanians and the fourth most common fraud perpetrated against New Jersey residents.) These calls are made by fraudsters in the hope the senior citizen will answer the phone.  An increasing variation on these types of calls is the use of spoofing to make it seem the call is coming from someone with the same exchange as the senior citizen (the exchange is the set of three numbers immediately following the area code).

Upon answering the phone, the senior citizen is faced with a number of possible scams.  For example:

• There is a problem with the senior’s bank account that needs to be resolved immediately;
• There is a problem with the senior’s credit card that needs to be resolved immediately;
• The caller is from the senior’s credit card company and advises the senior that he/she is eligible for a credit line increase;
• The warranty on the senior’s car has expired, but the caller can immediately renew it;
• The caller is from a charity that is experiencing financial problems and needs help to continue (for example, the local animal shelter that, if it doesn’t get financial help, will have to close and euthanize all the dogs and cats).

The purpose of these calls is to obtain personal financial information from the senior which can be used to, among other things: drain bank accounts, make unwanted charges on the senior’s credit cards, or enable identity thieves to open new accounts in the senior’s name.

To help avoid such frauds, senior citizens should be educated that they should never give out personal financial information over the phone to persons they do not know.  For example, if they are advised there is a problem with their bank account, they should immediately hang up and call their local branch to find out if there really is a problem.

Similarly, for credit cards, they should immediately hang up, get their latest credit card statement and call the number listed on their statement.  Another possibility is to have the senior citizen sign up for a service such as Nomorobo which can screen out robocalls.  Although Nomorobo does not work with traditional copper-based land lines, it is free for VOIP landlines and only $1.99 per month for smartphones.  Another similar service is Robokiller ($0.99 per month).

The third most frequent scam perpetrated against seniors is the Sweepstakes Scam (also known as the Jamaican Lottery Scam).  Under this fraud, the fraudster calls the senior and advises him/her that he/she has won a sweepstakes prize – usually something in the neighborhood of $50,000 to $100,000. (In one variation, Anderson was contacted by such a fraudster and advised he had won a top-of-the-line Mercedes Benz, but needed to pay the taxes on the prize before he could receive it.)

In order to claim the prize, the senior is told that he/she must pay a small processing fee or a local tax (usually anywhere from $250 to $1,000).  The senior is advised to pay the fee in a variety of ways:  via wire transfer; via Western Union wire; via use of prepaid VISA/Mastercard or gift card; via purchase and mailing or a money order; or even by sending cash in the mail.  After the fraudster receives the payment, he/she calls the senior citizen back and persuades the senior citizen to pay another small amount; for example, the fraudster claims to have made a mistake in the processing fee amount or states that he/she forgot that there also is a local tax that must be paid, etc.

The fraudsters will continue to call back the senior with requests for additional amounts as long as the senior keeps making payments.  The fraudsters also sell the senior’s information to other fraudsters (which can be quite lucrative since the senior has shown a propensity to pay).  In one variation of this fraud, after the senior had paid over $20,000 and not received the promised prize, the senior was contacted by a person who wanted to help the senior recover the “stolen” funds.  This person offered to do so for just $1,000 (and so began another scam of the senior).

To help seniors avoid being victimized by such scams, they should be educated to never send money to claim such a prize and to hang up the phone and immediately contact a knowledgeable family member or friend. Such assistance also is available from a Certified Fraud Examiner working with an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

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

If you sell goods via your website or via other websites (such as Etsy, Amazon, eBay, etc.), you need to be aware of fraud schemes that are perpetrated against sellers such as yourself.  In this week’s blog, I discuss articles about such fraud schemes and how to fight them which have been recently featured on the business website entrepreneur.com.

These fraud schemes include:

• Classic Fraud: Under this scheme, fraudsters purchase stolen credit card credentials on the dark web, and place orders using the stolen information. The fraudsters arrange for you to ship your product to a P. O. Box or other location from which they can retrieve the product (such as a re-shipper).  They then sell locally the fraudulently obtained items.
• Triangulation Fraud: The fraudster creates a storefront on Etsy, Amazon or eBay, and offers high demand goods at very low prices. He/she fulfills orders by using the Classic Fraud scheme to purchase these goods from legitimate vendors, and has the goods shipped to the customer who purchased from his/her store. This fraud scheme also allows the fraudster access to the credit card information of the customer who placed an order on his/her website.
• Interception Fraud: Most common during the winter holidays, fraudsters steal packages from the front porch of houses. Also, if fraudsters have gained access to a victim’s computer, they can monitor for e-commerce orders, and arrange to have the purchases rerouted.
• Card Testing Fraud: Under this scheme, fraudsters test the validity of credit card numbers by visiting websites which provide information as to why a card purchase was declined (such as exceeds credit limit or incorrect expiration date). They then use this information to make purchases on a different website under the Classic Fraud scheme.
• Account Takeover Fraud: The fraudster, often using phishing, obtains the logon ID and password of a customer. The fraudster then logs on as the customer, looking to see if credit card information has been stored by the customer for that website.  If so, the fraudster initiates purchases and changes the shipping address (as per the Classic Fraud scheme).
• Identity Theft: This type of fraud has become prevalent. Under this scheme, the fraudster obtains the personal identification of a person, and either creates credit cards in the victim’s name or opens new credit cards in the victim’s name.
• Chargeback Fraud: This type of fraud is most often perpetrated by consumers. The consumer makes an online purchase.  He/she then contacts the vendor (after the purchased items have been delivered) and states that his/her credit card was stolen or otherwise misappropriated and that he/she did not make the purchase or receive the items. Alternately, the customer claims that they are a victim of Interception Fraud because they never received the goods ordered.

So, how do you fight such fraud?  Here are three possibilities:

• Turn On Gateway Fraud Filters: You work with your payment gateway vendor to set up basic fraud prevention rules to block or flag transactions that may be fraudulent (for example, an AVS mismatch – where the billing address entered does not match the billing address on file with the credit card company, or declining all transactions originating from certain countries). However, this can create false declines which could prevent you from certain non-fraudulent transactions.
• Manual Review: You assign one or more employees to check out every transaction or ones that are above a specified dollar amount or ones for which the items purchased are not shipped to the same address as the billing address. Your employee may use Google and social media to check the legitimacy of the shipping address.  However, this can be very time consuming, and the online research tools available are limited.
• Use of Third-Party Fraud Prevention Companies: Such companies provide online solutions to reduce or eliminate fraud. They can be very effective and can significantly reduce chargebacks.  However, they can be expensive and may require fraud expertise to set up and maintain.

If you would like the opinions of an expert in the field of fraud prevention, a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help. For details, contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

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

In today’s age of technology, most sales transactions involve an electronic or paper check payment.  However, there still are numerous businesses that largely deal with cash payments, including cannabis operations, casinos, retailers in low income areas, food trucks, and small food operations (such as water ice or pretzel carts). For such businesses, the risks of fraud due to diversion of cash are much higher than those of businesses that deal primarily with electronic (including credit card) or paper check payments.

Fraud from Moment of Sale to Internal Depository

Cash can be diverted between the moment of sale and the business’s internal depository (typically a safe or locked cabinet) in a variety of ways.  These include:

• The employee receiving the cash payment from the customer can just pocket the money, and not leave the business with any documentation evidencing the customer’s payment; or
• The employee receiving the cash payment can prepare a manual receipt for the customer (either not numbered or numbered but not controlled), place the cash receipt in a register drawer, and later remove both the cash and any copy of the cash receipt before the register drawer is removed and counted; or
• The employee who removes and counts the register drawer can remove both the cash and any copy of the cash receipt before counting and recording the cash in the register drawer and placing it in the internal depository.

Safeguards to protect against the above types of diversion include:

• Use of video surveillance;
• Use of point-of-sale systems to record all sales;
• Use of numbered and controlled manual cash receipt books (with duplicates);
• Removal and counting of cash register drawers under management supervision;
• Regular management review of sales transactions.

Fraud Between Internal Depository and Actual Deposit of Cash into a Bank

Cash also can be diverted between the time it is placed in the internal depository and the time it is deposited in the bank.  These diversions can be accomplished by:

• An employee who can prepare and record bank deposits, and who also performs bank reconciliations, can remove cash from the internal depository, record a bank deposit for the amount removed, and “adjust” the bank reconciliation to hide the fact that no bank deposit was made.
• Alternatively, an employee who can initiate and record credit memos (and who also has access to the internal depository) can remove cash from the internal depository and process a credit memo against customer sales to “account” for the shortfall in cash.
• Also, for a business that does not or cannot use bank accounts (such as cannabis operations), an employee with access to the internal depository simply can remove cash from the internal depository.

Safeguards to protect against the above types of diversion include:

• Use of video surveillance;
• Separation of duties so that no employee who prepares bank deposits makes bank deposits; that no employee who performs bank reconciliations; and that no employee who initiates credit memos can record deposits or access cash in the internal depository;
• Regular and timely reconciliation of bank accounts; and
• Performance of regular (even daily) cash counts of the contents of the internal depository under management supervision.

Fraud Involved with Cash Disbursements

Cash also can be diverted as part of the disbursement process when it is used to pay employees, vendors, and others.  These circumstances occur in businesses that do not or cannot use bank accounts (again, cannabis operations).  These diversions can be accomplished by:

• An employee in charge of processing cash disbursements creates a non-existent vendor, creates phony invoices, and “pays” himself/herself the amount on the invoices.
• An employee in charge of processing cash disbursements for inventory or supplies arranges to return certain delivered inventory or supplies to the vendor but “pays” the original vendor invoice to himself/herself. He/she then pays the vendor the revised (lower) vendor invoice amount, keeping the difference between the two vendor invoices.
• An employee in charge of processing payroll creates a non-existent employee, and “pays” himself/herself the payroll amount.
• An employee in charge of processing expense reimbursements creates either non-existent expense documentation (such as getting fake receipts from http://salesreceiptstore.com/) or makes copies of previously submitted expense documentation, and “pays” himself/herself.

Safeguards to protect against the above types of diversion include:

• Use of video surveillance;
• Separation of duties so no employee who processes cash disbursements can create a vendor or employee or return inventory or supplies. Additionally, such employee cannot hand out payroll payments to employees.
• Management approval of all vendor invoices, expense reimbursements, and employee payroll.
• Performance of regular (even daily) cash counts of the contents of the internal depository under management supervision.

The potential cash diversion risks and safeguards discussed above are not all-encompassing but are meant to provide examples.  The actual cash diversion risks and safeguards to prevent them are dependent upon the specific circumstances present in the business.

Additionally, very small businesses (as well as smaller non-profit organizations such as sports league snack stands and smaller houses of worship) may not be able to afford video surveillance and may not have enough staff to facilitate the separation of duties discussed above.  In such cases, more management oversight would be necessary to offset these shortcomings.

If you want to learn more about how to prevent fraud in your cash operations, a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help. For details, contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

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

In Parts 1 and 2 of this three-part series, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, discussed frauds committed by trusted accounting employees, and how these frauds could have been prevented.  This week, he closes the series with a look at frauds by trusted members of management which he has investigated.

Fraud #1: The President (and 1/3 owner) of a family-owned retail business was a gambler.  He could be found at one or more Atlantic City casinos four or more days a week.  However, he ran short of money to support his gambling habit.  He knew the family business generated a lot of cash sales, so he schemed to use the company’s cash to finance his gambling.  He made sure all cash sales were manually recorded on numbered receipt pads.  He then made sure the pads were used in mixed sequence (of the six pads in use at any one time, no two pads were in sequence), so the receipt numbers could not easily be tracked.

Next, he fired the long-time bookkeeper and installed his new girlfriend as the bookkeeper.  She had no accounting background at all, and therefore depended on him to teach her bookkeeping and how to use the accounting system.   Finally, he made himself responsible for reconciling cash received to the receipts.  Then, each day, he took a handful of receipts and threw them in a desk drawer while simultaneously pocketing the cash amount of those receipts.  He gave the remaining receipts and cash to the bookkeeper for entry into the accounting system and deposit in the bank.

Over time, the business began to experience cash-flow problems (due to his fraud).  He hid this by slowing or even stopping payments to vendors, and then blamed the 2008 recession as the cause of their refusal to ship product to the business.  His scheme was discovered when he was out sick one day.  His brother, another 1/3 owner of the business, was looking for a document and, in searching for the document in the President’s desk, discovered the drawer with the hidden receipts.  By then, the President had taken over $750,000 from the business.

Since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight.  Also in this case, the other two business owners should have been suspicious of the President firing the long-time bookkeeper.  They should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures, train the bookkeeper, and produce monthly operating reports.  If this had been done, the President would not have been able to perpetrate his fraud scheme.

Fraud #2: The Vice President /General Manager of a family-owned business was the heir-apparent to run the business as the primary owner began to cut back on his involvement in the business.  However, he had only a minor ownership interest, and was supposed to share the profits of the business with other family members.  Instead, he schemed to keep most, if not all, of the profits for himself.  He began by charging significant amounts of personal expenses on his company credit card.  Since he approved credit card purchases, he was able to have these charged as business expenses of the company.

Next, he began to purchase inventory through this company, but for the benefit of his wife’s retail business.  He alone took control of how much the wife’s business was to reimburse the family-owned business for these purchases.  Over the course of several years, he had the wife’s business reimburse only a fraction of the inventory she used, but which was paid for by the family-owned business.  Next, he closed one of the company stores and installed his wife’s business in the store.  Although he stated his wife’s business would reimburse the family-owned business for the rent, he again only had her business reimburse a fraction of the total rent.

Finally, he set up another business to compete with the family-owned business, and began diverting sales to his new business.  His fraud was discovered after the company began to experience significant cashflow problems.  His attempts to cover-up his fraud caused him to have major disagreements with the primary owner.  Due to these disagreements, the primary owner fired the Vice President /General Manager.  After the primary owner stepped back into the business, he discovered the fraud.

As with the previous fraud, since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight. The primary business owner should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures and produce monthly operating reports.  If this had been done, the Vice President/General Manager would not have been able to perpetrate his fraud scheme.

Fraud #3: The General Manager of an automobile dealership owned only 15 percent of the business, but schemed to keep a greater share of the profits.  He purchased two small nearby businesses – a car wash and a used car lot.  Previously, the automobile dealership had sent each customer car it serviced and each used car it purchased to an auto detailer.  Now, the General Manager started to send each such car to his car wash.  He merely washed each car, but charged the automobile dealership for a full detail.

Next, he schemed to have the automobile dealership sell to his used car lot good quality used cars at large discounts, and to purchase from his used car lot poorer quality used cars at large markups.  His scheme was discovered when an employee overheard the General Manager discussing the huge profits that his car wash and used car lot were making at the expense of the automobile dealership.  The employee reported this to the dealership’s primary owner, and the General Manager was fired.

As with the previous frauds, since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight.   The primary business owner should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures and produce monthly operating reports.  If this had been done, the General Manager would not have been able to perpetrate his fraud scheme.

As can be seen from the frauds discussed above, when a business owner cedes active oversight to internal senior management, it is critical to employ an outside accounting or forensic accounting firm to provide a measure of oversight and independent reporting to the business owner.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help safeguard your company, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

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

Last week, in the first segment of a three-part series, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed payroll frauds committed by trusted accounting employees, and how the frauds could have been prevented.  This week, in Part 2, he looks at non-payroll frauds by committed by trusted accounting employees.

Fraud #1: The Controller of a regional retail chain began using the company’s petty cash fund (over which she had total control) to perpetrate her fraud.  Initially, she “borrowed” money from the $1,000 fund and left a personal check in the petty cash box for the amount borrowed.  After receiving her next paycheck, she repaid the “loan” and retrieved her check.  This went on for several months with the “borrowed” amount regularly increasing until she was taking almost the entire $1,000 amount each pay period.  To further her scheme, she persuaded the owner to increase the petty cash fund to $5,000.

As the scheme continued, her “borrowings” increased to the point that the amount borrowed exceeded her entire paycheck, and she was unable to repay the petty cash fund.  No problem, she then launched her next scheme.  She made copies of other employee’s previously reimbursed expense documents, and submitted these as her own (reimbursing herself through petty cash).  This scheme was discovered only when the Controller was away on vacation and the owner went into the petty cash box to pay the person who watered the plants in the office.  He discovered that less than $100 cash was left in petty cash along with over $4,900 in copies of receipts (one of which he recognized was from his most recent expense reimbursement request).

The owner should have initially been suspicious of the request to increase the petty cash fund to $5,000.  He should have demanded written documentation of why it was necessary for such a large increase.  Additionally, he should have conducted regular random surprise audits of petty cash, particularly on the day before a payday and on the day before a long holiday weekend (these are the most likely times to find petty cash fraud).  Had he done so, he could either have prevented the petty cash fraud or stopped it in its early stages.

Fraud #2: The same Controller as in the above fraud also engaged in an additional fraud scheme involving accounts receivable.  The retail chain had its own branded credit card for customer use in making purchases from the chain.  The Controller had previously been issued such a credit card, and the card balance reached a point where she was unable to pay the amount due.  To solve this problem, she simply issued a credit memo which wiped out the credit card balance (obviously the company had no internal controls over credit memos).

The Controller then expanded this scheme by identifying friends, family, and neighbors who also had the chain’s branded credit cards.  She approached these people with an offer to eliminate their credit card balances in return for cash payments (to her) of a percentage of the amount eliminated.  This scheme was discovered as part of the forensic examination Anderson conducted after the owner found the above petty cash fraud.

Because of the possibility of improper use, credit memos should be tightly controlled.  In this case, either the owner’s approval should have been required for issuance of a credit memo or at least approval by two different managers for such issuance.  Additionally, the owner should have required that a monthly analysis of accounts receivable be produced which included identification of all credit memos applied against accounts receivable.  Had such controls/procedures been in place, the fraud could have either been prevented or stopped in its early stages.

Fraud #3: The long-time bookkeeper for a personal liability law firm was responsible for all accounting activities, including writing checks from the firm’s escrow account and recording all transactions on a manual One-Write accounting system.  She began her fraud by writing checks to herself, but recording them on the One-Write system as having been written to various vendors.  Because of the large number of cases, she was able to spread out the improper payments so no one case would have too many vendor payments.

This fraud continued for years until one week when the bookkeeper was on vacation.  The owner received a call from a vendor complaining an invoice had not been paid (such a call would normally have been transferred to the bookkeeper).  Because the escrow account bank statements had arrived the day before, the owner started going through the paid checks to see if any of them were for this vendor’s invoice.  Instead he found multiple checks paid to the bookkeeper.  Our investigation found that this fraud cost the law firm over $500,000.

As with some of the previous frauds, the easiest way to have prevented this fraud or to have caught it in the early stages would have been for the owner to have had the escrow account bank statements sent by the bank directly to him so that he could spend a few minutes each month reviewing the statement and the cancelled checks.

Many business owners believe installing controls to prevent frauds are time-consuming and expensive.  In each of the above cases, installing relatively easy-to-implement and low-cost, or no-cost, controls could have prevented each of the above non-payroll frauds.

Next week, in the final segment of this three-part series, Anderson will discuss fraud executed by trusted members of management.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help safeguard your company against such fraud schemes, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

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

Fraud is most often committed by employees who have decided to take advantage of their trusted status. They are usually able to commit these frauds because their relationship with the company has caused management to relax its oversight of their activities or because, as members of management, they can override internal controls.

This article is Part 1 of a three-part series addressing frauds investigated by forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia. It will focus on some payroll frauds committed by trusted accounting employees, and how the frauds could have been prevented. 

Payroll Fraud #1: The Controller of a real estate development company noted there was a “bug” in the new payroll software.  The bug caused the cash requirements report (used to determine how much was required to fund the payroll bank account) to show a higher total funding requirement than was necessary.  Rather than reporting the bug to the software company, the Controller funded the payroll bank account with the total shown on the flawed report, and, using out-of-sequence checks, paid himself the overage each pay period.  Because of his trusted status, the company’s owner never noticed the problem until several years later when the company experienced cash flow problems.  The discovered fraud exceeded $3 million.

If the owner had decided to have the payroll bank account statements (and corresponding cancelled checks) delivered directly to him, and spent a few minutes each month reviewing these documents, he would have noticed the large checks written to the Controller and would have discovered the fraud much earlier.  Alternatively, the owner could have required regular analyses of fluctuations in expenses.  In such a case, he would have noticed a sudden and ongoing sizeable jump in payroll costs, and could have investigated the cause.  In either case, the fraud could have either been prevented or discovered in its early stages.

Payroll Fraud #2: The newly hired Director of Finance for a municipal utility learned, among other responsibilities, she was wholly responsible for setting up employees with the utility’s payroll service, and for tracking (via a spreadsheet) employee vacation and sick pay.  Using these trusted capabilities, she started her fraud by informing the payroll service that she had a higher starting salary than she did.  She then based subsequent raises (which were rewarded as percentage increases) on this higher salary.  Additionally, because she alone was responsible for tracking vacations and sick pay, she regularly took additional vacations and sick pay over her actual earned vacation and sick pay.  This was magnified even further because she frequently worked overtime during weeks that she took the unearned vacation and sick pay.  As a result, some of her regular work hours were paid at overtime rates.  This fraud was only discovered when she retired, and, in reconciling her pension entitlement, the new Director of Finance noticed the difference in her original approved starting salary and the salary that was paid to her.

If the municipal utility had instituted certain procedures for handling the payroll, vacation and sick pay for senior executives, this fraud could have been prevented.  Such procedures would require either multiple signoffs for executive salary changes as well as for approvals of vacation and sick pay, or would have designed a specific executive to approve these items for another executive. 

Payroll Fraud #3: The long-time bookkeeper for a small professional services business was given total responsibility for processing payroll.  One of the features of the payroll process was that the company used the payroll system to reimburse employees for business expenses.  The bookkeeper realized this could enable her to receive reimbursements for non-existent expenses.  Experimenting with small amounts at first, she noticed that management was not reviewing payroll, and not picking up on these improper reimbursements.  She eventually increased the reimbursements to herself to many thousands of dollars per pay period (because she was also given total responsibility for the company’s accounting system, she was able to manipulate how the reimbursements were recorded in the company’s system). This fraud encompassed many hundreds of thousands of dollars and was only discovered when the company experienced cash flow problems and hired an outside consultant to help it improve its cash flow.  The outside consultant found the excessive reimbursements and reported them to the company.

Because the company was relatively small, if the owner had taken a few minutes each pay period to review the payroll and payroll funding reports, he would have noticed the increase in payroll costs and the unusual amount of reimbursements going to the bookkeeper.  This would have either prevented the fraud or caught it in its early stages.

You’ll note a common scheme in each of the above frauds.  Because the top executive or owner trusted the accounting employee, he or she failed to take the small amount of time necessary to review payroll activities.  This in turn enabled the perpetrator to execute the fraud.

Next week, Anderson will discuss non-payroll frauds perpetrated by trusted accounting employees who turned to the dark side.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help safeguard your company against such fraud schemes, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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