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Protecting Charities and Non-Profits from Fraud

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

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

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

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

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

As a result, the organizations, said Anderson, must rely upon a few trusted employees and volunteers to oversee their operations and to handle their finances. With such limited resources, explained Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, most small to medium-sized non-profits are not able to effectively implement the necessary internal financial and accounting controls to adequately protect against fraud.

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

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

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

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

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

 

About David Anderson & Associates

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

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

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

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

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

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

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

About David Anderson & Associates

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

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

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

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

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

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

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

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

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

About David Anderson & Associates

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

Fighting Vendor Billing Fraud

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

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

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

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

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

So, how can such fraud be combatted? Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, recommends business owners consider the following procedures:

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

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

About David Anderson & Associates

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

What is a Song Worth?

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

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

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

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

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

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

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

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

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

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

About David Anderson & Associates

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

Why Bank Reconciliations Are Critical in Protecting Against Fraud

It is important for a business to closely monitor and control its bank reconciliations and other account-related activities to help prevent fraud, according to a noted Philadelphia forensic accountant and Certified Fraud Examiner.

David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, previously has written about various aspects of the role that bank reconciliations play in enabling or preventing fraudsters from embezzling or diverting funds.

In this article, Anderson looks at various features of such types of fraud and the steps that can be taken to prevent them.

To start, there’s the diversion of bank deposits or improperly receiving cash from bank deposits. To prevent this fraud from occurring, according to Anderson – a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley – the duties of preparing deposit slips, making the bank deposits, recording the deposits in the company’s accounting system and performing the bank reconciliation should be separated from one another.

Another typical fraud pattern involves the improper withdrawal of funds via the use of counter checks, or out of sequence checks. To keep this from taking place, the duties of check signatory, physical control of checks and bank reconciliation should be separated from one another, says Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

One more commonly seen scheme also deals with the improper withdrawal of funds but, in this case, fraudsters use transfers to other accounts at the same bank, ACH (automated clearing house) payments and wire transfers to receive their ill-gotten gain.  Anderson, a Certified Fraud Examiner in Philadelphian, said this particular fraud plan can be thwarted by keeping persons who have the authority to perform these transactions separated from the bank reconciliation function.

Also, the improper use of business ATM cards, according to Anderson, can be prevented by keeping the persons who have the use of these cards separated from the bank reconciliation function.

While Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, said he recognizes that – especially in smaller companies – it might not be possible to separate such functions, he suggests adding these controls:

  • Have bank statements (along with copies of paid checks) mailed directly to the home of the business owner or senior executive (other than the executive who performs the bank reconciliations).
  • Have that person open and peruse the bank statements looking for unusual transactions and checks. These actions, said Certified Fraud Examiner in Philadelphia Anderson, can include the improper use of ATM cards, lower amounts of deposits than expected, unexpected ACH payments and wire transfers, transfers to unknown bank accounts, out of sequence checks, counter checks, checks paid to unknown parties, and checks paid to known parties but for larger amounts than expected. Only after these items have been inspected (which doesn’t take much time) should the documents be given to the person performing the bank reconciliation.
  • Have the completed bank reconciliations reviewed by the business owner or a senior executive. The reviewer, said Anderson – a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley – should ask questions about such items as deposits in transit (bank deposits that have been already recorded on the company’s accounting system but which were not received by the bank as of the bank statement cut-off date) and unpaid checks that are more than 90 days old as well as anything else that seems out of the ordinary or unusual.  Many small companies utilize an outside expert such as a forensic accountant or Certified Fraud Examiner to regularly review completed bank reconciliations.

By adding these controls to bank accounts and bank reconciliations, Anderson said a company can go a long way to preventing many types of fraud.

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

About David Anderson & Associates

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

Tricks of the Trade – Looking at the Numbers

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

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

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

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

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

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

Another area that Anderson, a Certified Fraud Examiner in Philadelphia, said a forensic accountant can analyze is the numbers associated with non-descriptive general ledger accounts. These can include such accounts as: Exchange, Transfer, Reserve, Miscellaneous Expenses, Other Expenses, Other Services, Cash Over and Short, and Consulting. Depending on the name of the account, Anderson said a forensic accountant will analyze the transaction detail and period-ending balance.

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

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

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

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

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

This is the final blog in a series of four posts that will examine the so-called tricks of the trade that forensic accountants use when conducting fraud investigations.

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

About David Anderson & Associates

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

Tricks of the Trade – Dates and Time

In conducting investigations, a forensic accountant often will analyze dates and time to determine if fraud or minority shareholder oppression may be present.

Date and time analysis can be used for a variety of purposes, explained David Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.

For example, Anderson said many fraudsters with access to business accounting systems enter transactions after hours or on weekends so no one can observe them. Hence, in analyzing the date and time of transaction entries, a forensic accountant will conduct additional analysis of transactions entered after hours or on weekends to determine the propriety of those transactions, said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia. He added that the forensic accountant can also investigate online off-hours access to systems to determine whether unauthorized outsiders have accessed the company’s systems.

In minority shareholder oppression cases, as well as in marital dissolution cases, a forensic accountant will analyze the date and time of reimbursable travel, meal and entertainment expenses, Anderson said.

“In one recent case, I found that over a period of three years the majority shareholder had submitted reimbursable meal expenses for over 100 meals on Friday nights, Saturdays, Sundays, nights before a holiday and on the holidays themselves,” said David Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley.

When deposed, Anderson said the shareholder, whose company was a retail business, claimed that each of these meals – some of which were for hundreds of dollars – were for entertaining customers. However, no customers were specifically identified with any of the meals.

Furthermore, when the shareholder did provide the names of specific customers that he claimed to have entertained, all but one of the customers had purchased less than $500 from the business over the three-year period, said Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

In a marital dissolution case, Anderson – a Certified Fraud Examiner in Philadelphia – said he noted frequent travel, meal and entertainment reimbursements that occurred over weekends and holiday periods. This travel included international travel even though the business was a local business. In analyzing the supporting documents, forensic accounting expert Anderson said he found that all of the travel was for vacations for the business owner and his girlfriend.

Dates of birth can also be utilized by forensic accountants to verify the validity of employee social security numbers, Anderson said. Certain tables are available that provide approximate information regarding when an individual applied for his/her social security number, explained Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.

Running these tables against the birthdates of employees can identify potential mismatches, such as a 30-year-old worker whose social security number falls in the range of numbers that were issued prior to 1950, said Certified Fraud Examiner and forensic accounting expert Anderson. These mismatches, he said, can then be further investigated to determine whether or not the employee has furnished a valid social security number.

This blog is the third in a series of four posts that will examine the so-called tricks of the trade that forensic accountants use when conducting fraud investigations.

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

About David Anderson & Associates

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

Tricks of the Trade – How A Forensic Accountant Can Use Names, Addresses and Phone Numbers

A forensic accountant can use names, addresses and phone numbers when investigating potential minority shareholder suppression cases and when conducting a fraud investigation.

In minority shareholder suppression cases, a forensic accountant will look for employees, subcontractors and vendors having the same last name as that of the majority shareholders, explained David Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.

“We also obtain information regarding the married names of female relatives of the majority shareholders and search for those names” said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia. “In several of my cases, I have identified significant payments being made to the majority shareholder’s daughter, her husband or her children, who performed little or no work for the company, as part of an effort to divert profits from the minority shareholder.”

When he is conducting fraud investigations, forensic accounting expert Anderson says he performs the same analyses.

“In one instance, the general manager of a division was found to be making referral payments to a seemingly unrelated third party,” said David Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley. “However, during my investigation, I found that this person actually was his wife – using her maiden name so as to appear to be unrelated to the general manager.

Anderson, a Certified Fraud Examiner in Philadelphia, said he made this discovery by Googling the general manager. One of the items he said he came up was the wedding announcement which contained the wife’s maiden name.

One final name analysis which Anderson said can be performed by a forensic accountant undertaking fraud deterrence in a fraud investigation is a search for vendor companies that use abbreviations in their titles (for example, ARH Enterprises or H & B Associates). Because of ego, many fraudsters and others use their own initials or those of their spouse and themselves in the names of companies that they set up, said David Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. He said any companies he finds during such an investigation warrant additional analysis.

Addresses can also help identify potential fraud, forensic accounting expert Anderson noted. When an employee sets up a phony vendor, Anderson said the employee often uses his/her home address as the address for the vendor. By running matches between the employee files and the vendor files, he said he has found numerous phony vendors.

“I also run the employee’s addresses against the company’s address or that of the corresponding subsidiary, division/group headquarters or facility address, said Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley. “In these instances, I am looking for employees who are using one of the company’s addresses as their stated home address.

Certified Fraud Examiner Anderson said follow-up investigations of those employees have revealed that they usually are doing so for one of several reasons, including:

— hiding from the government because they are undocumented aliens or parole violators;

— hiding from ex-spouses or debtors; or

— trying to avoid paying state or local taxes . . . such as a Philadelphia resident working in Montgomery County who is trying to avoid having the Philadelphia wage tax withheld.

A final address analysis that can be completed when a forensic accountant is conducting a fraud investigation or a program of fraud deterrence is running employee addresses and looking for employees who have the same address as another employee. While some such persons may be relatives of the employee and could be living in the same household, forensic accounting expert David Anderson said he also has found ghost employees by performing this analysis.

Just as with addresses, telephone numbers also can be used to identify potential fraud in the same way, said Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley. During his investigations, he said he has identified phony vendors and ghost employees by matching employee phone numbers against those of vendors and other employees.

This blog is the second in a series of four posts that will examine the so-called tricks of the trade that forensic accountants use when conducting fraud investigations.

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

About David Anderson & Associates

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

Tricks of the Trade: Benford’s Law Can Serve as Red Flag in Fraud Investigations

The business of forensic accounting is — most of the time — a very precise, highly detailed process. It might surprise you then to learn that one of the tricks of the trade forensic accountants use in fraud investigation stems from the very inexact science of probabilities, specifically, Benford’s Law.

“Frank Benford was a physicist in the 1930s who essentially proved an earlier hypotheses by astronomer Simon Newcomb in the 1880s that numbers starting with 1 occurred more frequently than other numbers,” explained David Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley. “Newcomb had noticed that when he looked up logarithm tables in a book he shared with colleagues, the earlier pages (which contained numbers that started with 1) were much more worn than the other pages. Benford tested and expanded that work and the phenomenon was named after him.”

Benford’s Law, also known as the First Digit Law, states that the lower the first digit, the higher the probability that it will occur more often than higher numbers, Anderson said. Studies have confirmed the concept by showing that the number 1 occurs as a first digit more than 30% of the time, the number 2 occurs as a first digit about 18% of the time, and so on, according to Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia. The number 9 occurs as a first digit the least – less than 5% of the time, Anderson added.

Benford’s Law is one of the tricks of the trade that forensic accountants use in analyzing financial transactions during fraud investigations, Anderson said. If the results of the financial analysis show a mismatch with Benford’s Law, it is a red flag to forensic accountants that fraud may be present.

In one case, Anderson said, senior management engaged him to determine if any of their divisions were circumventing spending authorization limits.

“The company had a policy that required higher levels of approval for expenditures in excess of $100,000,” according to Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley. “I analyzed all transactions between $10,000 and $100,000 for each division and found that three divisions had a higher incidence of transactions between $90,000 and $99,999 than would be expected. Two divisions exceeded 10%, while the third division exceeded 8%.”

Anderson’s findings for the three divisions were out of sync with Benford’s Law and a further analysis of the transactions between $90,000 and $99,000 revealed that the three divisions were “splitting” vendor invoices that exceeded $100,000 so as to avoid having to obtain higher level approval, explained Anderson, a Certified Fraud Examiner in Philadelphia.

In another case, Anderson said, management had a policy that employees did not have to submit copies of receipts for meal expenditures under $25. When a senior sales representative submitted six months of travel reimbursement requests at once, the corporate controller noted that more than 50% of his meal charges in more than 17 different cities were for the same amount – $24.73 – regardless of whether they were for breakfast, lunch or dinner.

As a result, senior management engaged Anderson to analyze travel reimbursement requests for all employees. Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, found that more than 70% of all employee reimbursement requests for meals were for between $24.00 and $24.99. But under Benford’s Law, more than 70% of all employee meals with a stated cost of under $25.00 should have been less than $20.00, he said.

“The resulting conclusion was that employees were likely abusing the company’s policy,” explained Anderson, a forensic accounting expert in Philadelphia. “Management changed its policy to reimburse employees at the equivalent federal per diem rates. The only exceptions to this were for business meals at which customers or prospects were entertained. In these cases, the employee was required to provide a receipt.”

Two years later, management analyzed its travel meal reimbursements, and found that it was actually spending less than it had prior to the policy change, Anderson said. In this case, the fraudulent behavior was stopped, and the company realized material expense savings, he said.

This blog is the first in a series of four posts that will examine the so-called tricks of the trade that forensic accountants use when conducting fraud investigations.

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

About David Anderson & Associates

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

Detailed Financial Data Needed for Litigation Support Services and Expert Witness Testimony

A forensic accounting expert in Philadelphia or elsewhere in the U.S. often requires very specific, detailed financial documents for analysis before providing litigation support services and expert witness testimony during legal proceedings. But too often, attorneys engage the services of forensic accountants late in the process after having requested insufficient financial data from the opposition.

“There have been a number of times that I have been retained late in discovery or even after discovery has closed,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley. “In some of those cases, the only financial records counsel requested were income tax returns and bank statements, believing those documents contained sufficient financial information for my analyses and reports. Unfortunately, they did not.”

Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, notes that income tax returns contain only summary level information. For example, he said, sales revenue is shown as a single amount. No detail is provided concerning the dollar amounts or numbers of specific products or services sold.

“In one of my cases, counsel wanted to know how much was being paid to non-officer family members,” explained Anderson, a Philadelphia forensic accountant. “But counsel had obtained only the income tax return, which merely showed total wages and salaries paid to all employees, not to each individual. The tax return could not be used to answer the question.”

Anderson said the attorney could have overcome this hurdle if detailed company payroll information had been requested during discovery.

In another case, explained Anderson, a forensic accounting expert in Philadelphia, counsel suspected that the majority shareholders were running personal expenses through the company – such as auto expenses, travel, meals, entertainment, etc. But again, because the income tax returns showed only summary level information, Anderson was unable to determine whether any of the expenses were of a personal nature.

“Had counsel asked for detailed general ledger information and copies of invoices supporting all expenses, I would have had the necessary information to conduct my forensic examination,” explained Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.

Bank statements also are frequently requested in discovery, but they too lack detailed information. The Philadelphia forensic accountant said bank statements seldom show deposit detail – what checks, cash and/or incoming wire transfers made up each deposit and from where the checks or incoming wire transfers came.

In addition, bank statements do not provide detail regarding checks written against the account – only check number, amount and date charged against the account, according to Anderson, whose Philadelphia forensic accounting firm provides litigation support services and expert witness testimony in Philadelphia. Bank statements may show debits or credits posted against the account as well as cash withdrawals and transfers to/from the account, but with little detail, he said.

Generally, the only real details contained in bank statements are for outgoing wires (showing to whom the wire was sent), for debit card purchases, and for recurring ACH (automated clearinghouse) payments, according to Anderson, a Philadelphia forensic accountant.

“Attorneys can overcome bank statement shortcomings by requesting copies of all deposited items, including deposit slips; copies of all cancelled checks; copies of all documents supporting debits, credits, transfers to/from and withdrawals from the bank account; detailed general ledger information; and copies of invoices supporting each cancelled check,” he said.

However, Anderson cautions, each case is different and carries with it its own unique set of circumstances. The best way an attorney can be sure he or she has requested the financial documentation necessary to generate the reports that will support the case is to retain the services of a forensic accounting expert early in the discovery process.

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

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst. Anderson also has provided expert witness testimony in the Greater Philadelphia area and served as a forensic consultant on both civil and criminal cases.

The Role of the Forensic Accountant in Fraudulent Conveyance Litigation

Faced with losses that come as a result of foreclosures, divorces and other legal proceedings, less-than-scrupulous business owners sometimes resort to the fraudulent conveyance or transfer of property or other assets to lessen or eliminate their losses essentially by hiding valuable assets. When that happens, it is the role of the forensic accountant to uncover the improperly transferred assets and determine their value.

“Black’s Law Dictionary defines fraudulent conveyance or fraudulent transfer as ‘the illegal transfer of property by a debtor to avoid creditors or claims’,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley. “It is a blatant action intended to undermine often legitimate claims filed by creditors, ex-spouses and other parties.

Anderson said the resulting fraudulent conveyance litigation typically involves civil suits bought by creditors or bankruptcy trustees seeking to recover improperly transferred assets or business. Examples of these transfers include:

  • Payments to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends or business partners of the debtor;
  • Transfer of title of assets from the debtor to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends or business partners of the debtor;
  • Sales of assets at bargain prices from the debtor to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends or business partners of the debtor;
  • Transfer of business (sales) to other entities in which the debtor or relatives, friends or business partners of the debtor have an ownership interest; and
  • Gifts made by the debtor during a period of financial stress, including donations to charity.

In cases of fraudulent conveyance litigation, attorneys rely on forensic accountants to document the alleged fraudulent transfer; identify and locate improperly transferred assets, and calculate the lost value of improperly transferred assets or business, said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley who has performed forensic work in multiple fraudulent conveyance matters, recalled one such case that later became the basis for his case study, “The Sore Losers.”

He said the case involved business owners who wanted to avoid a creditor’s foreclosure action by draining funds from the company. Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, said the business owners improperly paid themselves special bonuses and distributions, drastically increased rents charged to the business on real estate owned separately by the business owners, and ran personal expenses through the company. Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia, was able to identify each of the transactions and calculate the total amount of the payments, thereby facilitating the creditor’s recovery of the payments.

Anderson, a forensic accounting expert in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, recalled another case in which a husband who planned to divorce his wife sought to reduce the value of his business so as to decrease the amount of his future divorce settlement.

The husband sold certain assets to his girlfriend at a bargain price and also had a friend set up a competing business, to which the husband directed his own customers. After the divorce was completed, the plan was to have the friend sell a majority interest in the new business to the husband at a bargain price, according to Anderson, a Philadelphia forensic accountant.

The fraudulent transactions were discovered after Anderson was engaged by the wife’s counsel to value the husband’s business. “During my investigation, I noted a significant decline in the business as well as the sale of certain assets during the two years preceding the divorce,” he said. “The investigation revealed the transfer schemes, and I was able to value the husband’s business as if these improper transfers had never occurred, thereby increasing the divorce settlement paid to the wife.”

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

About David Anderson & Associates

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

Forensic Accountant Advises Caution in Interpreting Financial Statements

Recipients of company financial statements that are “associated” with Accounting Firms often assume that the financial statements are accurate, fairly presented, have undergone a rigorous examination by the Accounting Firm, and are not subject to fraud or misstatement. While that may be true in some cases, it very often is an inaccurate assumption that can result in unwanted consequences, cautions a forensic accountant in Philadelphia.

“Simply being ‘associated’ with an Accounting Firm does not mean the financial statement has undergone a thorough examination for accuracy,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley. “Investors, litigants and other interested parties need to understand the true implications of having Accounting Firms ‘associated’ with financial statements.”

Anderson, a forensic accountant in Philadelphia who also is a Certified Fraud Examiner in Philadelphia, said there are four primary ways in which an Accounting Firm is “associated” with financial statements:

  • when the financial statements are in a binder with the name of the Accounting Firm on it;
  • when the Accounting Firm performs a Compilation;
  • when the Accounting Firm performs a Review; and
  • when the Accounting Firm performs an Audit.

Binders

Anderson said Accounting Firms provide clients with some form of financial statements in a binder usually when the Accounting Firm is performing a special analysis or projection for internal use only. These types of financial statements usually do not reflect actual financial performance, and are referred to as “pro-forma,” he said.

Financial statements found in a binder usually are stamped with the words “Confidential,” “Unaudited” and/or “For Internal Use Only,” Anderson noted. Accounting Firms usually do not verify or authenticate the underlying information used in “pro-forma” financial statements, said Anderson, a forensic accounting expert in Philadelphia. Furthermore, he added, the Accounting Firm generally does not issue a letter to accompany these financial statements (other than perhaps a transmittal letter).

Compilations

Compilations performed by an Accounting Firm and accompanied by a Compilation letter are limited to presenting information that is the representation of management, Anderson explained. Substantially all disclosures and financial statement notes are usually omitted from a Compilation, he said.

The Accounting Firm does not audit or review the statements, does not express any opinion about presentation of the information in the statements and provides no assurance about their reliability, according to Anderson, a forensic accountant in Philadelphia whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

Reviews

Reviews, accompanied by corresponding Review letters, consist primarily of inquiries of company personnel and analysis of the financial statements, including ratio analysis, explained Anderson, a forensic accounting expert in Philadelphia who also is a Certified Fraud Examiner in Philadelphia.

The Accounting Firm does not perform any audit procedures and does not express an opinion about presentation of the information contained in the financial statements, he said. However, the Accounting Firm does provide limited assurance that the financial statements do not require any material modification, Anderson noted.

Audits

Audits performed by an Accounting Firm, which also produces an accompanying Audit letter, are detailed examinations of financial statements intended to provide assurance that the financial statements are free of material misstatement, Anderson explained. The Accounting Firm expresses an opinion that the financial statements present fairly, in all material respects, the financial position of the company, he said.

However, Anderson cautioned, an Audit does not guarantee there is no fraud. He said fraud may be present but not identified by the Accounting Firm if: (1) there is management collusion (such as with Enron, Tyco International, WorldCom, etc.); (2) there is management override of internal controls (such as with Adelphia Communications and HealthSouth Corporation); (3) the Accounting Firm fails to adequately plan and execute the audit (such as with ZZZZBest); or (4) the Accounting Firm or its affiliates earn significant non-audit fees from the company (such as with Enron and Bernard L Madoff Investment Securities, LLC).

An Accounting Firm also may perform an Audit and issue an Audit letter that questions the ability of the company to continue in business, said Anderson, a forensic accountant in Philadelphia who recommends that every company enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. This type of Audit letter is known as a “Going Concern” audit letter, according to Anderson.

“When considering financial statements with which an Accounting Firm is “associated, it is critically important to carefully read any accompanying letter from the Accounting Firm,” Anderson said. “These letters provide insight regarding the degree to which the Accounting Firm has performed assurance services, if any.”

Anderson, who has conducted numerous fraud investigations, also recommends  recipient carefully analyze the financial statements themselves, notes to financial statements and supplemental schedules, if any, to gain a more complete understanding of the statements.

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

About David Anderson & Associates

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