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Fraud Deterrence Measures Combat Computer Hackers

Despite heightened awareness about hackers and increased expenditures for cyber security, major businesses and financial institutions continue to fall victim to hackers.  Businesses can bolster their fraud deterrence measures in this area by being aware of the non-computer system exploits that allow hackers to successfully attack computer systems and taking steps to prevent them.

“Most companies refuse to explain how they were hacked, so no one can say with any certainty that a particular exploit was used in any one instance of hacking,” 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.  “But because of the risk these exploits present, it’s important for businesses to understand how hackers can circumvent their computer system security and what steps can be taken to help stop them.”

Anderson, a Certified Fraud Examiner in Philadelphia who recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley, said business should be on the lookout for three key exploits as outlined below:

Social Engineering

A social engineering “hack attack” relies on the willingness of company employees to share their user IDs and passwords with someone they don’t know, Anderson said, a forensic accountant with extensive experience in fraud investigation and fraud deterrence initiatives.

In this type of attack, he said, the hacker identifies a target employee who has high level access to financial systems and/or confidential information.  The hacker also uncovers the names of several IT employees, usually by calling into the IT Department and posing as an executive recruiter.  Next, the hacker calls the company (usually the sales or purchasing department) and asks for the target employee, who the hacker knows works in a different department.  The employee who answers the phone transfers the hacker to the target employee, who sees a call coming from what appears to an inside line and assumes the caller is another company employee.  The hacker then identifies himself as an IT employee by using one of the previously obtained IT employee names, and informs the target employee that they are having systems problems.  He asks the employee to log out of the computer system and then log back in.  He tells the employee to inform him of what he is entering as the user ID and password, which he then tells the target employee matches what the IT Department has on file.  After the employee successfully logs back in to the system, the hacker indicates that there does not appear to be a problem with the employee’s access, advises the employee to contact IT if there are any future access problems, and thanks the employee for his assistance.

“It doesn’t take much effort to obtain the confidential user ID and password of an employee with high level access,” explained Anderson, a forensic accounting expert in Philadelphia whose Philadelphia forensic accounting firm provides a full range of fraud investigation and fraud deterrence services.  “Most companies experience occasional computer problems so users are accustomed to being contacted by the IT Department to resolve the problem.  As a result, it is unfortunately not uncommon for an employee to unwittingly provide key information that allows the hacker to penetrate the company’s systems.”

Forensic accountants such as Anderson recommend that companies defend against this type of hack attack by establishing a set of written procedures specifically related to dealing with computer access problems and by training employees not to give out user IDs and passwords unless they know the IT employee personally or unless they call back the IT employee at that person’s internal system phone number.

Loose Lips Sink Ships

Another easy way hackers or their associates obtain employee passwords is simply to walk through an employee’s work space, Anderson said.  Fearing they will forget their passwords, many employees write the password down and post it in plain sight on their monitor, a cork board, or on their desk near the monitor.  Anderson recommends that employers perform occasional spot checks to make sure that their employees are not displaying their passwords for all to see.

Employees also sometimes willingly share user IDs and passwords with others, Anderson said, a forensic accountant in Philadelphia and the Delaware Valley.  For example, if an employee is out of the office and unable to access information in their computer, the employee may provide his/her user ID and password to a colleague to access the needed information.  Companies should always prohibit the sharing of user IDs and passwords, advises Anderson, forensic accounting expert in Philadelphia.

Similarly, companies often provide a temporary employee with the regular employee’s user ID and password to avoid having to set up the temporary employee in the computer system.  Others provide a guest user ID and password, but fail to change the access information after the temporary employee leaves.  In both cases, the temporary employee has a valid user ID and password that can be passed on to a hacker.  Companies should establish unique user IDs and passwords for temporary employees, and immediately disable them once the temporary employee has left, Anderson notes.

Click on This Link

Another common exploit occurs when hackers send employees of a targeted company an email that encourages them to click on a link.  For example, click on this link to see a nude picture of a certain well-known actress/singer/athlete, or an unbelievable athletic feat/kitten playing the piano/skier in an avalanche, etc.  When the employee clicks on the link, a malicious program is inserted into the user’s computer, thereby allowing user information to be transmitted to a hacker, Anderson said.

A company’s fraud deterrence measures for this type of exploitation should include the use of special software or third-party services to screen e-mail from unknown senders, Anderson said, adding that employers also must educate employees about the dangers of clicking on links in emails from unknown senders or in unusual emails from known senders.  For example, he said, if your sister doesn’t normally send you emails about body part enhancement, receiving such an email from her should raise a red flag.

“Enhancing computer system security to prevent access by hackers requires more than just hardware and software,” said Anderson, a forensic accounting expert in Philadelphia whose company provides forensic accounting services in Philadelphia and the Delaware Valley.  “It also requires being aware of the non-computer system exploits that hackers use and taking steps to prevent these exploits.”

If you aren’t sure that your fraud deterrence measures adequately protect you and your company, it may be time to contact a Certified Fraud Examiner in Philadelphia to conduct a computer security analysis and create a comprehensive fraud deterrence program that will keep hackers at bay.

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 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.

Tales of Fixed Asset Fraud

Most asset misappropriation frauds are focused on cash, and maybe inventory.  However, frauds involving fixed assets, primarily equipment and furniture, are also prevalent. Accordingly, fraud deterrence and prevention programs also should address protecting fixed assets from fraud, said forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia.

Some of the more common fixed asset frauds, according to Anderson, a forensic accounting expert in Philadelphia, are:

  • Replacement of a fixed asset with another of lesser value: In his role as a forensic accountant, Anderson encountered such a situation when he was asked to analyze the fixed assets at the regional offices of a mid-sized public corporation.  Among the fixed assets were paintings, prints and sculptures with a total value of almost $1 million.  However, Anderson was unable to locate a single item on the company’s list of artwork.  Instead, he found a number of paintings, prints and sculptures of lesser or even dubious value.  A couple of the paintings appeared to have been purchased at Walmart or K-mart.  Anderson’s subsequent investigation revealed that employees would take home artwork that they wanted, and replace the artwork with something that they either had at home or purchased from a store.  Management was focused on selling their products and, therefore had turned a blind eye to the substitutions.  Because no one was tracking these items, management was unable to identify who took most of the artwork.  In the end, this fraud cost the company over $700,000.
  • Purchases of fixed assets of lesser value or quality than was authorized and paid for: In one scheme, David Anderson – a forensic accounting expert in Philadelphia – learned that the manager of a new office had been given a budget of $300,000 to furnish the office (furniture, fixtures, and office equipment). The manager submitted purchase orders totaling almost $300,000 for these items.  However, the manager schemed with an office furnishings vendor to actually spend less than $200,000 by substituting lesser quality items.  The manager than split the over $100,000 in extra payments with the office furnishings vendor.  This scheme was only discovered when the office experienced a fire, and an insurance claim was submitted.  However, the insurance company investigator had the furniture portion of the claim significantly reduced because none of the furniture matched what the company showed in its records.
  • False reports of theft or loss of fixed assets: These schemes typically involve smartphones, tablets, laptops or other “mobile” items. Certified Fraud Examiner in Philadelphia David Anderson was asked by a local government agency to assist it with establishing a fixed asset tracking system – one of the recommended fraud prevention measures.   The security department of the agency had a number of expensive walkie-talkie/radios in its inventory.  In tracking the serial numbers of the walkie-talkie/radios, more than 25 such items that were found to have been reported lost or stolen in the past were actually still in the inventory.  However, the corresponding replacement items could not be located.  Subsequent investigation revealed that a number of security employees over a multi-year period had engaged in the scheme of reporting the walkie-talkie/radios as lost or stolen (when they really weren’t), and had conspired with a purchasing department employee to pocket the funds for the purchase of replacement walkie/talkie radios.
  • Frauds involving “retired” assets: These schemes involve assets that have been taken out of service (no longer actively used in the business). Such assets are typically stored in an out-of-the-way location, and occasionally are sold to used equipment/furniture dealers or even to junk dealers.  Companies have usually fully depreciated these assets, and tend to forget about them once they are retired.  But, they still have some value to the company.  In one instance, a client company was hit by a scheme that originated in the IT department.  IT had a replacement program in effect.  Any computer that was more than three years old and any printer, copier, scanner, etc. that was more than five years old was replaced.  The old equipment was stored in a corner of the warehouse, and was essentially ignored by the company.  However, when the company sold the warehouse and relocated, it discovered that only a small portion of the retired IT equipment was present.  An investigation by the Philadelphia forensic accounting firm of David Anderson & Associates revealed that an IT employee routinely sold newly retired computers and other office equipment to used equipment dealers, and pocketed the proceeds.  The employee subsequently admitted to having been paid over $100,000 over a five-year period.

So, what fraud deterrence and prevention measures can a company put in place to avoid these frauds? Certified Fraud Examiner David Anderson of the Philadelphia forensic accounting firm of David Anderson & Associates has the following recommendations for fraud deterrence and prevention measures a company can put in place to avoid these problems: The first is to establish a fixed asset tracking program.  Under this program, a scannable bar code label is attached to each fixed asset.  The fixed asset information from purchase orders/invoices is then entered in a database.  All asset additions and dispositions are also entered into the database.  Finally, the company establishes a periodic physical inventory (such as inventorying 1/12 of the inventory each month) that allows the inventory team to scan the bar code label of each selected item.  If the bar code label is missing (assuming that the company has used a reliable method of affixing the labels) or if the bar code scan does not match the item in the database, the company is able to investigate immediately.  “Retired” assets should also be tracked until disposed of.  This type of program will prevent or significantly reduce the likelihood of the schemes above.   In addition, the company should install tip lines, make sure that employees are aware of the company’s anti-fraud stance, and provide educational programs for management and employees which teach fraud deterrence prevention.

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.

Business Valuation: How an Unprofitable Business Can Have Value

Uncovering value in an unprofitable business might seem to make as much sense as wringing water out of a rock, but – by putting forensic accounting principles to work – a knowledgeable business valuation expert can do just that.

“Business valuators look to three primary methods for valuing a business – the Income Method, the Market Method and the Asset Method, relying primarily on the Income Method because a “hypothetical” buyer is looking for value from the profits and cash flows of a business,” said David Anderson, a Certified Valuation Analyst and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley.  “So it stands to reason that if a business isn’t making a profit, it would not be of any value to a potential buyer. That, however, is not necessarily true.”

How can this be?  There are several scenarios under which an unprofitable business can have value.

The first, according to information provided by David Anderson & Associates, a business valuation expert providing forensic accounting services in Philadelphia, is a startup business. Typically, the costs of starting up a business and ramping up its sales can take several years.  During that time, the business usually operates at a loss.  However, because of the future earnings potential, investors are willing to give a business value based upon this potential.  Case in point offered by the Philadelphia forensic accounting firm David Anderson & Associates is Pinterest – the Internet company that allows users to create and share collections of visual bookmarks.  Founded in late 2009, Pinterest didn’t even begin to generate sales revenue until 2014.  But this didn’t stop investors from putting hundreds of millions of dollars into the company and valuing it by as much as $3.8 billion before it began to generate sales revenue.

Similar to startup businesses are those that are in bankruptcy.  Such companies typically have been unable to produce sufficient profits to cover operating costs and debt service (the cost of repaying debt with interest).  Through the bankruptcy process, these companies are able to shed their debt.  That, says business valuation expert in Philadelphia David Anderson, a Certified Valuation Analyst, makes them attractive to potential investors who are focusing on the potential future profitability of the debt-free company.  For example, until the deal unraveled recently over certain lease agreements, Florida developer Glenn Straub was willing to purchase the bankrupt Revel Casino for $95.4 million.

A third type of unprofitable business that can have value is one that has assets whose value exceeds the liabilities and debts of the business.  In this case, notes David Anderson & Associates, a business valuation expert in Philadelphia that also serves as a Philadelphia forensic accounting firm, a potential purchaser is less concerned with the profitability of the business it is acquiring because it is focusing primarily on the assets of the business, and the value of incorporating those assets into the purchaser’s business.  Case in point – Sun Pharma, the largest pharmaceutical company in India has pursued a strategy of buying unprofitable drug makers and merging their operations into its own.  In fact, says David Anderson, a Certified Valuation Analyst offering forensic accounting services in Philadelphia, Sun Pharma has made 10 such acquisitions totaling several billion dollars over the past 15 years.

Unprofitable businesses can have value to the “hypothetical” and real buyer, concludes David Anderson, a business valuation expert in Philadelphia. In each of these scenarios, the purchaser sees the potential for value in the future operations of the business.

If you require the services of a Certified Valuation Analyst or business valuation expert 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, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner, a Certified Valuation Analyst and a business valuation expert in Philadelphia.

Assure Timely Royalty Payments with Royalty Audits by Forensic Accountants

Have you or your clients licensed the use of intellectual property in return for royalty fees?  Are you or your clients franchisors who receive franchise fees from your franchisees?  If so, are you conducting royalty audits in a timely manner to assure that you are receiving the fees to which you are entitled?  If not, it may be time to turn to a forensic accountant to establish regularly scheduled royalty audits and make sure you are getting the royalty checks you deserve.

“Royalty fees are sometimes fixed so that a certain amount is paid each year, but more often, they are based on production, sales or gross profit by the licensees,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware  Valley.  “In those situations, the license agreements allow for royalty audits.  The problem is that many licensors fail to conduct royalty audits or they conduct them long after the fees are due, effectively cheating themselves out of money they are owed.”

Royalty audits are a complex undertaking that generally are not conducted by patent holders, copyright holders, trademark/tradename holders or franchisors, but instead by a trained financial expert such as a Philadelphia forensic accountant with experience in conducting royalty audits for licensed intellectual property or for franchisors, Anderson said.  The cost of a royalty audit usually is paid by the licensor, Anderson said.  However, many royalty agreements contain provisions that require the licensee(s) to pay for the royalty audit if the audit discovers willful understating of fees due, he said.

A royalty audit is a detailed examination of the licensee’s financial records intended to ensure that the production, sales or gross profit reported by the licensee matches the actual production, sales or gross profit recorded in their financial records, according to Anderson, a forensic accounting expert in Philadelphia who has expertise in royalty audits.

In situations where different license fee rates apply to different types of items, a royalty audit analyzes the licensee’s fee calculations to make certain that the correct rates have been applied, Anderson explained.  A royalty audit also examines the licensee’s financial data to make sure it is consistent with that of comparable companies, Anderson said.  For example, if a license fee is based on the gross profit of sales of licensed items, the royalty audit will evaluate gross profits reported on comparable sales by comparable companies to determine if the gross profits reported by the licensee are reasonable.

When significant amounts of royalties or multiple licensees are in play, the license holder may require electronic reporting of financial information, said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  That requirement often results in large amounts of information being reported to the licensor and the subsequent need for the royalty auditor to employ specialized software for data analysis, he said.

As a forensic accounting expert in Philadelphia, Anderson recently conducted a royalty audit for a well-known musician whose music was licensed throughout the world in many forms – albums, singles, sheet music and Internet downloads, as well as songs used for commercials, movies and television programs, by cover bands, and by commercial music services, among others.  In addition, the royalty rates paid differed by form and licensee, he said.

Much of the financial information was provided in electronic format and involved many thousands of lines of data, according to Anderson, a Philadelphia forensic accountant with expertise in royalty audits.  Anderson said he relied on specialized data analysis software to help facilitate the audit, thereby eliminating hundreds of fee hours and significantly reducing the time needed to conduct the audit.

Anderson also noted that a key benefit of royalty audits is the proactive use of audit techniques to regularly monitor licensee compliance and avoid waiting until year end (or beyond) to determine compliance.  In the case of the world-famous musician, the routines Anderson developed in the specialized data analysis software were adapted for use on a monthly basis.  This allowed for regular analysis of financial data, which, in turn, reduced the amount of work required for the year-end royalty audits and allowed for faster reaction to underpayments by licensees.

Regular royalty audits and the proactive analysis of licensee data assures holders of intellectual property licenses and franchisors that their licensees/franchisees are paying royalties/fees at the correct rate and in a timely manner.

If you require the services of a Philadelphia forensic accountant with expertise in royalty audits 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.

Fraud Investigations Reveal How to Stem Purchasing Department Fraud

Do you have a purchasing department employee who suddenly started taking expensive vacations, wearing expensive jewelry or driving an expensive new car?  There are lots of reasons why an employee might appear to be living beyond their means.  Perhaps the employee or their spouse came into an inheritance, won the lottery, received a sizeable insurance settlement, or had other legitimate sources of money to spend.  But countless fraud investigations also point to those same behaviors as red flags that your purchasing department employee is engaged in fraud.

“The typical purchasing department can provide lots of opportunities for employees to carry out illicit activities,” 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.  “Employees who deal with outside vendors and who either have the authority to make purchasing decisions or who exert great influence over purchasing decisions are the most likely candidates to become involved in fraudulent activities.”

This posting will examine three of the most widespread types of purchasing fraud that employees perpetrate and provide recommendations for fraud deterrence measures that can help prevent it.

One of the most blatant forms of purchasing fraud involves employees who receive outright bribes or kickbacks from one or more vendors, said Anderson, a forensic accountant who also is a Certified Fraud Examiner in Philadelphia.  Typically, Anderson said, the vendor will charge an inflated price for their products or services or they will provide poor quality products or services as a way of maintaining profitability in light of the bribes or kickbacks.

“One indication that this type of fraud is occurring is the sudden switch from a long-time vendor to a new vendor without there being a good reason for the switch, while the purchasing employee vehemently defends the switch but is not able to sufficiently support the basis for it,” said Anderson, a forensic accounting expert in Philadelphia who has conducted numerous fraud investigations.  “It’s an even greater indication if it is happening with multiple vendors.”

Sometimes, Anderson said, the thought of committing fraud may never have even crossed an employee’s mind, but may have come to his or her attention by a vendor looking to win a percentage of the company’s purchasing dollar or to increase the existing percentage of business they have.

A more subtle form of this kind of purchasing fraud can occur when vendors sponsor sales contests in which a customer — your purchasing employee — can win increasingly valuable prizes (such as vacations, electronics, jewelry, gift certificates, etc.) based on the amount of purchases or the amount of the increase over the prior year’s purchases, according to Anderson, a Certified Fraud Examiner in Philadelphia.

“The vendor has to recoup the money spent on the expensive prizes somewhere,” said Anderson, a forensic accounting expert 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.  “The employee may be accepting higher prices or poorer quality goods or services, or the employee may purchase larger amounts of products or services than are needed in order to ‘win’ more prizes.”

A third scheme that is similar to the first two occurs when the employee receives expensive gifts at Christmastime and/or for his/her birthday from one or more vendors as a “reward” for purchases during the year, Anderson said.

There are several anti-fraud controls and fraud deterrence measures that businesses can embrace to fight fraud in the purchasing department, explained Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  They are:

  • Regularly analyze the cost of products and services to detect increases in costs and identify the reasons for those increases;
  • Regularly analyze inventory levels to prevent the excessive purchase of products;
  • Validate decisions to switch vendors or to significantly change the level of purchases (up or down) from existing vendors;
  • Install a tip line to provide employees with a reliable, anonymous way of reporting suspected fraud;
  • Publish company policies that inform employees that the company does not condone fraud and that it is taking active measures to prevent fraud;
  • Sponsor regular anti-fraud training programs for managers and employees.

“Of course, the analyses discussed above should be undertaken outside the sphere of influence of the purchasers,” said Anderson, a forensic accounting expert in Philadelphia.  “That means relying on people from outside the purchasing department to conduct the analyses.”

Your internal audit department or possibly the finance/accounting department might be able to perform the analyses, Anderson said.  But if the expertise to perform these analyses is not available in-house or there is no department outside of the sphere of influence of the purchasers, then a third party such as a forensic accountant should be engaged.

A forensic accountant can perform the necessary analyses and design stronger fraud deterrence measures to better protect your business or organization from purchasing department 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.

Employee-Driven Retail Fraud Continues Despite Fraud Deterrence Measures

Despite increasingly stringent fraud deterrence measures, fraudulent activity in retail operations such as stores and restaurants continues to pose a significant problem, with the retail industry estimating a loss of nearly $3.2 billion to fraud in 2014.

“Technological improvements and greater oversight have made it more challenging for fraudsters to steal cash and inventory from retail establishments,” 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.  “But the incidence of fraud persists in the retail world because of the sheer number of opportunities to commit fraud and the never-ending determination and creativity of fraudsters to circumvent anti-fraud controls.”

This post will examine some of the most common retail fraud schemes carried out by employees and offer recommendations that can reduce the success of those schemes.

Cash Register Schemes:

The simplest of the cash register schemes is the outright theft of cash from the till, said Anderson, a forensic accountant who also is a Certified Fraud Examiner in Philadelphia.  This fraud is easily combated by reconciling the cash in the register to recorded sales.  Anderson said some retailers — fast food restaurants, for example — perform reconciliations several times a day.

Other cash register schemes include those in which an employee “short-rings” or “no rings” a sale — records a lower amount than the actual sale or records a $0 sale to open the register.  The employee then pockets the difference between the actual sale and what was rung up either at the time of the sale or later when no one is looking, explained Anderson, a forensic accounting expert in Philadelphia who recommends that every organization adhere to a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

Dishonest bartenders run a similar scheme in which they serve a number of drinks to a customer, but ring up only one or two of them, Anderson said.  What usually happens in these cases is that the bartender receives an inflated tip from the customer in return for undercharging the number of drinks.

Retailers have been fighting cash register schemes in a variety of ways, said Anderson, a forensic accounting expert in Philadelphia who has conducted numerous fraud investigations.  The first is the use of an electronic cash register and the requirement that each purchase be scanned into the register.  Similarly, Anderson said, restaurants require the wait staff to enter every customer order into the system to facilitate meal preparation.  These measures prevent employees from ringing up purchases for less than the actual sale amount.

Many bars have installed electronic systems that measure the amount of alcohol poured from each bottle.  At the end of the shift, management can reconcile the number of pours with sales to verify that the pours are being properly rung, Anderson explained.

Inventory Schemes

Inventory schemes involve the outright theft of inventory, as well as tag switching, according to Anderson, a forensic accounting expert in Philadelphia.  Anderson said tag switching occurs when an employee works with an accomplice who switches the price tag on an item with that of a less expensive item, or the employee pretends to scan the more expensive item but instead scans an inexpensive item twice.  The more expensive item is either sold to a third party (with the co-conspirators pocketing the profit) or is returned to the store by the accomplice for a refund, explained Anderson, who also is a Certified Fraud Examiner in Philadelphia.

Retailers have been using security tags on inventory for years to prevent outright theft by both employees and customers, said Anderson, a forensic accountant whose fraud investigations have uncovered fraudulent activity in many different types of businesses.  Retailers also employ several other methods to combat outright theft and tag switching.

Anderson said these include requiring a person who is returning an item to produce the original sales receipt; granting only store credit for those without sales receipts (making it harder for the fraudsters to convert the return into cash); and daily inventory tracking for expensive items (for example, tracking 50-inch televisions so that any discrepancy between inventory and sales is identified in the same day).  Retailers have also installed surveillance cameras to combat employee and customer fraud.

“The belief that ‘Big Brother is watching’ often is enough to significantly reduce the incidence of retail fraud, even if security personal doesn’t have time to actively review the tape recordings or if the cameras aren’t really recording anything,” said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

To stem the loss of cash or inventory from your store or restaurant, it may be time to engage a forensic accountant to analyze your fraud controls and enact stronger fraud deterrence measures that will adequately protect your retail establishment and lessen the chances of theft.

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.

Forensic Accountants Simplify the Most Complex Data for Jurors

Presenting financial information to a jury, especially in complex matters, can seem a nearly impossible task.  Most jurors have little or no understanding of financial statements or financial analysis, and introducing large amounts of data and complex spreadsheets can be mind boggling and intimidating.  But the job of a forensic accountant providing expert witness testimony to a jury is to make even the most complicated financial data understandable.

“Presenting complex financial information in a way that allows jurors to grasp its meaning can have a significant impact in the presentation of a case,” 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 the financial data that often can make a difference between winning a case and losing a case, or between a significant jury award or a paltry one.”

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, recalled one case in which he was asked to prepare detailed financial reports for a jury and provide expert witness testimony during the trial.  Anderson said the case centered around a claim by his client (the plaintiff) that the actions of the defendants had caused the client to lose sales and, therefore, profits.  (Note:  The company name, amounts and dates in the examples below have been changed to protect client confidentiality.)

As a result of a thorough analysis of the data, Anderson’s report to the plaintiff’s counsel included the following two spreadsheets. (Click on each chart for a closer look.):

 

Blog 47 - Litigation Support - 2-3-15 -nothing but six charts_Page_1 Blog 47 - Litigation Support - 2-3-15 -nothing but six charts_Page_2 Blog 47 - Litigation Support - 2-3-15 -nothing but six charts_Page_3

“Imagine yourself sitting on a jury and being confronted with these schedules,” said Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia.  “The columns of numbers would have been difficult to remember and even harder to understand.  And they would not have had the intended impact on the jury.”

Anderson did not present the schedules as they appeared in his report to the counsel, but instead reduced the information to a simplified set of color-coded charts:

Blog 47 - Litigation Support - 2-3-15 -nothing but six charts_Page_4 Blog 47 - Litigation Support - 2-3-15 -nothing but six charts_Page_5

“These charts made it much easier for the jury to see the impact of the defendant’s actions and to visualize the amount of losses suffered by the plaintiff in each quarter,” said Anderson, a forensic accounting expert in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.

Anderson said another method of getting the point across to a jury is with the strategic use of color and the intensity of the color.  Another chart from Anderson’s expert witness testimony before the same jury was the following:

Blog 47 - Litigation Support - 2-3-15 -nothing but six charts_Page_6

“The dark blue color evokes a feeling of strength as opposed to the light blue color, which appears to be weaker,” explained Anderson, a forensic accountant who provides litigation support services in both civil and criminal cases. “It’s this strategic use of color that can leave the subtle impression in the jurors’ minds that my loss calculation for the plaintiff is stronger and, therefore, more reliable than the defendant’s loss calculation.”

These are just two examples of how a forensic accountant providing expert witness testimony can assist in the successful presentation of a case to a jury.

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 services, 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 accounting consultant on both civil and criminal cases.

Fraud Tales: Fraud Investigation Tracks Tiny Fraud that Grew

As fraudulent activity goes, it was a seemingly miniscule theft — a mere $2,000 pilfered decades ago.  Hardly worth raising an eyebrow.  But the case of Mark Jenkins is a prime example of how a seemingly innocuous case of fraud can mushroom into a major theft, requiring a forensic accountant to conduct a fraud investigation and calculate the loss.

“Like so many fraud cases, the story of Mark Jenkins is a cautionary tale,”  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.  “Companies need to have comprehensive fraud deterrence measures that cover employees at every level.  No employee should ever be able to manipulate documents to his or her personal advantage.  The opportunity simply should not be there.”

The story of Mark Jenkins, whose name has been changed to protect both his confidentiality and that of his former employer, begins in 1989 when Mark was named Controller of a small West Coast subsidiary of MegaGiantInternational Corporation, according to Anderson, a forensic accounting expert in Philadelphia. It was a dream job but for one thing — the starting salary was $2,000 less than Mark had asked for. He accepted the position anyway.

On his first day on the job, Mark learned that one of his responsibilities was to provide wage and salary changes to the payroll department in New York City.  There was no approval process, no signature required, no checks and balances, explained Anderson, who also is a Certified Fraud Examiner in Philadelphia.  Mark was simply to report the changes.  And so he did, reporting his own salary at $2,000 more than it really was.  Now, it really was his dream job.

Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, said the $2,000 salary bump was the only fraud Mark Jenkins ever committed at his company.  In fact, he went on to have a stellar career at MegaGiantInternational Corporation.  He rose steadily through the ranks, being promoted to Controller of a larger subsidiary in the same division; to Division Controller; to Group Controller; and finally to Group Chief Financial Officer, Anderson said.

Over his 25-year career, Mark received an average of 8% per year in salary increases and an average of 10% in annual bonuses, said Anderson, a forensic accounting expert in Philadelphia.  Additionally, the company provided a 3% 401-K match each year and also made an average 8% contribution each year for Mark to its profit-sharing plan.  In December 2014, at age 66, Mark retired.

The discrepancy in Mark’s starting salary was discovered when the company conducted a payroll reconciliation to assure Mark’s pension records were accurate, explained Anderson, a forensic accountant and Certified Fraud Examiner in Philadelphia.  A forensic accounting expert subsequently was engaged to determine the extent and impact of the fraud.

So, what did Mark’s little fraud end up costing the company?  As the accompanying spreadsheet* shows, the single largest windfall came from the excess salary the company paid as a result of wage and bonus increases compounded over 25 years — nearly $147,000.  In addition, the company paid more than $16,000 in retirement plan contributions, which, incidentally, would have grown even more as the contributions were invested.  Mark’s one-time little $2,000 fraud in 1989 had cost the company a whopping $163,000. (Click on the chart for a closer look.)

Fraud Chart for Blog #46“Clearly, the fraud deterrence measures the company had in effect in 1989 were faulty,” said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “No one should be able to set their own salary in the payroll system. The company should have required the written approval of the employee’s superior.  And the payroll department should have confirmed the starting salary with the Human Resources Department.  This was a fraud that never should have happened.  It was easy to prevent.”

Anderson, a forensic accountant and Certified Fraud Examiner in Philadelphia, said that with Mark’s pension as leverage, MegaGiantInternational reached a settlement with their former employee regarding the overpayments, and his pension was adjusted to the lower numbers.

This Tale of Fraud is part of an ongoing series of articles that examine actual cases of fraud carried out in businesses, non-profits and government offices, how fraud investigations played a part in discovering the fraudulent activities, and the fraud deterrence measures that might have thwarted them.

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 Fraud Examiner and a Certified Valuation Analyst.

*NOTE:  On the spreadsheet, all salary increases, bonuses and profit-sharing contributions have been averaged.  In actuality, the increases fluctuated with the greatest increases occurring with promotions and good operating years.

Fraud Tales: Fraud Investigation Uncovers Medicare and Medicaid Fraud

Government payments to providers under the Medicare and Medicaid programs are based on an “honor billing system,” meaning it is up to providers to honestly and accurately bill the government for services or goods provided.  Not surprisingly, fraud investigations routinely uncover fraudulent activities that cost the government billions of dollars each year.

“As a forensic accountant, I have been asked to investigate Medicare and Medicaid billing fraud both by the government and by private companies that suspected some of their employees were involved in fraudulent activities,” 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.  “My fraud investigations have unearthed some of the most common Medicare and Medicaid fraud schemes as well as some that were quite creative.”

Medicare is a federal government health insurance program established in 1966 to provide health insurance to people 65 and older and to certain disabled people, said Anderson, who also is a Certified Fraud Examiner in Philadelphia.  The program is funded through payroll tax deductions and administered by the federal government.  Medicaid is a government program established in 1965 to provide health insurance to low-income individuals in all 50 states, Anderson said.  Medicaid is funded jointly by the state and federal governments and administered by the states.

The so-called “honor billing system” puts the onus on healthcare providers, including durable medical equipment suppliers and pharmacies, to truthfully bill the two agencies for services and goods, said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  As a result, Medicare and Medicaid billing fraud generally is detected only after the fact, based either on tips from whistleblowers or after-the-fact data analysis that detects unusual billing patterns, he said.

Among the fraudulent Medicare and Medicaid schemes Anderson’s fraud investigations have uncovered are:

  • Upcoding Schemes: These frauds involve healthcare providers who  charge for a more expensive procedure than was actually performed, said Anderson, a forensic accounting expert in Philadelphia.  For example, he said, because Medicare pays more for a comprehensive annual physical exam than it does for a routine office visit, some providers will improperly bill a routine office visit as a comprehensive annual physical exam to receive the higher fee.  Or, a physical therapist may schedule a group session to provide physical therapy for multiple individuals at the same time, but bill Medicare/Medicaid for individual treatments at a much higher rate.
  • Unbundling Schemes: This fraud occurs when a group of medical tests typically billed as a single procedure are instead billed individually, thereby increasing the total fees for the tests.  An excellent example of this, said Anderson, a Certified Fraud Examiner in Philadelphia, is the Chemistry Panel and Complete Blood Count test.  This panel includes tests for cholesterol, triglycerides, blood glucose, calcium, potassium, iron, and complete blood count, as well as a number of other tests.  By performing a Chemistry Panel and Complete Blood Count but billing for each test individually, the laboratory can make a much higher fee for its services.
  • Non-existent Services Schemes: These fraud schemes occur when a healthcare provider bills for goods or services never provided, Anderson  In his work as a forensic accountant, Anderson uncovered a dentist who billed Medicaid for removing the same tooth from a patient four different times.  Another example, he said, is a gynecologist who billed for performing an internal pelvic exam on a man.  Anderson, a forensic accounting expert in Philadelphia, said Medicare and Medicaid recently have cracked down on home health care companies, for example, for providing eight hours of home health care but billing for 24 hours of care.
  • Medical Equipment Schemes: These schemes have many variations but generally involve providers who bill for new medical equipment but deliver used equipment, or who bill for equipment that was never delivered at all.
  • Prescription Drug Schemes: There also are more variations on this scheme, which include pharmacies that provide patients with generic drugs, but bill for more expensive name brands, or pharmacies that bill for a higher dosage or number of pills than was provided to the patient.

“The FBI estimated that in 2012, Medicare fraud alone cost the government as much as $250 billion for the year,” said Anderson, a forensic accountant and Certified Fraud Examiner in Philadelphia.  “Add to that the many billions of dollars lost to Medicaid fraud annually, and you can see how big a problem this is.  Hopefully, both federal and state governments will implement new procedures to reduce Medicare and Medicaid fraud in the future.”

This Tale of Fraud is another in a series of occasional posts that explores actual frauds perpetrated against businesses, non-profits or government offices and agencies and the fraud investigations that uncovered the illicit activities and, when possible, the fraud deterrence measures that could have prevented them.

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 Fraud Examiner and a Certified Valuation Analyst.

Fraud Tales: Fraud Investigation Reveals Fraudulent Junior Partner

The senior partner at an auto dealership was a successful businessman who owned multiple businesses.  As a result, he relied heavily on his junior partner to act as the general manager of the dealership.  With the dealership running smoothly and turning a profit, the senior partner had no reason to suspect anything was amiss until a fraud investigation conducted by a forensic accountant found that his trusted junior partner had defrauded him of tens of thousands of dollars over a number of years.

“This was a classic case of fraud in that the fraud was made possible by the clear presence of the Fraud Triangle, the three key factors necessary for fraud to occur — pressure, opportunity and rationalization,” 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.  “The junior partner’s pressure came in the form of college tuition bills for his two sons and a wife who felt her husband was underpaid and under appreciated by the senior partner.  Opportunity came from the trust the senior partner placed in the junior partner to run the dealership and set up the necessary controls and reporting procedures.  And rationalization came when junior partner felt entitled to the illicit financial benefits because he worked so hard and his name — not the senior partner’s — was on the dealership.”

Anderson, a Certified Fraud Examiner in Philadelphia, said the junior partner actually carried out three frauds simultaneously.

The first occurred when the junior partner presented his family with expensive Christmas gifts – ATVs for each son and an RV for his wife.  He purchased the vehicles through the dealership at significant discounts not normally available to retail purchasers and then, even though they were in his possession, listed the vehicles in the dealership’s vehicle inventory, Anderson said.  The junior partner’s plan to repay the dealership evaporated when he realized after about a year that the senior partner never looked closely at the vehicle inventory, so he could just leave the vehicles listed there and never pay for them.

The second fraud occurred when the junior partner learned that some insurers cover only vehicle repairs made using cheaper after-market parts instead of genuine auto manufacturer-supplied parts.  The junior partner set up a wholesale auto parts business (essentially a small office with two delivery trucks) to buy after-market parts.  Anderson, a Certified Fraud Examiner in Philadelphia, said the fraudster then swapped those parts with the genuine auto manufacturer-supplied parts in the dealership’s inventory and sold the more expensive parts to other auto dealers and body shops, pocketing a larger profit than he could make selling the cheaper parts.  Meanwhile, the value of the auto dealership’s inventory carried on the books was higher than the actual inventory value because the books reflected the value of the more expensive parts instead of the value of the cheaper after-market parts the junior partner had fraudulently put into inventory.

The third fraud occurred when the junior partner persuaded the senior partner that used cars purchased for resale and serviced customer vehicles should be detailed instead of merely washed by the dealership, claiming he had an agreement with a local car wash to detail each vehicle for $35 (instead of its normal $75 rate).  The junior partner then purchased a nearby car wash and sent more than 100 vehicles a month to it for detailing.  The car wash billed the dealership $35 per vehicle, Anderson said, but instead of actually detailing the vehicles, the junior partner had each vehicle washed and then paid a car wash employee $5 per vehicle for cosmetic cleaning to make it appear the vehicles had been detailed.  The junior partner pocketed more than $25 on each vehicle.

“The fraud could have continued indefinitely except that a disgruntled former employee of the auto dealership tipped off the senior partner about one of the frauds,” said Anderson, a forensic accounting expert in Philadelphia who recommends that every organization enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

As a result of the tip, Anderson said the senior partner hired a forensic accountant to conduct a thorough fraud investigation, which not only confirmed the tip, but also uncovered the other two frauds.  The forensic accounting expert’s fraud investigation further found that the frauds could have been easily prevented by removing a key element in the Fraud Triangle – Opportunity.

“Had the senior partner engaged a forensic accountant with expertise in auto dealership operations to perform certain fraud deterrence procedures every month, the frauds would have been prevented entirely or uncovered in a much shorter period of time,” explained Anderson, a forensic accounting expert in Philadelphia who also is a Certified Fraud Examiner in Philadelphia.

The fraud deterrence measures that should have been enacted were:

  • A detailed review of certain monthly reports, such as the vehicle aging report, which indicates how long vehicles have been in inventory as well as their classification in the inventory system.
  • Surprise monthly audits/counts of selected parts in inventory, with different parts counted on a rotating basis each month.
  • Closer scrutiny of outside services/vendors to ensure that the contracted service was actually provided.

“With adequate fraud deterrence measures in place, the junior partner may never have been able to get away with a single fraud scheme, let alone three of them,” said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “The opportunity simply would not have been there for him to do so.”

If your fraud deterrence measures have not been reviewed by a forensic accounting expert recently, it may be time to engage the services of a Certified Fraud Examiner in Philadelphia to analyze your company’s fraud controls and assure that they will adequately protect your company from fraudulent activity.

This Tale of Fraud article is part of an ongoing series of occasional posts that examine real cases of fraud against businesses, non-profits or government offices and the fraud investigations that revealed how the fraud was perpetrated.

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 Fraud Examiner and a Certified Valuation Analyst.

Valuation Issues in Divorce Best Left to Forensic Accounting Experts

Determining the equitable value of a business that is at the center of a divorce case can be a tricky situation, particularly when spouses have differing opinions about what that value should be.  No doubt that is why most attorneys turn to a forensic accounting expert who has served as a marital dissolution accountant and a business valuation expert to determine a fair value for the business.

“We’ve all been in situations where we know inherently that circumstances dictate we rely on a professional with experience in the matter at hand.  Handling a business valuation in a divorce proceeding is one of those situations,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley.  “The spouses may not agree on the value of the business and their attorneys may have partisan opinions as well. What it boils down to educating everyone involved on how a forensic accounting expert addresses valuation issues in a divorce.”

Anderson, a Certified Valuation Analyst and marital dissolution accountant in Philadelphia and the Delaware Valley, said there are four distinct business valuation issues that surface regularly in marital dissolutions.  They are:

  • The cost of the in-spouse’s services to the business being valued (the in-spouse is the spouse who owns the business interest being valued as opposed to the out-spouse who does not have ownership in the business);
  • Personal goodwill and its impact on the business being valued;
  • The presence and impact of unreported cash sales;
  • Personal expenses charged to the business.

This article, the last of a four-part series, will explore the issue of personal expenses charged to the business.

Anderson said it is common for in-spouses to charge non-business-related expenditures to a business and just as common for them to become an issue in a divorce case.  Anderson, a business valuation expert whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, said a forensic accountant must analyze the expenditures and deduct them from the business’ expenses.

“I had one extreme case in which an attorney in-spouse charged his business more than $150,000 for shore house renovations that included the addition of a movie-screening room,” said Anderson, a Certified Valuation Analyst forensic accounting expert in Philadelphia and the Delaware Valley.  “The attorney claimed he needed a comfortable, presentable place to work when he visited the shore house, and that business-related visitors needed to see an upscale home office that fit his reputation.  I reduced the expenses of the business by the entire cost of the renovation.”

In another case, explained Anderson, a divorce accountant and business valuation expert who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, said the in-spouse was a wholesale distributorship owner who attended semi-annual meetings of a trade association.  The in-spouse always brought the out-spouse (because some colleagues also brought their spouses) and their two children (because they did not want to pay a babysitter).  The in-spouse charged the business for the cost of travel, hotel rooms, meals and entertainment (including tickets to amusement parks, museums, etc.) for the out-spouse and two children — the same amount that Anderson later deducted from the expenses of the business.

“There is no limit to the creativity some in-spouses will employ in justifying the personal expenses they charged to their businesses,” said Anderson.  “Most divorce accountants have heard it all.  That is not to say there are no legitimate reasons for charging seemingly personal expenses to the business.  There are.  And it is the forensic account’s job to figure out which of the expenses are justified and which are not.

This final post concludes the four-part series examining valuation issues forensic accountants consider in divorce cases.

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

About David Anderson & Associates

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

Rely on Forensic Accounting Experts to Untangle Valuation Issues in Divorce

The decision to end a marriage is a messy affair that becomes undoubtedly more complicated when the division of property includes a business that must be valued.  In these cases, determining a fair value for the business is best left in the hands of a forensic accounting expert who has experience serving as a marital dissolution accountant and a business valuation expert.

“The issues that have to be considered in a business valuation during divorce proceedings are complex and numerous,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley.  “It usually begins as an educational process in which the forensic accountant must explain to the spouses and their attorneys how a forensic accounting expert addresses valuation issues in a divorce.”

In general, four key business valuation issues arise repeatedly in marital dissolutions, said Anderson, a Certified Valuation Analyst and marital dissolution accountant in Philadelphia and the Delaware Valley.  They are:

  • The cost of the in-spouse’s services to the business being valued (the in-spouse is the spouse who owns the business interest being valued as opposed to the out-spouse who does not have ownership in the business);
  • Personal goodwill and its impact on the business being valued;
  • The presence and impact of unreported cash sales;
  • Personal expenses charged to the business.

This article, the third of a four-part series, will explore the issue of unreported cash sales and their impact on business valuation.

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

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

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

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

The final post in this four-part series examining valuation issues forensic accountants consider in divorce cases will deal with personal expenses charged to the business.

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

About David Anderson & Associates

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

Forensic Accounting Experts Tackle Valuation Issues in Divorce

Marriage dissolution is never easy.  Throw in the complexity of one spouse owning a business that must be equitably valued and the complications multiply.  Fortunately, forensic accounting experts who also have served as marital dissolution accountants and business valuation experts can help unravel the complexities and help the parties reach a fair valuation of the business.

“The issues a forensic accountant will consider in these matters are not issues that people normally think about nor are they issues that are generally understood,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley.  “A forensic accountant must start by taking the spouses and their attorneys through an educational process so that they will understand how a forensic accounting expert addresses valuation issues in a divorce.”

There are four key business valuation issues that frequently arise in marital dissolutions, explained Anderson, a Certified Valuation Analyst who also has served as a marital dissolution accountant in Philadelphia and the Delaware Valley.  They are:

  • The cost of the in-spouse’s services to the business being valued (the in-spouse is the spouse who owns the business interest being valued as opposed to the out-spouse who does not have ownership in the business);
  • Personal goodwill and its impact on the business being valued;
  • The presence and impact of unreported cash sales;
  • Personal expenses charged to the business.

This article, the second of a four-part series, will explore the second of these issues — personal goodwill and its impact on the business being valued.

Personal goodwill is the portion of a business’s value and income that is attributable to the personal reputation, expertise or contacts of one or more of the business’s owners, according to Anderson, a divorce accountant and business valuation expert whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes marital dissolution and business valuation services in Philadelphia.  This issue comes into play mostly in professional services businesses, such as physicians, attorneys, accountants, engineers, etc.

A divorce accountant must disregard personal goodwill when valuing a business because it is assumed the in-spouse’s reputation, expertise or contacts would not accompany the business if it was sold.

Anderson, a Certified Valuation Analyst who is a business valuation expert and marital dissolution accountant in Philadelphia, recalled a case in which he was asked to value an anesthesiology practice whose senior member (the in-spouse) had a stellar reputation on the east coast.

During his investigation, Anderson discovered that the practice regularly received referrals from other doctors because of the in-spouse’s widespread, excellent reputation.  Further Anderson found that the business that came from the referrals represented a significant percentage of the practice’s revenues.  As a result, Anderson a forensic accounting expert in Philadelphia and the Delaware Valley, reduced the value of the practice to reflect that the personal goodwill of this senior member was responsible for a large percentage of revenues.

“The out-spouse clearly expected that a higher value would be placed on the business,” said Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “But so much of the practice’s business came from the anesthesiologists highly regarded reputation.  If the in-spouse left the practice or it was sold, the business would have dropped off precipitously, meaning the true value or the business was far less than it seemed.”

The next posting in this four-part series exploring valuation issues a forensic accountant must consider in divorce cases is an examination of the presence and impact of unreported cash sales.

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

About David Anderson & Associates

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