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Forensic Accounting Experts Unravel Complex Valuation Issues in Divorce

Ending a marriage equitably can be a complex process when spouses and their attorneys face the daunting prospect of determining the value of a business.  In these cases, it is always a good idea to consult a forensic accounting expert who also has served as a marital dissolution accountant and a business valuation expert to help the parties reach a fair valuation of the business.

“Rarely do the parties fully understand the issues that must be considered by a forensic accountant in these matters,” 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 process often begins as an educational one in which a forensic accountant must explain to the spouses and their attorneys how a forensic accounting expert addresses valuation issues in a divorce.”

Anderson, a Certified Valuation Analyst who has served as a marital dissolution accountant in Philadelphia and the Delaware Valley, said there are four key business valuation issues that arise repeatedly 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 first of a four-part series, will explore the first of these issues — the cost of the in-spouse’s services to the business being valued.

Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, said he was once asked to value a one-person ophthalmology practice in which the in-spouse earned about $200,000 a year.  The out-spouse and his attorney believed the business would be valued at more than $1 million, but Anderson assigned a value of less than $150,000.

“The out-spouse and his attorney did not consider the cost of the in-spouse’s services to the practice,” said 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.  “If a hypothetical buyer of the practice was not an ophthalmologist, the buyer would have to hire an ophthalmologist at a cost of $180,000 a year for a person with the same level of education and experience as the in-spouse.  Hence, the annual net income of the business available to the buyer would be only about $20,000, not $200,000.

“If another ophthalmologist purchased the practice, that person would know he or she could earn $180,000 working for another practice without having to invest money in a practice.  Why would anyone spend more than $1 million to earn only an extra $20,000 per year?  They wouldn’t,” said Anderson, a business valuation expert and marital dissolution accountant in Philadelphia.  “The practice simply was not worth as much as the out-spouse thought.”

Of course, a valuation can go either way.  Anderson, who also is a Certified Valuation Analyst, was once asked to value a retail furniture business whose CEO (the in-spouse) had an annual salary of more than $1 million and whose business had annual net income of less than $50,000.  The in-spouse expected the business to be valued at about $300,000 and was shocked when Anderson valued it at approximately $3 million.

“At the time, a hypothetical buyer could hire a CEO for about $350,000 per year, not the $1 million plus salary the in-spouse was taking,” said Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley.  “The $650,000 per year salary differential had to be added to the business’s bottom line, thereby resulting in a higher-than expected valuation.  These are the types of issues a divorce accountant has to consider to determine the fair value.”

Up next in this four-part series exploring valuation issues a forensic accountant must consider in divorce cases is an examination of personal goodwill and its impact on the business being valued.

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.

Fraud Investigations Identify Common Expense Reimbursement Schemes

Expense reimbursement fraud is one of the most common and pervasive types of fraud affecting companies today.  While the amount stolen by any one individual is relatively low, fraud investigations have found that the sheer number of employees committing this type of fraud can translate into a significant loss for a company.

“Many employees don’t believe that padding their expenses is immoral or illegal.  They think it is their right, as much as a paid vacation or a safe work environment is their right” 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.

“Some see it as a common practice their employer overlooks because the dollar amount stolen is insignificant in the greater scope of things,” said Anderson, a Certified Fraud Examiner.  “Still others see the money they pocket as an unauthorized bonus for putting up with the hassles of business travel.  Employees have all kinds of justifications for padding their expenses, but the bottom line is that when you add it up, companies are dealt a hard blow from expense reimbursement fraud.”

The following types of expense reimbursement schemes have been identified by forensic accounting experts as those most commonly used by employees.  Following each scheme are recommendations companies can use to combat the fraud.

Air Travel

The Scheme:  Some companies allow employees to travel in first or business class or to book coach tickets that allow flight plan changes without incurring an additional change fee.  Fraud occurs when an employee buys a ticket with a personal credit card, submits the cost for reimbursement and then returns the ticket to the airline for reimbursement and replaces it with less expensive travel, according to Anderson, a forensic accountant who also is a Certified Fraud Examiner.  The employee may fly coach instead of first or business class; replace a non-change fee ticket with a less expensive ticket that carries a change fee; use frequent flyer miles; or even travel by train or car instead of plane.

Fraud Deterrence Measures:  Companies should book tickets and pay for them on a company credit card so if a ticket is returned, funds are applied to the company card instead of the employee’s card, Anderson said.  Companies also should require employees to submit boarding passes as documented proof of the expense.  A company manager well versed in boarding passes can verify the pass was actually used, he said.  And because most airlines require boarding passes be printed within 24 hours of the scheduled flight time, it is harder for employees to print a pass and then change the ticket.

Meal and Entertainment Fraud

The Scheme:  The most common fraud is for an employee to pay for meals or entertainment with cash, obtain a blank receipt from the restaurant/venue and then enter a higher amount on the blank receipt, said Anderson, a forensic accounting expert.  Another scheme involves a group of people dining together and one employee charging the entire bill to a credit card while everyone else pays cash.  The employee pockets the cash but submits the entire bill for reimbursement.  A third method is for an employee to claim a personal meal as a business expense.  Another scheme is for the employee to submit a phony restaurant receipt (available at websites such as www.salesreceiptstore.com) for an amount greater than what the employee actually spent.

Fraud Deterrence Measures:  These schemes are difficult to detect and validate because it is impossible to know where employees actually ate or what they paid, Anderson said.  But companies can require employees to use company credit cards for all charges, thereby eliminating the need to reimburse them for meal and entertainment expenses.  Companies must carefully scrutinize credit card charges to make sure employees do not charge personal expenses and also must require employees to identify the attendees and business purpose of each charge.  One other alternative that limits a company’s total meal cost is to use the per diem tables issued by the federal government and reimburse employees at the per diem rate regardless of what the actual expenses were, Anderson said.

Taxi, Parking and Tolls Fraud

The Scheme:  An employee reports having paid cash for a taxi, parking or bridge/highway tolls and failing to obtain a receipt.  Many companies allow claims up to $20 or $25 for each of these types of expenditures without a receipt.

Fraud Deterrence Measures:  The two most effective means of combating this fraud is to require use of a company credit card or to deny reimbursement without the required receipt for these expenses.  Many taxis, parking venues and toll booths produce receipts electronically now, so it is difficult for employees to claim that a receipt was not available.

The Copy of a Receipt Fraud

The Scheme:  An employee submits a copy of a receipt, keeping the original receipt or another copy of it to be submitted for additional reimbursement at a later date.

Fraud Deterrence Measures:  Companies should require employees to submit original receipts and deny reimbursement for photocopies.

“Some of these fraud schemes are actually easy to prevent,” said Anderson, a forensic accountant 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.  “But many companies think the loss is so low that it is not worth the effort to combat it.  If they added up the ‘minor’ pilfering for each employee for the full year or multiple years, it would likely no longer be a ‘minor’ loss.”

When was the last time your expense reimbursement procedures were examined by a forensic accountant?  A forensic accounting expert from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can recommend fraud deterrence measures that will strengthen your expense reimbursement measures and help prevent losses, Anderson said.

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

About David Anderson & Associates

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

Business Valuation: Why Shares in Private Companies Are Discounted

You own 25 percent of a privately held business valued at $2 million, so it stands to reason that your investment is worth $500,000, right?  Not necessarily.  When valuing an ownership interest in a privately held company, business valuation experts must consider factors that can significantly reduce the value of your stake in the business.

“There are two key factors that can impact the value of a privately held business — lack of marketability and lack of control,” said David Anderson, 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.  “Depending on the circumstances, they can pull the value down by as little as 10 percent or less to as much as 90 percent or more.  This is definitely something you want to consider if you own shares in a privately held company or are thinking about buying or selling this type of shares.”

Anderson, a Certified Valuation Analyst and a business valuation expert in Philadelphia, said lack of marketability refers to the difficulty of selling shares in a privately owned business.  While it is easy to sell shares in a publically traded company simply by contacting a stockbroker to handle the transaction, the same is not true for a privately held company, he said.

“There is no ready market for the shares of a privately held company,” Anderson said.  “Selling these shares usually requires the services of a business broker and even using a broker takes time.  Of course, the longer it takes to sell the shares, the less the value they hold because they are tying up your money.  If the shares could be sold immediately, you would have the option to reinvest the proceeds immediately.”

In addition, Anderson explained, unless the privately held business pays regular distributions or dividends, the shareholder does not receive interest or dividends on the investment while the stocks are being sold.

A business broker also is likely to require a greater commission or fee to sell shares of a privately held company than a stockbroker would charge for selling shares of a publicly held company, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley.  Finally, he said, if the  ownership stake is subject to a shareholder’s agreement, the agreement may contain additional restrictions on the sale of shares.

“A Certified Valuation Analyst must consider each of these issues to determine the amount of discount that will be applied to the shares due to the lack of marketability,” Anderson said.

Lack of control — the other key factor a business valuation expert must consider in determining the worth of a privately held business — refers to the inability of a minority shareholder to make key decisions affecting the company, Anderson said.  For example, he said, a majority shareholder can set salaries, benefits and bonuses or decide to sell part or all of the company.  A minority shareholder lacks the power to make those decisions and usually lacks the ability to compel or influence others to make them.

As a result of this lack of control, the business valuation expert will further discount the pro-rata value of the interest to satisfy the expectations of potential buyers.

“A business valuation expert must analyze the lack of marketability, the lack of control and many other factors to determine a reasonable discount and, consequently, the true value of your shares”  Anderson said.

If you require the services of a 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.

Fraud Tales: Fraud Investigation Uncovers Theft in Auto Dealership

An auto dealership with a high volume of business established specific cash controls to assure that no car was delivered to a buyer until the dealership had received or accounted for all payments due from the sale.  Despite the required checks and balances, a fraud investigation found that a senior salesman was able to misappropriate cash payments from customers in excess of $25,000.

“The salesman was quite skilled in understanding how to thwart the controls and also in knowing how to cover his tracks,” 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 this also was a case in which the fraud deterrence measures fell short of what was needed to protect the dealership and an overworked accounting manager made mistakes that allowed the fraud to occur.”

Anderson, a Certified Fraud Examiner, said the dealership established a checklist of all payments due on a sale — customer deposits and additional payments, bank or finance company payments and manufacturer rebates.  Each salesperson was required to attach documentation for each payment (except for rebates) to the checklist, and the sales manager was required to confirm that all applicable payments were made or accounted for by signing the checklist.  Finally, the accounting department was required to reconcile all payments due from each sale.

“Each of these anti-fraud controls made sense,” Anderson said.  “They just didn’t go quite far enough.”

Salespeople at the auto dealership were required to take cash payments to the accounting manager, who would record the payment and issue a receipt, Anderson said.  The dishonest salesman — realizing that the cash receipts book was a generic one that could be purchased at any office supply store — issued his own cash receipt to customers, attached a copy of the receipt to the checklist and pocketed the cash.  When the sales manager reviewed the checklist, he would see the copy of the cash receipt and sign the checklist.

When the accounting manager performed the reconciliation — about 90 days after each sale because of the heavy workload — and found missing payments, the salesman would promise to collect the amount due from the customer.  The next day, he would turn in cash he had “collected.”  The overworked accounting manager never questioned the odd circumstances because the salesman was always able to collect the payment due, said Anderson, a Certified Fraud Examiner 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.

The fraud was discovered only after the controller took over when the accounting manager was out sick for an extended period.  The controller discovered several customer accounts receivable over 90 days old and traced each of them back to the same salesman.  The salesman apologized for the “few unusual lapses” and promised to collect money from the customers as soon as possible.  He arrived the very next day with cash he had “collected” from five customers.  The Controller thought it strange that the sales person was able to collect the past due amounts so quickly, and that all the customers paid in cash, even one for $5,000.  The controlled expected to see checks for anything over $1,000.

Suspicious, the Controller engaged a forensic accountant to conduct a fraud investigation.  The forensic accounting expert found more than $25,000 in outstanding customer accounts receivable from sales closed by the dishonest salesman.  When questioned by the forensic accountant, the salesman admitted to having taken more than $50,000 in cash payments from customers, as well as from deposits on deals that fell through or deals that had not yet been completed.

“What the fraudster was doing was similar to a check kiting scheme,” said Anderson, a forensic accounting expert.  “He would steal the cash, then hope that the fact that it was missing was never discovered.  If it was, he returned he money.   He would delay refunds on deals that fell through by telling customers the accounting department was slow to process refunds.  He was very creative is getting a steady supply of cash and sometimes never having to repay it.”

The salesman was fired and with the help of the forensic accountant, the dealership referred the matter to local law enforcement for prosecution.

Anderson, a forensic accounting expert who also is a Certified Fraud Examiner, said the company could have avoided the theft by making three minor changes in its fraud deterrence measures.  First, the company should have spent a few extra dollars to order cash receipts imprinted with the company logo and with a unique numbering system instead of using generic receipts.  Second, the checklist should have required that the accounting department confirm that cash receipt number was one they issued.  Third, the accounting department should have been required to complete all payment reconciliations within one week of the sale and to report any exceptions to the controller for immediate handling.

Does your fraud deterrence program have loopholes that could make your company vulnerable to fraud?  A Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can identify weaknesses and recommend strengthened fraud deterrence measures to help protect your company, Anderson said.

This Tale of Fraud article is the fifth in a series of occasional posts that examine actual cases of fraud against businesses, non-profits or government offices and the fraud investigations that uncover how the fraud was perpetrated.

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

About David Anderson & Associates

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

Recovering from Disaster with the Help of a Forensic Accounting Expert

Hurricanes.  Tornadoes.  Floods.  Blizzards.  Fires.  When disaster strikes, companies often rely on business interruption insurance to cover lost profits and extra expenses incurred as a result of the catastrophe.  They also often rely on a forensic accounting expert to guide them through the complex process of calculating lost profits and filing the necessary economic damage claim.

“The aftermath of a disaster is a trying time for any business,” 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, including development, implementation and management of  comprehensive contingency and disaster recovery plans.

“Amid the turmoil, determining how to calculate lost profits, analyzing the extra expenses and assuring the insurance claim is properly filled out are responsibilities best left in the hands of a forensic accounting expert.”

Anderson said that in order to make an economic damage claim, a forensic accountant must calculate what the business profits would have been during the business interruption period had the disaster not occurred and then compare that with the actual profits of the business during the same period.  The difference represents the company’s lost profits.

The four most commonly used methodologies for calculating lost profits are the Before and After method, the Sales Projection method, the Yardstick method and the Market Model method, said Anderson, who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

  • The Before and After method determines whether pre-disaster profits were growing, declining or level in order to calculate what the profits would have been during the business interruption period. The forensic accountant then compares these profits with the actual profits after the disaster occurred.
  • The Sales Projection method relies on forecasts and budgets the company had for the business interruption period, analyzes the past accuracy of forecasts and budgets, and calculates lost profits based on the analysis.
  • The Yardstick method usually applies to businesses with little history (for example, a company that started business a month before the disaster). Under the Yardstick method, the forensic accountant analyzes profits of companies in the same industry to calculate lost profits.
  • The Market Model method typically is reserved for companies large enough to have a measurable share of their local or national market (for example, one of the Atlantic City casinos that was affected by Hurricane Sandy). Under the Market Model method, the forensic accountant compares the overall market share of the company before the disaster to the market share during the business interruption period to calculate the company’s lost profits.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, said forensic accountants also work to identify and calculate the extra expenses the company incurred to recover from the disaster.  For example, he said, qualified extra expenses might be cleanup costs or the cost to re-enter lost computer data.

A forensic accounting expert also can assure that a company’s business interruption claim does not include disallowed items.  Anderson said that when an F2 tornado destroyed one of his client’s corporate headquarters and primary warehouse, the company continued to pay employees during the two weeks it took to relocate to a temporary facility, even though most employees stayed home or worked only part time.

The company included the wage payments in their economic damage claim, but Anderson discovered that the policy covered only wages for actual work performed. As a result, the client adjusted the claim.  Had they not done so, Anderson said, the insurance company would have disallowed the expense and required the company to revise the claim, causing payment to be delayed.

Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, recommends that companies consult with a forensic accounting expert to assure that their business has a comprehensive contingency and disaster recovery plan in place before misfortune occurs.

“Recovering from a disaster can be very difficult and very stressful,” said Anderson.  “Forensic accountants can help companies prepare for the worst.  And should disaster strike, your forensic accountant can lessen some of the pain by guiding you through the complex process of filing a business interruption claim.”

If you require 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, contingency and disaster recovery planning, 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.

Fraud Tales: Fraud Investigation Uncover Inventory Control Weaknesses

The anti-fraud controls in place at a shipping supplies company were extensive and outwardly thorough.  Incoming shipments were closely checked against the shipping manifest and outgoing shipments against the sales requisition that then became the invoice.  The warehouse had an alarm to prevent break-ins.  And the company conducted a detailed physical inventory at year-end to determine the quantities and cost of the inventory.  Still, a fraud investigation conducted by a forensic accountant found that more than $20,000 in inventory was being stolen each year and no one at the company had a clue.

“Company management was fully aware of the need for fraud deterrence measures and took what they thought were the necessary steps to protect their inventory,” 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 without a forensic accountant to guide them, the fraud deterrence steps fell short of what the company needed to safeguard against fraudsters intent on stealing.”

Anderson said the shipping supplies company owner had no idea the fraud was occurring because the controls in place were unable to identify that inventory was missing.  The theft was discovered only by accident.

An outside accountant who prepared the company’s income tax returns also had an outside business selling collectibles on eBay, which was also where he purchased his shipping supplies, Anderson said.  During one purchase, the accountant saw that the seller was local and asked if he could pick up the shipping supplies.  While doing so, Anderson said, the accountant noted that the seller had an uncommon last name, which he realized was the same as that of the general manager at the shipping supplies company that was his client.

The next day, the accountant called his client and learned that the general manager’s son worked in the company’s warehouse, said Anderson, a Certified Fraud Examiner 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.  The accountant informed the company owner that he had purchased shipping supplies from the son and picked them up at the son’s house.

The owner immediately engaged a forensic accounting expert to conduct a thorough fraud investigation.  The forensic accountant’s investigation revealed several holes in the company’s anti-fraud measures, including:

  • The company closely checked incoming and outgoing shipments, but never kept running balances of inventory items, instead relying on the annual physical inventory to provide end of year balances.
  • The alarm system protected against intruders breaking in, but there was no security to prevent employees from simply walking out with inventory.
  • The company never tracked the profitability of individual customer orders and compared them to year-end profitability.
  • Inventory costs were determined only once a year after the physical inventory and were never compared to the costs experienced by similar shipping supply businesses.

Had the company kept a running balance of inventory items, it would have discovered discrepancies with the year-end balances reported after the physical inventory, Anderson said   Further, if the company had tracked profitability of customer orders against year-end profitability and/or compared its inventory costs with those of similar businesses, it would have known its profitability was lower than expected and its inventory costs higher than expected, he said.

“Proper fraud deterrence measures would have raised a red flag,” said Anderson, a forensic accounting expert who also is a Certified Fraud Examiner.  “That would have led the company to investigate the matter and thereby discover the theft much earlier.”

Anderson said the case of the defrauded shipping supply company ends on a cautionary note.  He said the son, when confronted by his father, admitted to the theft.  The company fired the son, but declined to file criminal charges to avoid negative publicity.  But the accountant who accidentally discovered the fraud in the first place notes that the son continues to sell shipping supplies on eBay.  It appears he may have found another job — and another company to defraud.

“Failure to prosecute may solve your immediate problem, but often the fraudster simply moves on to another company,” Anderson said.  “And if that company is inheriting your problem, then it stands to reason you may be inheriting someone else’s problem too.”

If you’re absolutely confident that your fraud deterrence measures are sufficient to fully protect your company, consider the case of the defrauded shipping supply company owner who thought the same thing.  Perhaps it’s time to engage a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A Certified Fraud Examiner will analyze your company’s entire operation to identify weaknesses that make it vulnerable to fraudulent activities and then recommend strong fraud deterrence measures to help protect the company, Anderson said.

This Tale of Fraud article is the fourth in a 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 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 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.

Forensic Accounting Experts Play Crucial Role in Marital Dissolution

Ending a marriage is difficult under any circumstances.  But it becomes a complex and tangled affair when the marriage involves spouses who brought numerous assets into the marriage or acquired them during it.  In these situations, a forensic accounting expert plays a crucial role in the marital dissolution by sorting through the financial maze to help arrive at a fair and equitable division of assets.

“Marital dissolution can be a long, involved and costly process,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and other litigation support services in Philadelphia and the Delaware Valley.  “A marital dissolution accountant is uniquely qualified to analyze even the most complicated portfolio a couple can build during a marriage and help both sides resolve key financial issues.”

Anderson, who has served as a marital dissolution accountant in Philadelphia and the Delaware Valley, said forensic accounting experts can assist in divorce cases in many areas, including:

  • Identifying and valuing the couple’s assets at the date of marriage
  • Tracking and accounting for each spouse’s financial activities during the marriage
  • Identifying and valuing assets of the spouses at the date of separation or other applicable dissolution date
  • Searching for hidden assets or hidden income
  • Analyzing each spouse’s income and personal expenses to determine support and alimony
  • Accounting for post-separation transactions of each spouse.

“When couples wed, they each bring assets into the marriage,” Anderson explained.  “There may be securities, real estate, ownership interests in private businesses and other investments.  Or they may own a home or a vacation house, or perhaps cars, motorcycles, boats or airplanes.  And, of course, there is personal property, such as furniture, antiques, collectibles and artwork, to be considered.”

Anderson, a divorce accountant whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes marital dissolution and other litigation support services in Philadelphia, said many states allow each spouse to retain the assets they brought into the marriage.  The problem, he said, is that in many marriages, some or all of the couple’s assets may have been sold during the marriage with the proceeds invested elsewhere or the proceeds from the sale of one spouse’s pre-martial assets may have been commingled with funds of the other spouse.  Attorneys rely on forensic accounting experts to sort out these transactions and properly account for the assets each spouse brought into the marriage, Anderson said.

The analytical skills of a marital dissolution accountant also can be invaluable when couples use marital income to acquire new assets together during the marriage, or when they use marital income to invest in a business that one spouse brought into the marriage.  In the latter case, Anderson said, the spouse who was not involved in the business before the marriage would be entitled to share in the increased value of the business that occurred during the marriage.

Divorce accountants often are asked to identify and account for the couple’s total assets and to value them as of the date of separation or other applicable dissolution date as this information is crucial to the divorce settlement, Anderson said.

An  already-complex marital dissolution can become contentious when one spouse accuses the other of failing to list certain assets or income.  In these cases, a forensic accounting expert will launch an investigation to determine if the assets or income actually exist, said Anderson, a marital dissolution accountant in Philadelphia.  The divorce accountant will examine public records, analyze both bank and investment account statements and review income tax returns for evidence of the missing assets or income.

One case in which Anderson served as a marital dissolution accountant providing litigation support services in Philadelphia involved a spouse who claimed her husband owned commercial real estate in Philadelphia.  By analyzing the couple’s income tax returns and brokerage accounts, Anderson was able to identify a property tax deduction that was taken on the income tax return, as well as regular monthly payments made to a brokerage account.  He said the payments did not come from either spouse’s employer or from any of the couple’s known bank accounts.  Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, discovered that the husband’s limited liability company owned a building in Philadelphia and that the checks being sent to the brokerage account were rent checks from the building’s tenant.

Forensic accounting experts also are called on to analyze the income and expenses of each spouse to assist the court in determining how much support and/or alimony one spouse must pay another.  A divorce accountant also may be needed to analyze income earned by the spouses after the date of separation, or other transactions involving marital assets that the spouses engaged in after the date of separation.

“Unwinding a marriage often can be a mind-boggling process involving complex financial matters that are best left to a forensic accounting expert to evaluate,” said Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “Putting the financial issues into the hands of a marital dissolution accountant can ease tensions in sometimes stressful situations and keep things moving toward an amicable resolution.”

If your divorce case would benefit from the expertise 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.

Fraud Tales: Fraud Investigation Reveals Fraud Scheme in Supplies Shipping

The Director of Operations at a large national financial services firm was very good at his job.  Asked to cut costs, the Director recommended the company centralize its purchase of office supplies, a move he said would save the company more than $50,000 a year.  Sure enough, during the first three years of the program, the company’s annual savings exceeded $50,000 each year.  There was just one wrinkle.  A fraud investigation launched as a result of an eagle-eyed accounting clerk found that the actual savings topped $150,000 per year and that the Director was pocketing more than $100,000 a year for himself.

“The fraud perpetrated by this trusted employee was ingenious in that the very program he initiated to save the company money was, in fact, the same program that allowed him to siphon a significant amount of money out of the company and into his own hands,”  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 company was thrilled that the program performed as well as the Director said it would.  There was not a single person in the company who had any reason to suspect illicit activity.”

The fraud investigation found that the Director of Operations was able to set the wheels in motion on the fraud from the very beginning.  He negotiated a deal for a significant discount on office supplies with a major office products company that would become the sole supplier of office products for the company’s more than 100 offices in all 50 states, Anderson said.  He then set up a system that allowed each office to submit a requisition for office supplies on a monthly basis.

As the requisitions came in each month, the Director consolidated them into a single order with deliveries scheduled for each office.  He then used the monthly invoice from the office products supplier to assign costs to the applicable offices and forward the approved invoice to the corporate accounts payable department for payment, said Anderson, a Certified Fraud Examiner 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.

During the fourth year of the program, a newly hired accounts payable clerk was processing the latest invoice when she noticed an oddity.  One of the shipments had been delivered to a small eastern Montana town that was near her own hometown, but it was charged to the Helena office more than 300 miles away.

Anderson said the clerk reported the discrepancy to the Corporate Controller, who contacted the Helena office to inquire about the shipment.  The Helena office manager denied any knowledge about the shipment and also denied receipt of the items shipped.  Suspicious, the Controller checked all of the shipments on that month’s invoice and found that while some shipments went to company offices, a number of them went to locations nowhere near company offices.  He took the information to senior management and a forensic accounting expert was engaged to conduct a comprehensive fraud investigation.

What the fraud investigation uncovered — and the Director of Operations admitted — was that once the agreement with the office products supplier had been negotiated, the Director set up his own website to sell office supplies at discounted prices.  As buyers placed orders and paid for them through the website, the Director forwarded the orders to the office products supplier to fill.  When the monthly invoice arrived from the supplier, the Director assigned the cost of each invoiced shipment to the nearest company office.  So the Helena office — the only office in Montana — was charged for all shipments to Montana, both those ordered by the office and those ordered on the website by unrelated companies or individuals in Montana.

The Director admitted to the forensic accounting expert that his website transactions exceeded more than $100,000 per year, meaning he had actually shaved $450,000 off the company’s office supplies expenditures over the three years, but stole $300,000 of that for himself.

“He really was very good at his job,”  Anderson said.  “He also, unfortunately, was a crook.”

Had the alert accounts payable clerk not noticed the discrepancy with the Montana shipment, Anderson said the theft might have continued much longer.  He added that the entire scheme could have been short circuited simply by having the accounting department assign the invoice costs to each office instead of allowing the Director of Operations to do so.

If your fraud deterrence measures are in need of an overhaul, it’s time to engage a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A Certified Fraud Examiner can examine your accounting and purchasing programs and procedures and make recommendations for enacting strong fraud deterrence measures that will help safeguard your company, Anderson said.

This Tale of Fraud article is the third in a series of occasional posts that will examine actual cases of fraud that impacted businesses, non-profits or government offices and the fraud investigations that uncovered how the fraud was perpetrated.

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

About David Anderson & Associates

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

Engage Expert Witnesses Early for Successful Litigation Support

Trial attorneys know that expert witness testimony from a forensic accounting expert can be critical in determining the outcome of legal proceedings.  Likewise, the timing of when an attorney engages the services of a forensic accountant for litigation support services and, ultimately, expert witness testimony also has a direct bearing on the success or failure of the case.

“The earlier a forensic accounting expert is called in to consult on a case, the greater the chances the expert will be able to contribute information crucial to winning the 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.  “Forensic accounting experts who are engaged too late in the process often cannot have the impact on the case that the attorney needs.”

Anderson recently was asked by an attorney to provide expert witness testimony in Philadelphia for ongoing litigation.  The attorney’s client, who was a minority shareholder in a medium-sized distribution business, was claiming that the majority shareholders were taking outsized salaries and benefits; paying significant salaries and benefits to family members who performed little or no work; paying exorbitant office rent to entities owned by the majority shareholders; and running personal expenses through the business.

The attorney said he and his client expected to resolve the litigation without going to trail, but that didn’t happen.  Now, an expert report was due within two weeks.  Discovery had closed several months before, but the attorney had the company’s federal income tax returns for the past five years and believed that would be enough for Anderson to create a comprehensive report detailing the transgressions of the majority shareholders.

Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, agreed to examine the tax return and let the attorney know that same day if he would be able to produce the rushed report that was needed.

“Unfortunately, certain schedules were missing from the returns, and the information presented was in summary form – merely totals of overall expense categories with no specifics, said Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley.  “Individual employee wages were not shown and there were no details for benefits, travel, professional fees, meals and entertainment and other categories the minority shareholder suspected were being inappropriately paid by the company.  A $50,000 line item for ‘Miscellaneous Expenses’ appeared on one year’s return, but with no breakdown.”

Absent the complete accounting detail that is often not found in the income tax returns, but instead in the company’s accounting records and detailed financial reports, Anderson was unable to produce the comprehensive report the attorney needed to assure a win in the case.

Engaging a forensic accountant for litigation support services at the very beginning of a case can help attorneys establish the foundation of the case and determine the most effective course for the litigation, said Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.  Forensic accounting experts provide litigation support services and expert witness testimony for both plaintiffs and defendants in civil cases, as well as both prosecutors and defense attorneys in criminal cases.

Early involvement allows the expert witness to provide advice in areas such as:

  • Assistance in identifying and formulating arguments for the complaint (if for the plaintiff)
  • Initial evaluation of the plaintiff’s claims and identification of the information or testimony needed to support those claims
  • Analysis of the complaint and assistance with identifying arguments for the response (if for the defendant)
  • Assistance with preparation of discovery requests and interrogatories, including identifying the format(s) for delivery of the requested information (for example, if requesting detailed accounting system information, identifying acceptable formats for the delivered information so that it can be analyzed in a timely and cost-effective manner)
  • Follow-up on information delivered in response to discovery requests and responses to interrogatories in order to identify either missing information or additional information needed
  • Assistance with identification of individuals to be deposed
  • Assistance with development of questions for the deponents, including for the expert witness’s own deposition
  • Preparation of a report identifying and calculating damages or business value
  • Preparation of rebuttals for opposing expert reports (if necessary)

“Engaging a forensic accountant from the start provides expert analysis of your case before the discovery and deposition phases are closed,” Anderson said.  “In any financial dispute, the insights and advice of a forensic accounting expert can make the difference between winning and losing the case.”

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.

Fraud Tales: Fraud Investigation Finds Stolen Cash in Business

Cognizant of the rampant escalation of fraud in the business world, the owner of a mid-sized retail establishment took great care in establishing fraud deterrence measures to protect the company.  With more than 80 percent of the company’s sales paid in cash, multiple checks and balances were put into place to make sure each day’s receipts, cash register tapes, bank deposit slip and bank receipt all matched.  And still, the accounting manager was able to steal $400,000 from the company.  This second Tale of Fraud in an ongoing series recounts an actual fraud investigation that revealed exactly how the fraud was perpetrated.

“The fraud deterrence measures seemed foolproof to the business owner,” 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 owners need to realize that the people handling their money are in a unique position to identify loopholes in the system and, given the opportunity, to exploit them.”

Anderson said the fraud deterrence measures set up by the company required cashiers to manually record each sale on a numbered receipt from multi-copy receipt books and also to ring up the sale on the cash register.  At day’s end, the cashiers totaled the register drawers and matched them to the register tapes.  The accounting manager then recounted each drawer and rematched it to the tape.  She gave the cash, checks and credit card receipts, along with the corresponding numbered manual receipts, to the accounting clerk for entry into the computer system.  The accounting clerk prepared the deposit slip, and the controller took deposit slip and receipts to the bank.  The accounting clerk then verified that the amount on the printed bank deposit receipt matched the amount on the original deposit slip.

“By having multiple people involved in the process and having receipts and deposits checked multiple times, the owner couldn’t envision a scenario in which anyone would have been able to steal a penny,” said Anderson, a Certified Fraud Examiner 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.  “A forensic accounting expert would have offered a different opinion.”

The fraud investigation Anderson performed found that the genesis of the fraud was in the numbered receipt books, which used only four-digit receipt numbers.  Because the business had thousands of transactions each year, the same four-digit receipt numbers were used multiple times.  There was no delineated plan for providing specific receipt books to the cashiers or for tracking numbered receipts, meaning the same receipt book might be used by multiple cashiers during a year.

The fraud investigation also found that although the register tapes were matched to the drawer contents each day, there was no requirement that the tapes be retained or that the bank deposit total match the register tape total.

These weaknesses in the fraud deterrence measures were the catalyst for the accounting manager’s illicit activity, Anderson said.  First, she discarded the register tapes each day so that no one could go back and match them to the bank deposit.

Then, according to the fraud investigation, she destroyed some of the handwritten cash receipts and pocketed the amount of cash they represented. The remaining receipts were given to the accounting clerk to enter into the accounting system.  As a result, the remaining cash, checks and credit cards matched the remaining handwritten receipts, as well as the amount deposited into the bank, Anderson explained.

“There was no reason to suspect the accounting manager of being anything but loyal, reliable and diligent,” Anderson said.  “Except, of course, that she was in that very special position of being intimately involved in the accounting procedures and therefore able to exploit the weaknesses in them.  A comprehensive fraud deterrence program developed by a forensic accounting expert would have helped close the loopholes and prevent the loss of $400,000.”

If you suspect your anti-fraud controls may have weaknesses, consider contacting a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A Certified Fraud Examiner can examine your fraud deterrence measures and make recommendations for improving them, Anderson said.

This Tale of Fraud article is the second in a series of occasional posts that will analyze actual cases of fraud that occurred in businesses, non-profits or government offices.

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

About David Anderson & Associates

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

Outsourced CFOs Bring Big Benefits at Reasonable Cost

Many small- to medium-sized businesses rely on their controller or accounting manager to handle routine financial and accounting matters.  But what if a company’s financial needs exceed the basic functions their controller or accounting manager can provide?  What happens when the more specialized services of a Chief Financial Officer (CFO) are needed, but the company can’t afford a more costly CFO or doesn’t need one on a permanent basis?  The solution is easy:  Contract with an outsourced CFO.

“Good, experienced controllers and accounting managers are very are well suited for activities such as preparing monthly, quarterly and annual financial reports; paying vendors; collecting accounts receivable, and handling payroll and payroll tax reporting,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of outsourced CFO services and other forensic accounting services in Philadelphia and the Delaware Valley.  “But for more complex, specialized issues, a company really needs the expertise and knowledge of a CFO.”

These activities might include:

  • Obtaining bank loans and/or lines of credit
  • Raising additional funds through issuance of equity or hybrid securities
  • Investor relations
  • Insurance, including liability and property and casualty insurance
  • Employee benefits, including health care insurance, dental, vision, 401-K plans, profit-sharing plans, etc.
  • Cash management and short-term investments
  • Human Resources issues, including employee manuals, policies & procedures, training, job succession, etc.
  • Regulatory and compliance reporting of both financial and operational matters
  • Budgeting and long-range financial planning, including strategic plans
  • Information technology, including computer security, systems life-cycle planning, systems maintenance and enterprise software
  • Disaster recovery planning
  • Assisting company ownership in exit strategy planning

While these are the types of matters that are best left in the capable hands of an experienced CFO, Anderson said bringing aboard a full-time CFO is often not an option for small- to medium-sized businesses.

“CFOs can be not only difficult to find, but also quite expensive,” said Anderson, a forensic accounting expert in Philadelphia who provides outsourced CFO services in Philadelphia and the Delaware Valley.  “Many CFOs also expect that part of their compensation package will include an ownership interest in the company and that is something most business owners are reluctant to offer.  The outsourced CFO is the perfect solution for a small- to medium-sized businesses.”

An outsourced CFO is hired on a contract basis for as long or short a time period as the business needs, Anderson said.  Some businesses will engage an outsourced CFO only for the time it takes to complete specific projects.  Other companies contract with an outsourced CFO for an extended period of time to work a certain number of days per week or hours per month, he explained.

“Using outsourced CFO services in Philadelphia or anywhere in the country gives small- to medium-sized businesses access to the knowledge and experience they need whenever they need it,” said Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley.  “Companies get all the benefits of having a CFO on staff, but they don’t have to pay top-dollar salary and compensation packages that include benefits and bonuses, nor do they have to worry about relinquishing a partial ownership interest in the company.”

If your business is in need of outsourced CFO services in Philadelphia and the Delaware Valley or any other forensic accounting services in Philadelphia, 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 in Philadelphia and the Delaware Valley.  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.

Fraud Deterrence on Foreign Soil

Your company has decided to open a factory overseas, or to begin selling their products in a foreign country.  Do you understand the laws that will affect how your company operates outside the boundaries of the United States?  Which payments to foreign government officials are allowed and which are considered fraudulent?  A forensic accounting expert can help you navigate this complex international maze and establish policies and procedures as part of a comprehensive fraud deterrence program that will protect your company from unwittingly participating in fraudulent financial activities abroad.

“In today’s global economy, failing to understand the laws that affect business operations in a foreign country can land your company in a heap of trouble,” 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.  “There are laws both in the United States and in foreign countries that you have to be concerned about.”

Take the case of the U.S. company that wanted to open a new factory in Thailand.  Although the company’s product was sold in Great Britain and other countries, this would be the company’s first factory operation outside the U.S.

The factory was two months from opening when the general manager of the Thailand subsidiary called the U.S. parent company with the news that the provincial governor in Thailand had just told him there was a two-year backlog in approving factory licenses.  The provincial governor also said that if the company paid him a “fee” in cash, he would be able to expedite the process and issue the license by the time the factory was ready to open.

“The senior executive in the U.S. was in a quandary,” said Anderson, a Certified Fraud Examiner 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.  “The company needed to get the factory open on time, but if they made the payment to the provincial governor, were they breaking any laws?  Was making a payment to get a license issued faster a violation of the Foreign Corrupt Practices Act and, therefore, an act of fraud?”

The Foreign Corrupt Practices Act of 1977 and its 1988 amendments (FCPA) make it a crime for a business or its officers, directors, employees, agents or shareholders to bribe a foreign official for the purpose of influencing that official in order to obtain or retain business, Anderson said.  However, he said, the law does permit facilitation payments.

Facilitation payments are payments to foreign officials to expedite routine governmental actions — such as processing papers, issuing permits or other normal procedures — that the officials are bound to perform anyway.  Facilitation payments are not intended to influence the official’s decision, only the timing.  The payment to the provincial governor met the FCPA’s definition of a facilitation payment, meaning the company had no risk of violating U.S. law.

Unfortunately, the U.S. law wasn’t the only law the company had to worry about.  Because the company sold its product in Great Britain, they also were subject to the provisions of the United Kingdom Bribery Act of 2010 (UKBA), which holds that all payments to foreign officials — including facilitation payments — are illegal.

Under the UKBA, it doesn’t matter where the payment is made.  As long as a company does business in the UK, any facilitation payment in any country in the world is still illegal, Anderson said.  However, the U.S. company discovered that the UK agency charged with enforcing the law — the Serious Fraud Office — primarily focused on situations it deemed to be “serious or complex.”

Counsel to the U.S. company advised that “serious or complex” situations generally involved significantly large payments and/or multiple payments for the same purpose, neither of which was the case with the facilitation payment in Thailand.  Anderson said the company made the payment, documented and recorded it in its accounting system, received the factory license and opened the factory on time.

“Companies need to be careful when operating on foreign soil,” said Anderson, a forensic accounting expert with experience in both fraud investigations and fraud deterrence programs.  “As with the case of the U.S. company opening a plant in Thailand, you don’t necessarily need to have physical operations in a country to be subject to their laws.”

If your company operates in foreign countries or sells its products there — or is thinking about doing so — it may be time to contact a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.   A forensic accounting expert can design a comprehensive fraud deterrence program that includes policies and procedures regarding financial activities in foreign countries, Anderson said.

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

About David Anderson & Associates

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

Fraud Tales: Fraud Investigation Reveals Loopholes in Checkbook Controls

Harry Johnson was a savvy businessman who was well aware of the perils of not having the proper fraud deterrence measures in place.  He took great care to see that his successful small business was adequately protected by anti-fraud controls that he created himself.  Then how did Harry end up losing more than $200,000 from fraudulent activity?  This Tale of Fraud is the story of an actual fraud investigation that uncovered exactly what went wrong in Harry’s business.

“Harry was seemingly meticulous about safeguarding the checkbook used for his business,” 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.   “He diligently set up a series of anti-fraud controls that he truly believed would prevent fraud from occurring.”

Anderson said that although Harry, which is a fictitious name, allowed the controller to be listed as a signatory on the checking account, he always carefully watched the controller fill out each check and he always signed each check himself.  Additionally, Harry was the only person who could write in the checkbook, so he vigilantly recorded each check, Anderson said.

The controller was permitted to fill out the deposit slips, but only under Harry’s watchful eye.  And, only Harry could record the amount of the deposit, which he got from the printed bank deposit receipt.  Finally, Anderson said, although the controller performed the monthly bank reconciliation, Harry always matched the amount recorded by the controller in the checkbook to the monthly bank statement.

“To the untrained eye, Harry’s fraud deterrence measures might seem adequate,” said Anderson, a Certified Fraud Examiner 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.  “But a forensic accounting expert would have seen that the measures were filled with loopholes that the controller exploited, allowing him to steal well over $200,000 before Harry realized anything was wrong.”

How did the controller do it?

The fraud investigation Anderson conducted revealed that because the controller was a signatory on the checking account, he was able to prepare and cash counter checks that were never recorded in the checkbook.  In addition, while the controller prepared each deposit slip in front of Harry, he never totaled the deposit.  The fraud investigation found that once the controller got to the bank, he would enter a total that was less than the deposit, allowing him to take a certain amount out in cash that he then pocketed.  The net amount deposited was printed on the bank deposit receipt, Anderson said, and it was this amount that Harry recorded in the checkbook, never realizing that it was not the amount it should have been.

Finally, the fraud investigation discovered that Harry never kept a running balance in the checkbook, but instead, relied on the controller to perform the bank reconciliation and write the updated bank balance in the checkbook, Anderson explained.  The controller always made sure that the month-end amount recorded in the checkbook equaled the month-end balance shown on the bank statement.

“Protecting your company from devious-minded people who are intent on defrauding you is a complex process,” Anderson said.  “It’s not something to do yourself and hope you get it right.  Creating strong anti-fraud controls as part of a comprehensive fraud deterrence program that will adequately protect your business is something you should entrust to a forensic accounting expert.”

If you aren’t absolutely certain that your anti-fraud controls are effective enough to prevent fraud, it’s time to contact a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley to analyze the controls and make recommendations for strengthening them, Anderson said.

This Tale of Fraud article is one in a series of occasional posts that will examine actual cases of fraud that have occurred in businesses, non-profits or government offices.

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

About David Anderson & Associates

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