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Anderson to Speak on the Role of the Business Valuation Expert in Collaborative Divorce

Posted by & filed under Blog Articles, Business Valuation, Company News, Forensic Accounting, Marital Dissolution.

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

On Tuesday, April 24, 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, will be speaking about the role of the business valuation expert in a collaborative divorce at the Make Divorce Healthier 2018 Symposium.

The symposium, being held at the Normandy Farm Hotel and Conference Center in Blue Bell, PA, is an energizing day for professionals to come together around respectful, mindful, and more affordable divorce. Changemakers will gather to remove the shame, blame, and fear associated with divorce.

Anderson’s presentation will address such issues as:

  • Having a properly credentialed business valuation expert
  • Comparing and contrasting the role of the business valuation expert in a traditional divorce vs. a collaborative divorce
  • Understanding the business valuation process
  • Understanding key issues in valuing a business

He will be presenting to therapists, mediators, collaborative attorneys, financial planners, divorce coaches, graduate students, and clients-turned-advocates.  His co-presenter will be Joseph Barbagallo, CPA, CFF, CVA, CFD, CFS, CFE, CFI, ABV, FCPA, CGMA.

The Symposium begins at 8:30 a.m. on Tuesday the 24th with the keynote address “Managing the Negotiation Within – For Our Clients and Ourselves” by David A. Hoffman, Esq. from the Boston Law Collaborative, LLC. That speech will be followed by a series of hour-long breakout and roundtable sessions.

Anderson and Barbagallo are scheduled to speak in the 2:30 p.m. slot on the topic “The Role of The Business Valuation Expert in Collaborative Divorce.”

For more information about the Make Divorce Healthier 2018 Symposium, please visit www.makedivorcehealthier.org.

For more information on marital dissolution, business valuation, 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 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.

Separation of Duties: A Critical Element of Fraud Prevention

Posted by & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.

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

Many of the frauds investigated by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, share a common element: The fraudster was able to perpetrate and hide the fraud for an extended period due to the lack of separation of duties.

Separation of duties requires more than one person be involved in the processing and reporting of financial transactions to eliminate the possibility of that person alone committing a fraud. If a fraud were to occur in a situation in which there was adequate separation of duties, it would have to be due to the collusion of two or more people involved in the processing or reporting.

For example, Anderson said, if you look at a sales transaction from start – entry of the customer purchase order/request – to finish – receipt, deposit and recording of the customer’s payment for the sold item(s) or services – you could expect to see the following steps:

  • Receipt and entry into the business system of the customer’s purchase order/request
  • Fulfillment of the customer purchase order via product shipment/delivery, manufacture and shipment/delivery, or provision of services
  • Creation, entry, and sending of customer invoice
  • Receipt and entry of payment
  • Application of credits, if any – usually for returns or errors in the customer invoice
  • Deposit of customer payment
  • Periodic reconciliation of an operating bank account into which the deposit is made.

Proper separation of duties would prevent a single person from processing the customer invoice; receiving, entering, and depositing the payment; applying credits; and performing the bank reconciliation.  If those duties are not separated, the person could potentially divert the payment received to a bank account under control of that person or, if the payment is made in cash, to that person’s own pockets, while hiding the diversion by:

  • Not recording the sale or customer invoice in the accounting system to hide diversion of the customer’s payment; or
  • Recording in the accounting system the receipt of the payment and hiding the failure to deposit the customer payment when performing the bank reconciliation; or
  • Applying credits against the customer’s account so that the balance in the bank equals the balance on the books, as adjusted through the bank reconciliation process.

Similarly, if you were to look at a purchase transaction from start – setup of the vendor and entry of purchase order/request – to finish – preparation and recording of vendor check for goods or services purchased – you could expect to see the following steps:

  • Receipt and entry into the business system of internal purchase order/request
  • Setup of the vendor, if not already in the system)
  • Fulfillment by the vendor of the purchase order via product shipment/delivery, manufacture and shipment/delivery, or provision of services
  • Receipt and entry of vendor invoice
  • Preparation and recording of vendor check
  • Sending of vendor check
  • Periodic reconciliation of an operating bank account from which the check was written
  • Interfacing with the vendor regarding amounts due to the vendor.

Proper separation of duties would prevent a single person from setting up the vendor in the business system, making changes to the vendor information, entry of the internal purchase order/request, receiving and entering the vendor invoice, preparing and recording the vendor check, and sending the vendor check and performing the bank reconciliation.  If those duties are not separated, the person could potentially:

  • Divert the vendor’s check to an account under control of that person, in which case the person would tell the vendor that there were problems with processing their payment or would refuse to pay the vendor; or
  • Create a phony vendor, or change the mailing address of an existing inactive vendor, and cause payment to be made for non-existent products – typically office supplies and other items that are expensed rather than being recorded as inventory – or services; and
  • Hide the diversion when reconciling the operating bank account.

Note that failure to adequately separate duties for payroll could be similarly exploited for payments to either a terminated employee or a non-existent employee.

Based on the description above, it is easy to see the need to properly separate duties as part of a fraud prevention program. However, many businesses and other organizations – including governmental and non-profit entities – do not possess a staff large enough to facilitate adequate separation of duties.  So, what are some alternative steps that can be employed?

In such circumstances, some alternatives these businesses and organizations should consider are:

  • Engaging an outside party such as a forensic accountant to provide periodic oversight and review of financial transactions and bank reconciliations;
  • Arranging for all bank statements to be sent directly to the owner or a designated executive, at an address outside the business, so the bank statements and cancelled checks can be briefly reviewed for unusual or missing items prior to being given to the person performing the bank reconciliation;
  • For deposits, requesting that the bank provides a separate machine-printed deposit receipt matching the in-house prepared deposit slip;
  • For checks, requiring two separate approvals and signatures for all checks above a designated amount, or requiring a separate management approval for all checks, i.e. someone separate from the check signer;
  • For payroll prepared by a third-party company, arranging for a periodic list of active employees be sent directly to the owner or a designated executive, at an address outside the business, so the list may be scrutinized for unknown employees or terminated employees still receiving pay.

The costs of these alternatives, either financial – for the outside review – or time – for internal review – are low relative to the potential cost of undiscovered fraud.

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

About David Anderson & Associates

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

Key Issues Regarding Marital vs. Non-Marital Assets in a Divorce

Posted by & filed under Blog Articles, Business Valuation, Company News, Forensic Accounting, Marital Dissolution.

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

One of the key tasks in a divorce is identifying the marital versus the non-marital assets of the divorcing couple.

To obtain a better understanding of the key issues involved regarding marital versus non-marital assets, 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, interviewed Kathy Bloom, Esquire. Ms. Bloom is an attorney-mediator who is the Managing Partner of the family law firm of Bloom Peters, LLC; the firm has offices in Horsham, PA and Mount Laurel, NJ.

Ms. Bloom began by stating that Pennsylvania, New Jersey and Delaware are “equitable distribution” states (as opposed to states like California which are community property states).  This means that the courts decide what they consider to be an equitable or fair distribution of the marital assets between the divorcing spouses (whereas in community property states the parties are generally entitled to a 50/50 distribution of marital assets).

As a result, it is very important to distinguish between marital and non-marital assets.  Such assets include homes and other real estate, vehicles (including cars, trucks, boats and planes), personal property (including art, collectibles, antiques, jewelry, furnishings, clothing, etc.), investment accounts, bank accounts and investments in businesses.  In Pennsylvania, 529 education accounts not held in trust are also considered marital assets regardless of the source of the contributions.

Ms. Bloom stated that the delineation between marital and non-marital assets is not based upon the name in which the assets are held, but rather when the assets were acquired.  If the assets were acquired prior to the marriage or after the date of separation (or date of filing for divorce, depending upon the state of residence), they are generally considered non-marital assets.  Assets acquired during the marriage as well as the increase in value of non-marital assets during the marriage are marital assets.

Of course, there are always exceptions to the above.  If there is a pre-nuptial agreement providing for segregation of certain non-marital assets and their subsequent earnings or increase in value, these can remain non-marital assets.  Another exception can occur for non-marital assets acquired by inheritance or gift during the marriage.  If those assets are segregated from marital assets, they can retain their non-marital status (although any earnings or increase in value during the marriage will still be considered as marital assets).

If non-marital assets are “comingled” with marital assets, these non-marital assets can become marital assets.  This can happen when one or both spouses put non-marital assets into a common marital asset.  For example, if both spouses contribute non-marital assets to a common joint account (such as a checking account or investment account) or to a commonly owned asset (such as a home, car, or real estate), over time the non-marital asset may become indistinguishable from the marital asset.

There are even exceptions to some of these exceptions.  Some Pennsylvania counties (such as Bucks County) employ the concept of “vanishing or diminishing credit”.  This credit is applied ratably over a twenty-year period.   For example, if a spouse contributed $20,000 of non-marital funds towards the purchase of a jointly owned home, and the couple divorces fifteen years later, the contributing spouse may claim a diminishing credit and be considered to still retain a 25% non-marital interest in the original $20,000 contribution.  While Bucks County commonly applies a diminishing credit, in other Pennsylvania counties, it is generally up to the judge to determine whether any credit remains in similar circumstances.

Issues can also arise if one or both spouses withdraw funds, marital or separate, before final distribution.  If any of those funds are invested (such as in a house, real estate or investment account), the increase in value of such investment may or may not be considered a marital asset.  As a result, Ms. Bloom recommended that any such distribution prior to the final divorce decree be subject to an agreement between the parties regarding any increase in value.

As can be seen from the above, there are many key issues involved in determining marital versus non-marital property.   Very often, the parties will need to engage a forensic accountant to trace both marital and non-marital assets throughout a marriage, particularly if some of the non-marital assets have been comingled with marital assets.

If you 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.

Understanding the Three Most Commonly Used Approaches to Valuing a Business

Posted by & filed under Blog Articles, Business Valuation, Company News, Forensic Accounting.

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

The three most commonly used approaches to valuing a business are: The Income Approach, the Asset-based Approach, and the Market Approach.

Professional business valuators are required to consider all three approaches.  In the end, a business valuation expert must use his or her judgment to determine the best approach or combination of approaches to arrive at a business valuation that is as fair and accurate as possible.

These three most common approaches which a business valuation expert will consider are:

  • The Income Approach, which values a business by using one or more methods to convert anticipated economic benefits (earnings or cash flow) into a single present amount.  There are two primary methods under this approach:
    • Capitalization of Earnings/Cash Flows Method, which is used when there has been a steady level of historical growth; and the
    • Discounted Earnings/Cash Flow Method, which is used when there have been fluctuations in historical growth and when the company can reasonably project earnings for the next five or more years.
  • The Asset-based Approach, which values a business by calculating the value of net assets, (the difference between total assets and total liabilities).  There also are two primary methods under this approach:
    • The Book Value Method, which calculates the net asset value as shown on the books of the business – typically at historical cost, and the
    • Adjusted Net Asset Method, which adjusts the value of assets and liabilities of the fair market value as of the valuation date.
  • The Market Approach, which values a business by comparing it to sales of similar businesses.  There are four primary methods under the Market Approach:
    • Transactions of comparable publicly held companies;
    • Transactions of comparable privately held companies;
    • Prior transactions involving shares of the company itself, and lastly,
    • The ability of the company to pay shareholder dividends as compared to dividends paid by comparable companies.

The specific methods used depend on the facts and circumstances surrounding the business being valued.  For example, if there are no comparable market transactions or an insufficient number to be meaningful, the Market Approach may not be useful.

Once the value of the business has been set under each of the approaches, the business valuation expert must determine whether one of the values is the best representation of the true value of the business or if a weighted blend of the values provides a more accurate final business value, he said.

Typically, the Asset-based Approach yields the lowest value, and is usually relied upon by the valuator to establish a floor value for the business.  However, if the business has had recent operating losses and no comparable market transactions are available, the Asset-based Approach may well be the basis for the valuation.

If the valuation expert is valuing a startup business with little or no operating history and/or profitability, the Income Approach might yield a very low value. However, the Market Approach might result in a considerably higher value based on the sale of comparable businesses.

Under this scenario, some valuators would select the Market Approach as being most indicative of value and others might choose a blend of the Income Approach and Market Approach with a higher weight on the Market Approach.

It all comes down to the professional judgment of the business valuator, based on his or her experience and knowledge about the business being valued.

If you need a business valuation professional 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 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.

Bring in Expert Witnesses Early to Enhance Your Litigation Support

Posted by & filed under Blog Articles, Company News, Litigation Support.

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

Trial attorneys know 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.”

Earlier in his career, Anderson was asked by an attorney to provide expert witness testimony in Philadelphia for ongoing litigation.  The attorney’s client, a minority shareholder in a medium-sized distribution business, was claiming 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 trial, 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 or would not be able to produce the rushed report that was requested.

“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 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.

Set Up A Tip Hotline to Help Stave Off Business Fraud

Posted by & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.

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

Many business owners and executives believe performing a formal financial audit each year is the most effective way of detecting and deterring fraud.

They are wrong.

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

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

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

And who were the main source of these tips?

By far, it is a company’s own employees. One surprising finding of the ACFE report was that a surprisingly high 52 percent of all frauds reported via tips came from company employees.

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

So how do you encourage employees to come forward?  The best way is using an anonymous tip hotline.

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

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

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

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

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

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

About David Anderson & Associates

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

Taking Steps to Prevent Rationalization Can Reduce the Threat of Fraud

Posted by & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.

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

In this blog, the final of a three-part series on The Fraud Triangle, Certified Fraud Examiner David Anderson of David Anderson and Associates, a firm offering forensic accounting services in Philadelphia, reviews the three factors – Opportunity, Pressure, and Rationalization – that must be present for fraud to occur. 

If even one of these three situations can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away. After reviewing Opportunity and Pressure in the first two parts of this series, Anderson closes with a closer look at Rationalization. 

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

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

Anderson said examples of rationalization can include:

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

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

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

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

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

About David Anderson & Associates

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

Break the Fraud Triangle by Keeping an Eye Out for Pressure Situations

Posted by & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.

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

In this blog, the second of a three-part series, Certified Fraud Examiner David Anderson of David Anderson and Associates, a firm offering forensic accounting services in Philadelphia, reviews the Fraud Triangle – a combination of three factors – Opportunity, Pressure, and Rationalization – that must be present for a fraud to occur. 

If even one of these three factors can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away. After reviewing Opportunity in the first entry last week, here Anderson takes a closer look at Pressure. He will discuss Rationalization in next week’s conclusion of this series.

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

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

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

Examples of the need for money include:

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

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

For example:

  • Has the owner or manager noticed whether an employee is driving a more expensive car or wearing more expensive jewelry and/or clothing than would be expected?
  • Has the owner or manager heard (or has it been reported to the owner or manager by another employee) an employee discussing expensive vacations, the purchase of an expensive home or vacation home, or the purchase of an expensive boat that would appear to be more than the employee would be capable of handling?
  • Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee discussing family problems, a family member’s illness or injury or a family member’s loss of employment?
  • Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee discussing gambling winnings or losses?
  • Has the owner or manager noticed (or has it been reported to the owner or manager by another employee) an employee exhibiting signs of a drug problem?
  • Has the owner or manager heard (or has it been reported to the owner or manager by another employee) the employee complaining about being underpaid or passed up for a deserved raise, bonus, or promotion?
  • If the answer to any of these questions is “yes”, the next step would be to consult with the company’s attorney before taking any action (including confronting the employee or questioning other employees).

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

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

About David Anderson & Associates

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

Breaking Down the Fraud Triangle – Don’t Let Opportunity Knock

Posted by & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.

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

In this blog, the first of a three-part series, Certified Fraud Examiner David Anderson of David Anderson and Associates, a firm offering forensic accounting services in Philadelphia, reviews The Fraud Triangle – a combination of three factors – Opportunity, Pressure, and Rationalization – that must be present for a fraud to occur. 

If even one of these three factors can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away. In this first piece in the series, Anderson takes a closer look at the first leg of the triangle – Opportunity.  In subsequent articles, he will examine the other two legs.

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

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

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

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

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

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

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

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

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

About David Anderson & Associates

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

Are You Sure Your “Trusted” Employees Can Really Be Trusted?

Posted by & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.

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

You have them, your competitors have them, every company large or small has them. “Them” are your trusted employees, women and men on your team who have worked with you forever and have, time after time, proven their loyalty to you and your organization.

Despite a spotless track record, though, can you really trust your “trusted” employees?

Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates, says you never should forget that these “trusted” employees can pose a significant fraud threat to businesses and organization.

“They may be family members, employees who have worked their way up the management ladder over the years, employees who are hardworking and who put in long hours, and/or employees who have contributed to the past success of the business,” he said.

Because of this “trusted” status, Anderson said, business owners and senior managers tend to exert less oversight over these employees than they do over the typical employee.

Most “trusted” employees are worthy of the trust they have earned.  However, other “trusted” employees have used the trust and lack oversight to commit fraud.  Over the past several years, investigations of “trusted” employees conducted by David Anderson & Associates have identified the following frauds perpetrated on their employers:

  • Use of employers’ business credit cards to charge personal expenses
  • Use of expense reimbursements to have the business pay for personal expenses or non-existent expenses
  • Manipulation of payroll to take improper salaries and bonuses
  • Use of more vacation, personal, and sick days than earned
  • Running purchases for their own personal business through the purchase accounts of their employer, and having the employer pay for these purchases
  • Diverting customer cash payments to themselves, and covering up the diversion by manipulating the employer’s accounting system
  • Removing inventory from the employer’s warehouse, and covering up the diversion by manipulating the employers accounting system
  • Diverting customers and sales from the employer’s business to their own personal or a friend’s business
  • Selling the employer’s fully depreciated assets to a third-party and pocketing the proceeds.

In each case, Anderson said, the employer had no fraud deterrence program in place.  These companies could have significantly reduced the likelihood of fraud occurring if management had instituted such procedures as:

  • Regular top management or third-party consultant review of credit card statements and expense reimbursement requests
  • Regular top management or third-party consultant review of payroll journals
  • Regular top management or third-party consultant review of monthly bank statements and monthly financial statements
  • Regular periodic review of operations by top management or a third-party consultant
  • Instituting an anti-fraud policy, disseminating it to all managers and other employees, and holding periodic training sessions on spotting and report fraud
  • Letting all employees know that top management does not condone fraud, and that supervisors are actively watching out for it.

“Trusted” employees continue to be a problem for employers who provide reduced oversight to them.  However, Anderson said, by instituting relatively simple and relatively inexpensive fraud deterrence procedures, management can significantly reduce the risk of such “trusted” employees becoming untrustworthy.

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.

Looking to Sell Your Business? Here’s How to Prepare

Posted by & filed under Blog Articles, Business Valuation, Company News, Forensic Accounting.

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

Selling a house is an important decision, one that’s not made capriciously but undertaken only after solid research and planning, and consultation with industry experts.

Selling a business is a very similar process. You’ve invested time, money, and sweat equity into your company and you want top dollar when you put it on the market. As you do your research and make your plans, strongly consider working with a forensic accountant experienced in business valuation to maximize the benefits of the transaction.

“Whether selling a house or a business,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm providing business valuation services in Philadelphia and the Delaware Valley, “you must hire a good broker, have your records and physical structure in order, and be prepared to address issues or questions from potential buyers.”

Anderson, a forensic accounting expert in Philadelphia who also is a Certified Valuation Analyst, offers these guidelines to help business owners prepare for a sale:

Find a Good Business Broker

Unless a business owner has extensive industry contacts and experience in selling businesses, Anderson said, sellers should work with a business broker.

“Just as you would do with a real estate broker you hire to sell your home, you’ll want to interview the business broker,” said Anderson, whose company specializes in business valuation services in Philadelphia and the Delaware Valley. “Check references and have the broker analyze your business before you agree to hire them.”

Get Your Books and Records in Order

This is a crucial step in the process, Anderson said, because your business broker and any potential buyers are going to want to examine your books and records as part of their due diligence.

“This is similar to getting your house ready for showings,” he said; “you need to do the same for your books and records.”

Among Anderson’s recommendations:

  • Collect financial statements, general ledgers and income tax returns for the past five years;
  • Secure copies of all leases, contracts and agreements; and
  • Gather organized documentation of any intangible assets or intellectual property.

Business owners also must ensure their books accurately reflect the financial position of the company, he said.  This includes:

  • Writing off old accounts receivable,
  • Adjusting inventory for obsolete and slow-moving items,
  • Removing retired fixed assets from the books,
  • Making sure all liabilities and debt are accurately reflected on the books, and
  • Identifying non-business and/or one-time expenses that have been recorded.

Failure to get books and records in order can result in potential buyers reducing their offers because they question the “quality of earnings” of your business.

It’s often a good idea to have an independent expert, such as a forensic accountant, review your books and records to make sure you haven’t missed anything, said Anderson, a Certified Valuation Analyst and forensic accounting expert in Philadelphia.

Address Key Potential Legal Issues

Review your business with your attorney.  Make sure your attorney (or the attorney’s firm) can address each of the following:  Do you having pending litigation?  If so, be prepared to address this with potential buyers.

Are key employees under contract?  If not, they could leave and take business with them or divulge business secrets.  Have you adequately provided for warranty and return issues?  If not, potential buyers may insist upon you setting up reserves which can lower the sale price.

Are your pension, profit-sharing, and other retirement plans fully funded?  If not, this also can lower the sales price.  Are your trade secrets and intellectual property adequately protected with patents or trademarks or other legal mechanisms? If not, move forward with implementing these protections.

 Get Your Business Premises in Order

Beyond the books and records, Anderson said business owners should take a critical look at their actual business premises.  Among his recommendations:

  • Straighten up and organize;
  • Dispose of obsolete inventory, old furniture, and retired equipment;
  • Make repairs and perform maintenance so the facilities are in working order and look fresh; and be sure you have keys to all locks, and
  • Investigate potential environmental issues, and address them before buyers come calling.

“These are the same things you would do when you are selling a house,” said Anderson, a business valuation expert in Philadelphia who specializes in providing a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “Making sure your physical premises are in top shape will help you get the best possible price for your business.”

Prepare for Questions

Anticipate what buyers will ask and have the answers ready, Anderson said. “This will speed up the due diligence process and impress buyers by showing them you truly know your business,” said Anderson, an expert in business valuation services in Philadelphia.  “Be prepared to discuss employees and key employee retention, customers and customer retention, vendors, products and services, industry trends, and your vision for the future of the business.”

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

About David Anderson & Associates

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

Tales of Business “Insecurity” – Part 2

Posted by & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.

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

In this blog, the second of a two-part series, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, concludes his look at examples of security failures he has observed in his work.

As he noted last week, many businesses implement a wide range of policies and procedures to protect their property, assets, and data. However, even the best of policies and procedures are ineffective if employees don’t adhere to them. Here are several more such “tales:”

The unsecure data center: Anderson was engaged to evaluate the IT security controls at a medium-sized company based in North Carolina.  Their “secure” data center was an unlocked coat closet just off the lobby.  Besides having no air flow, which could have caused the servers to overheat, visitors could have easily entered the closet, and even walked off with the equipment.

Common user IDs and passwords: At the same company as above, each member of the accounting department accessed the company’s accounting system by entering “Accounting” as the user ID and “Accounting” as the password.  Although the company had experienced departmental turnover, including one individual who had embezzled funds, the company had never changed the common user ID and password.

Not changing locks and system access: At a medium-sized Philadelphia-area company, Anderson’s investigation of the IT and facility security controls noted that the firm issued employees an office key when they started their jobs, but never asked for the key back when the employee left.  Additionally, the company never deleted the user ID and password for these employees.

Although Anderson said he was able to persuade the company to remove system access for terminated employees, management did not want to incur the cost of changing locks and issuing new keys.  This problem was resolved several months later after a former employee, who had retained his key, entered the premises one weekend and stole computers and inventory.

Non-secret passwords: This is perhaps the most common “insecurity” Anderson said he has encountered. At many companies, he has seen passwords taped to the monitor, or tacked to a corkboard next to the computer, or taped to the desk underneath the user’s keyboard.  In several of the companies, the company itself was the cause of the “insecurity” because many employees accessed multiple systems which each required a new password every 60 days, and passwords could not be common across systems.

Executives who violate access rules: This is another “insecurity” Anderson said he has seen in multiple companies.  A busy executive provides his/her user ID and password to his/her administrative assistant/executive secretary to facilitate access to his/her e-mail and personal files.  Assuming the administrative assistant/executive secretary is a trusted employee, many companies do not consider this situation to be a problem, even though, as Anderson points out, it usually violates company IT security control procedures.

This situation becomes a problem when that trusted employee is out and must temporarily be replaced. For example, Anderson said he has seen such employees out on vacation, maternity leave, family medical leave, etc. This means one or more new employees – or even temporary employees – are granted access to the executive’s e-mail and personal files.  Now, because the executive does not want to change user IDs and passwords, no such change is made.  This means other employees or temporary employees could continue to access the executive’s e-mails and personal files.

In each of the above cases, the employee’s failure to adhere to the established policies and procedures resulted in security lapses. To avoid the “insecurity” failures Anderson detailed both last week and this week, he makes the following recommendations:

  • Engage an outside expert to review your company’s security/control policies and procedures to identify potential failure points and provide solutions. For example, changing multiple passwords across multiple systems every 60 days is likely excessive. The expert can suggest alternatives, such as using the same password across multiple systems; increasing the number of days between password changes to 120 or 180 or even annually; or providing a password management tool.
  • Ensure all employees are provided with, and acknowledge receipt of, company security/control policies and procedures.
  • Conduct training on a regular basis, at least once a year, to remind to remind employees of the policies and procedures, and why they need to be followed.
  • Encourage employees to follow the guideline “if you see something, say something” with regards to unauthorized visitors and employees who violate company policies and procedures.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help you steer clear of such security issues, 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.

Tales of Business “Insecurity” – Part 1

Posted by & filed under Blog Articles, Forensic Accounting, Fraud, Fraud Deterrence.

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

Many businesses implement a wide range of policies and procedures to protect their property, assets, and data.  However, according to forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, even the best of policies and procedures are ineffective if employees don’t adhere to them.  The following is Part 1 of a two-part series featuring examples of security failures Anderson has observed in his work:

When Security Badges Aren’t Effective:

Many businesses require employees to wear a security badge and “swipe” it to gain access to facilities.  In one case, a just-fired employee returned to the company that had fired him and waited by the security access door. Other employees who had seen him around (and didn’t know he had been fired), held the door open for him (not noticing he didn’t have a security badge).  He then entered the building, proceeded to pull out a hammer, and vandalized several desktop computers until he was stopped by security officers.

In another case, Anderson said he was visiting the IT department of a large Philadelphia business to conduct an evaluation of its IT controls.  He was standing outside the secure data center when an employee with a large cart full of equipment swiped his security badge to enter the data center.  The employee was struggling to hold the door open for his cart and, seeing Anderson, asked him if he would hold the door (neither Anderson nor the employee had seen each other before, and Anderson was wearing a visitor badge).  Anderson helped and continued to hold the door open until the employee entered the data center and out of view. Anderson, now in center himself, went over to one of the terminals, and, if he had been malicious or interested in stealing data, he said he easily could have entered the necessary commands to do so.

When Terminals or Desktop Computers Aren’t “Secure:”

When conducting an IT security evaluation, Anderson wandered into the accounting department of another large Philadelphia business.  He observed an employee tell another he was going to lunch, and then watched him get on the elevator and leave.  Anderson walked over to the now-empty cubicle and noticed the just-departed employee had not logged out of the company’s accounting system.  Anderson said he sat down at the vacant desk and proceeded to access the accounts payable and general ledger applications.  No one challenged him, he said, or even appeared to notice he was there.  Again, had he wanted to, Anderson said he could have caused major damage to the company’s accounting system.

When Confidential Records Aren’t Secure:

When Anderson was a junior auditor (before the days of electronic medical records), his first assignment was on the audit of a large hospital.   One of his assignments was to make sure that selected patient records had been properly entered into the hospital’s accounting system (to facilitate billing).  He said he was unable to locate one patient’s file, and after investigation, learned it was because the patient was still in the hospital (and the records were at the nurse’s station on one of the patient floors).  He said he went up to that floor, and requested the patient’s chart (He said he was not wearing a badge and didn’t identify himself, but was dressed in a business suit).  The nurse handed the requested documents to Anderson, saying, “Here’s the chart, doctor.”

Taking Secured Data Files Home to an Unsecured Computer:

At one medium-sized company, Anderson was called in to investigate when their system became infected with a rather nasty virus.  It turned out the Controller had taken certain budget files home (on a thumb drive) to work on over a holiday weekend.  Unbeknownst to him, his high school son had been using the same family computer, and had unknowingly downloaded a virus.  When the Controller used the computer, the virus was transferred to his thumb drive and then to the company’s system.  What made this worse was that the Controller was responsible for updating the virus protection for the company’s system, but had failed to download three years of updates.

Becoming Victimized by E-Mail Spoofs:

Hackers had obtained confidential names, addresses, social security numbers and other salary information of the employees of a small subsidiary of a larger Philadelphia company.  Anderson said his investigation determined the company’s systems had not been penetrated, but instead, the Accounting Manager of the subsidiary had been victimized by an e-mail spoof.  She had received an e-mail, purportedly from the parent company’s Controller, informing her there was a problem with the subsidiary’s W-2 forms, and requesting she prepare and send to him an Excel spreadsheet of the subsidiary’s W-2 information, allegedly so the home office “can correct the problem.” The local Controller failed to notice the requesting e-mail came from an e-mail address that was similar to but not the same as the corporate Controller’s actual e-mail address.  She prepared the requested spreadsheet and attached the spreadsheet as she replied to the original “spoofed” e-mail.

In each of the above cases, employee failure to adhere to the established policies and procedures resulted in security lapses.  Next week, Anderson will continue with more examples of such failures, and offer some tips for avoiding them.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help you steer clear of such security issues, 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.