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Fraud Investigation Reveals Fraud Schemes

Fraud investigations into asset misappropriation — one of the three main types of fraud — reveal an assortment of deceitful means by which dishonest employees can steal from an organization.

“There is no shortage of schemes by which a fraudster can misappropriate funds from an employer, whether it is a company, a non-profit or a government office,” 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.  “And each of these schemes is often more common to certain types of organizations simply because of the way those organizations operate.”

In its 2014 Report to the Nations, the Association of Certified Fraud Examiners identified seven asset misappropriation schemes.  The other two types of fraud — corruption and financial statement fraud — are schemes in and of themselves and do not have subsets.  Bolster your fraud deterrence efforts by understanding the different types of schemes and the ones to which your organization is most susceptible.

Billing schemes, in which fraud perpetrators create phony vendors that are paid for goods never delivered or services never rendered, are common in most organizations, but especially in health care, education, transportation/warehousing and non-profits, Anderson said.

Service, insurance and education organizations in particular need to be on the lookout for skimming schemes.  In these schemes, the fraudster steals incoming payments from customers or other entities (an insurance claim payment or vending machine operator payments, for example) before they are recorded and then hides the diversions by entering credits against the customer’s or payee’s balance.

Cash-on-hand schemes, in which the perpetrator steals from the cash register, petty cash or company safe, occur most frequently in retail, banking and financial services companies.  Theft from a cash drawer often occurs when the employee voids a transaction or rings up a lesser amount and pockets the difference.

Check tampering is typically associated with non-profits and with construction, healthcare and transportation/warehousing companies and occurs when the perpetrator forges or alters a company check (by changing the payee name or the check amount, for example).

Expense reimbursement fraud most frequently plagues non-profits and education, health care and construction companies.  In these schemes, employees submit reimbursement requests for a non-existent expenses or inflate the amount of an expense.  Examples include personal expenses masked as business expenses, inflated mileage or gratuities, and charges for business class airline tickets when the employee flew coach.

Non-cash schemes occur when fraudster steals inventory, supplies, company equipment or the confidential information of a customer or the company.  These schemes most frequently affect manufacturing, retail, transportation/warehousing and oil and gas companies.

Payroll fraud, in which a dishonest employee inflates the number of hours worked or creates a “ghost” employee on the payroll, most often occurs in non-profits and construction companies.

Anderson said these schemes — with the exception of non-cash schemes — tend to be more prevalent in smaller companies because they tend to lack the strong fraud control and fraud deterrence programs usually found in larger companies.

“Fraud perpetrators are cleverly devious and are dedicated to hiding their activities,” said Anderson, a Certified Fraud Examiner and an ACFE member.  “They often get away with it because their bosses and coworkers are honest people, so they aren’t expecting — and therefore aren’t looking for — fraudulent activity.”

Anderson encourages all organizations to enact strict fraud controls and to adopt a comprehensive fraud deterrence program developed by a firm that provides  forensic accounting services in Philadelphia and the Delaware Valley.  At the first suspicion of illicit activity, organizations should engage a Certified Fraud Examiner to initiate a fraud investigation, he said.

Over the next weeks, Anderson will share more findings from ACFE’s 2014 Report to the Nations, the results of a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 70,000 members in more than 150 countries worldwide.

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.

Tip Hotlines Enhance Fraud Deterrence

Performing a formal financial audit annually is thought by many to be the most effective means of fraud detection and fraud deterrence.  It’s not.  Only three percent of all fraud is detected by a formal financial audit.  In fact, more than twice as many are discovered by accident than by formal audit.

So what is the best way to detect and prevent fraud?  You might be surprised.  According to the 2014 Report to the Nations from the Association of Certified Fraud Examiners, tips are responsible for uncovering fraud more so than any other method.  More than 42 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, the ACFE report said.  A whopping 49 percent of all frauds reported via tips came from company employees.

“Employees can be your first line of defense against fraud,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.  “Employees 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 through the use of 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.”

Anderson notes companies do not have to set up the tip hotline themselves.  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 that their identity will not be revealed by something they say or by speaking with someone who recognizes their voice.

Companies that provide tip hotlines for their employees typically find that the duration of fraudulent activity is cut in half and losses are reduced by more than 40 percent.

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

In the coming weeks, Anderson will continue to share findings from ACFE’s 2014 Report to the Nations, the results of a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 70,000 members in more than 150 countries worldwide.

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.

David Anderson Presents Municipal Fraud Webinar

On August 27, 2014, David Anderson of David Anderson & Associates, LLC presented a webinar entitled “Protecting Your Municipality From Fraud” to the Pennsylvania State Association of Township Supervisors (PSATS). Mr. Anderson and his co-presenter, Joseph Barbagallo of Barbagallo & Associates, discussed the differences between forensic accountants and traditional accountants; the types of fraud schemes that have been committed against municipalities; the losses suffered by municipalities due to fraud, and various anti-fraud measures that can be implemented by municipalities to fight fraud.

PSATS membership consists of township supervisors in the 1,456 second-class townships in Pennsylvania. More than 5.4 million Pennsylvanians reside in these townships.

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. Mr. Anderson can be reached at 267-207-3597 or via email at david@davidandersonassociates.com.

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Fraud Investigation Identifies Three Types of Fraud

Fraud investigations worldwide reveal that asset misappropriation, corruption and financial statement fraud are the three main types of fraud, according to the Association of Certified Fraud Examiners (ACFE).

The ACFE identified these three key types of fraud in its 2014 Report to the Nations, the results of a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud.

“Asset misappropriation is by far the most common type of fraud,” says 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 financial statement fraud, while not nearly as common, is a far more costly type of fraudulent activity.”

According to the ACFE, asset misappropriation — or the theft of cash or other assets such as inventory, supplies or company equipment — occurs in more than 85 percent of reported fraud cases.  (Because some fraud investigations find that more than one type of fraud is committed within the same incident, the total of the three types exceeds 100 percent.)  The median dollar loss reported from asset misappropriation is $130,000, the ACFE study noted.

Corruption occurs in more than 35 percent of the reported fraud cases, the report found.  Fraud by corruption involves misusing one’s influence (such as persuading someone to use a particular vendor or hire a particular person) or violating one’s duty to one’s employer (such as purchasing from a vendor whose price is more expensive or whose product is inferior; or hiring a less qualified employee).  ACFE said the median dollar loss from corruption is $200,000.

Financial statement fraud represents only 10 percent of the reported cases of fraud, but the median dollar loss from this type of fraud is $1 million, the ACFE report says.  Fraud investigations have shown that financial statement fraud occurs when a person intentionally misstates or omits material information from an organization’s financial statements, according to the ACFE.  Financial statement fraud can be perpetrated against a lender (by overstating a company’s sales, profits or assets in order to get a loan); an acquirer (by overstating a company’s sales, profits or assets in order to get a higher acquisition price); or shareholders/the public (by overstating a company’s sales, profits or assets in order to boost a company’s share price).

“Regardless of the type of fraud, it is clear that organizations today are at high risk of loss due to fraud and that every business, government entity and organization must have a strong fraud deterrence program in place to combat it,” said Anderson, a Certified Fraud Examiner and an ACFE member.

A comprehensive fraud deterrence program developed by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help protect your organization, Anderson said.  At the first hint of suspicious activity, Anderson urges organizations to contact a Certified Fraud Examiner to conduct a thorough fraud investigation and end the fraudulent activity.

During the coming weeks, Anderson will share more findings from ACFE’s 2014 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 70,000 members in more than 150 countries worldwide.

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.

Why You Can’t Afford Not to Invest in Fraud Deterrence

Think a fraud deterrence program is too pricey?  Consider this.  In its biennial global survey, the Association of Certified Fraud Examiners (ACFE) found that the typical organization loses five percent of its revenues to fraudulent activities each year.

That conclusion was a key finding in the ACFE’s 2014 Report to the Nations, the results of an international survey conducted every two years to study the costs, schemes, perpetrators and victims of fraud.

“Think about what that means,” says 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.  “If you have $1 million in sales each year, you are likely losing $50,000 per year to fraud.  At $10 million in sales per year, that adds up to $500,000 lost to fraud each year.  And so on and so on.”

The ACFE study also found that the median loss to fraud is $145,000 per incident and that 22 percent of reported incidences involved losses of more than $1 million.

Anderson says organizations sometimes tell him that installing anti-fraud controls and following a comprehensive fraud deterrence program is too expensive or simply not in the budget.

“But given the ACFE’s findings, it is far more likely that failing to install anti-fraud controls is what is too expensive.  Businesses, government offices and other organizations really can’t afford not to invest in fraud deterrence,” said Anderson, a Certified Fraud Examiner and an ACFE member.

Anderson encourages every organization to enact strong anti-fraud controls.  A comprehensive fraud deterrence program established by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help protect your organization from losses caused by fraud.  If you have even the slightest suspicion that illicit activity is occurring at your organization, Anderson urges you to contact a Certified Fraud Examiner to conduct a wide-ranging fraud investigation to stem the losses and determine the extent of them.

In the next several weeks, Anderson will share additional highlights from the ACFE’s 2014 study on global fraud.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 70,000 members in more than 150 countries worldwide.

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.

Understanding “The Fraud Triangle” Can Aid in Fraud Deterrence

Fraud deterrence is undoubtedly a complex issue.  But there is one seemingly simple approach that can help you keep fraud out of your business or organization:  Understanding “The Fraud Triangle” and using it to your advantage.

“‘The Fraud Triangle’ is what forensic accountants talk about when they refer to the three elements that are necessary for fraud to occur — pressure, opportunity and rationalization,”  says David Anderson, a Certified Fraud Examiner and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.  “If those three elements are not in place, then fraud cannot occur.  So it goes to reason that if you successfully eliminate one of the elements, fraud will not be a problem for you.  It’s really a rather straightforward, proactive approach to fraud deterrence.”

Pressure, the first element, is the motivation or incentive to commit fraud, Anderson said.  Pressure often comes from one’s personal life, such as the expensive illness of a loved one, a spouse’s unemployment, a gambling or drug problem, the practice of living beyond one’s means, or other situations that carry a heavy financial burden.  In these cases, Anderson said, an employee may feel extreme pressure to find more money and that can open the door to fraud.

The second element, opportunity, indicates the ability of the employee to carry out the fraud through the misappropriation of cash or other company assets, Anderson explained.  Opportunity arises when a company lacks critical anti-fraud controls, such as separation of duties, dual signature requirements for checks over a certain amount, management review of bank accounts and financial statements, and other necessary controls.  Opportunity also can occur when excessive trust is placed in employees who have the ability to override or circumvent anti-fraud controls.

The third element, rationalization, refers to an employee’s justification for committing fraud, Anderson said.  It can start as an employee’s simple rationalization that the theft is just a temporary loan that will be paid back before anyone ever finds out about it.  But that type of thinking can quickly mushroom into grander rationalizations, such as “I’m underpaid and just getting my due.” or “My boss is stealing, so why can’t I?” or “They’re making a lot of money and won’t even miss what I have taken.”

“If you’ve got all three elements, you’ve got a potential fraud brewing,” Anderson said.  “Remove one of the elements and the potential for fraud evaporates.”

Anderson recommends that you get to know your employees better so that you are more aware of any high-pressure financial situations they may be dealing with in their private lives.  Prevent opportunity by enacting comprehensive anti-fraud controls and establishing a strong fraud deterrence program, he said.  And send a clear message as a part of that fraud deterrence program that there is absolutely no acceptable rationalization for committing fraud, he added.

If have reason to believe that fraudulent activity has infiltrated your business — or if you believe “The Fraud Triangle” exists with any of your employees — Anderson recommends you act immediately by hiring a Certified Fraud Examiner from a firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A comprehensive fraud investigation will determine the extent of your losses, if any, and an experienced Certified Fraud Examiner will identify weak spots in your internal anti-fraud controls and set up a strong fraud deterrence program.

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.

Financial Statements Can Be Invaluable in Fraud Deterrence

Financial statements issued by companies, government entities or organizations can be invaluable tools in fraud deterrence.  But too often, the people in charge don’t bother to read these statements on a regular basis, and those who do often don’t understand what they are reading.

Understanding your financial statements, and knowing what to look for, are important components both in fraud identification and fraud deterrence.

“The only time officials in most companies, government entities or organizations actually look at the financial statements is after year-end,” said David Anderson, a Certified Fraud Examiner and 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 fraud investigation and fraud deterrence programs.  “They are doing themselves a major disservice.  Financial statements often have red flags that can alert you to potential fraudulent activity.”

A full forensic accounting analysis of your financial statements can identify the warning signs of fraud, Anderson said.  There are many things to consider in analyzing the statement, he said.

Say business is booming.  Do your financial statements show regular increases in sales or do they show relatively flat sales?  If it’s the latter, you’ll want to know why.  In one recent fraud case, a dishonest employee was diverting sales and cash receipts.  Had the business owner checked the company’s financial statements regularly, the fraud could have been detected sooner, Anderson noted.

Say business isn’t booming and your sales, understandably, are down.  If your financial statement is showing an increase in inventory purchases, something may be wrong.  Could someone be fraudulently diverting inventory?

If your gross margins — the difference between sales and cost of sales or cost of goods sold — are decreasing, find out why.  If certain operating expenses — such as office supplies/expense, travel and entertainment expense, etc. — are rising faster than expected, look into it.  If the cash balance on your financial statements doesn’t approximately equal the balances on the corresponding bank statements (allowing for some outstanding checks), look for missing funds.

The reason behind any of these “red flags” may be completely legitimate, Anderson said, but they also may warrant a fraud investigation to ferret out illicit activity.  At the very least, a consistent examination of your financial statements may identify business inefficiencies that can be resolved.

Lastly, regular financial statement analysis lets employees know that you care about the company, government entity or organization, and that you are following the flow of money to assure operating efficiency and to identify potential fraud.  It’s one of the strongest fraud deterrence messages you can send, Anderson advises.

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.

A Disaster Recovery Plan Can Help your Business Survive a Disaster

Disasters are in the news every day.  Tornadoes.  Hurricanes.  Sinkholes.  Floods.  Fires.  As a matter of practice, you’ve probably insured your home, your business, your health and your very life in the event disaster strikes.  But what do you actually do when the immediate threat has passed?  Do you have a disaster recovery plan in place?  Surprisingly, few businesses do.  And they are, frankly, flirting with disaster.

Insurance industry statistics show that 70-80 percent of businesses affected by a disaster never reopen or fail within two years of reopening.

“The businesses that do survive are the ones who prepared in advance for something they fervently hoped would never happen,” says 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.  “Creating a business continuity plan is just smart business.  It greatly enhances the chances that your business will survive the disaster and that your livelihood — and that of your employees — will be protected.”

Anderson said some business owners think they are covered as long as they have purchased insurance and backed up their computer files.  But a comprehensive contingency and disaster recovery plan covers myriad details of a business’ operations, some of them not always obvious.  And every business, no matter how big or small, needs to have a business continuity plan in place, Anderson said.

Can your business survive a disaster?  Ask yourself these questions:

— Are both your electronic and paper business records protected?  Is vital information backed up in case a computer hard drive crashes?

— If one or more of your offices or production facilities are severely damaged or destroyed, where will you relocate?

— What steps need to be taken to resume operations and how fast can you be up and running again?

— Do your employees know what to do and where to go?

— Do you have adequate insurance to rebuild your business?

— How do you assure your customers will keep paying you?

— Will your vendors continue to extend credit to you?

— How will you replace key employees injured or killed by the disaster?

— Are you prepared with step-by-step procedures to react to different types and severities of disasters?

Having a comprehensive contingency and disaster recovery plan (business continuity plan) in place can minimize your financial loss and help your business survive a disaster.

If you are in need of a comprehensive contingency and disaster recovery plan or require 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.

 

Fraud Deterrence Starts with You

As a reasonable and intelligent business owner who employs reasonable and intelligent employees, you might think fraud deterrence programs are unnecessary.  It’s a given that everyone knows they’re not supposed to steal from their employer, right?

And they also understand that as the boss, you get certain perks to which they are not entitled.  It’s your company, not theirs; your right, not theirs.  That’s another given, isn’t it?

Think again.

“Your actions determine the kind of message you are sending to your employees about fraud,” says 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.  “If you don’t have a strong fraud deterrence program in place and if you engage in questionable activities yourself, then you’re sending the wrong message.”

Anderson points to two recent fraud cases in which employees blamed management for creating an atmosphere of fraud tolerance.  In one case, a  defendant claimed the company never told her that fraudulent activities were unacceptable, indicating — to her — the company’s tacit approval of her illicit actions.  In another case, the defendant claimed that because the company president was committing fraud by running personal expenses through the business and claiming them as business deductions, it was okay for him to defraud the company too.

“Whether you are a business owner, a corporate executive or an elected or appointed official, your employees look to you for cues regarding what is and what is not acceptable behavior regarding fraud,” Anderson said.  “What kind of messages are you sending?”

Anderson suggests management make fraud deterrence a key objective by sending employees a strong message that fraud is unacceptable in the workplace and by living that message too.

Establish a clear fraud prevention policy and publicize it to employees through employee handbooks, manuals, training, memos, etc.  Let your employees know that fraud investigation is an ever-present aspect of your business and that steps are always underway to ferret out the perpetrators of fraudulent activity.

If you do suspect that your business has fallen victim to fraud, Anderson recommends that you contact a Certified Fraud Examiner to conduct a comprehensive fraud investigation and determine the extent of your losses.  A Certified Fraud Examiner from a firm that provides forensic accounting services in Philadelphia and the Delaware Valley also can help you establish a fraud deterrence program to help protect your company in the future.  And always remember that the message you send by the example you set can be a powerful deterrent.

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.

Business Valuation Reveals What Your Business is Really Worth

Something has come up and you need to know what your business is worth.  Do you need the advice of a business valuation expert to figure this out or can you do it on your own?

The business down the street sold for $10 million, the former owner claims.  Your business is about half the size; so is it worth $5 million?  Or you’ve heard you can approximate your business’s worth by multiplying its income by six.  Will that suffice?

In a word, no.

“Neither of those business valuation methods are remotely reliable,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley.  “A small software company named WhatsApp would have valued itself at between $50-$60 million using the six times income method.  But earlier this year, they sold themselves to Facebook for $19 billion — more than 300 times higher.”

If you really want to know the true worth of your business, says Anderson, you need a highly qualified business valuation expert.

There are many reasons a company may need to know the accurate value of its business: partner/shareholder disputes; gifting a portion of the business; sales, mergers and acquisitions; divorce; estate and trust matters; insolvency, and a host of other issues.

Depending on your situation, you may need one of two types of business valuations.  A calculation of value is an informal business valuation that provides a reliable approximation of your business’s worth.  A full-blown formal business valuation is important for estate planning, gifting and litigation.

A Certified Valuation Analyst will determine your business’s true income, examining salaries, expenses, profits, losses and more.  Are you paying yourself or your family members more or less than what outside managers would cost?  Do you have company cars or special deferred compensation programs for family members or any other expenses a third party would not incur?  Do you have one-time expenses related a lawsuit or losses from a natural disaster?

In calculating your business’s worth, a professional business valuation expert also considers industry, geographic and economic factors, as well as recent sales of businesses similar to yours.

Don’t rely on gut instinct, street rumors or amateur rules of thumb when you need an accurate business valuation.  Put your trust in a Certified Valuation Analyst to find out what your business is really worth.

If you require the services of a certified business valuation expert, please contact the Philadelphia forensic accounting firm of David Anderson & Associates today 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.

 

Fraud Investigations Reveal Trusted Employees Often at Fault

It’s in the headlines nearly every day — stories about fraud investigations that reveal the theft of hundreds of thousands and even millions of dollars from local businesses, government agencies and charitable organizations. And who’s to blame? Too often the culprit is a long-time trusted employee.

“The person responsible for defrauding the company frequently is the last person the business owner ever would have suspected,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that conducts fraud investigations and offers fraud deterrence programs and fraud deterrence training. “Our fraud investigations often point to the most loyal, trustworthy and reliable employee, someone the boss can’t even imagine running the business without.”

Even worse, it is precisely this high level of trust that the employee has earned that allows him or her to perpetrate the fraud for many years without raising suspicion.

“Business owners are always shocked that fraud has occurred and stunned by the dollar amount stolen,” said Anderson, a Certified Fraud Examiner. “Most of them are busy focusing on their core jobs and necessarily delegate important financial duties to these most trusted employees. As long as things run smoothly and the owners and employees get paid, there is no reason to suspect theft.”

So what fraud deterrence steps can you take? One easy thing is to have your bank statements (originals or copies) mailed to your home instead of to your business. Then, take 15 minutes each month to examine the statements and cancelled checks to see if anything unusual is happening, Anderson said. Look for unknown vendors receiving regular payments, strange check numbers, lower cash receipts or bank balances than expected, or any red flags that indicate you need the expertise of a Certified Fraud Examiner, a highly specialized forensic accountant who can conduct a thorough fraud investigation to determine your company’s exposure.

Fraud investigations conducted by David Anderson & Associates can ascertain your company’s susceptibility to internal or external fraud, quantify the extent of economic damages if fraud has occurred, uncover missing assets, and provide economic damages expert witness testimony and litigation support in resulting prosecutions.

David Anderson & Associates also can help companies seeking to take a proactive approach to preventing fraud by assisting with risk assessment, fraud deterrence programs and fraud deterrence training.

If you need the services of a Certified Fraud Examiner, please contact the Philadelphia forensic accounting firm of David Anderson & Associates today by calling David Anderson at 267-207-3597 or emailing him.

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the surrounding communities. 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.

The Impact of Different Conventions for Projecting Future Damages, Part I

When calculating damages for future periods – such as for lost profits, loss of income in wrongful death cases, etc. – experts are often charged with expressing an opinion as to what would happen in the future but for the wrongful act. These projections typically rely upon either industry trends or on the historical operating results of the injured party. Four of the most commonly used projection conventions when relying upon the operating results of the injured party are: the mean, the median, exponential smoothing and regression analysis. This blog post will define each of these conventions and discuss the pros and cons of each.

The Mean

The mean describes the central tendency of a set of numbers and is calculated as the arithmetic average. When there is only a limited amount of historical data available and no clear trend of growth or decline exists, relying upon the mean may be the most reliable method to project future periods. However, if more historical data is available and/or there is a clear trend of growth or decline shown in the historical data of the injured party, then using the mean will render projections that are less reliable or indicative of the future than other projection conventions and will be difficult for the expert to defend.

The Median

The median also represents the central tendency of a set of numbers, but in this convention it is calculated by reference to the middle number after the set of numbers are arranged from highest to lowest in value. Because the inclusion of extreme outlying values (e.g., if the historical data is 5, 6, 8, 9, 40) can render distorted projections, relying upon the median may be the most reliable convention to project future periods. However, once again when there is a clear trend of growth or decline, using the median will produce projections that are less reliable than exponential smoothing or regression analysis.

Exponential Smoothing

The mean and the median conventions treat each observation equally. The exponential smoothing convention (also known as weighted averaging) assumes that the oldest observation should receive the least weight and the most recent observation should command the most weight in projecting future performance. It applies a weighting factor to each historical observation and then calculates an arithmetic average of the weighted historical observations. For example:

adnderson-chart1

 

Use of exponential smoothing can be particularly effective if sufficient historical data exists and there are no extreme outlying values.

Regression Analysis

Regression analysis uses mathematical calculations to fit a line or curve to a set of historical numbers. The more common form of regression analysis used to project future periods is known as trend-based regression analysis or least squares analysis. This methodology seeks to fit a straight line to a set of historical numbers and then project future periods along that line. Like exponential smoothing, regression analysis can be particularly effective if sufficient historical data exists and if there are no extreme outlying values.

When calculating future damages based upon historical information, experts may rely upon a variety of conventions and projection methods. This post has discussed four of the most commonly used conventions – the mean, the median, exponential smoothing and regression analysis. In the next part, I’ll provide specific examples and show how each method impacts the damages calculation under each example.

 

The Impact of Different Conventions for Projecting Future Damages, Part II

The valuation of damages is designed to put the harmed party back into the same economic position that would have existed if the harm had not occurred. The most difficult part of that equation is to project the economic conditions one would have expected without the harm. An analysis of historical results is often used to assist in making that forecast. In my last blog post, I discussed the pros and cons of four of the most commonly used methods to analyze a series of events, namely the mean, the median, exponential smoothing and regression analysis. This post will present two examples and show how each method impacts the damages calculation under each.

Example: Projecting Damages From Theft of Customer Lists – Upward Trend

Hypothetical ABC Co. is a distributor of household cleaning products to small retail stores. Although sales and profits fell during the beginning of the financial crisis in 2007, since then both have steadily increased. At the beginning of 2011, the national sales manager left ABC and took with him all of the contact information for ABC’s customers. He then went to work at a competitor and ABC experienced a drop in sales and profits. ABC has sued to recover damages from 2011 for lost profits caused by this theft of customer lists. Net profits from 2007 through 2011 were:

chart2

 

Let’s apply each of the four methods to project what 2011 profits would have been but for the theft of customer lists:

  • Mean – the average of 2007 to 2010 profits is $20,000 (the sum of the four year’s profits divided by four).
  • Median – there are two midpoints – ($5,000) and $35,000 – so the median would be the point halfway between the two or $15,000.
  • Exponential smoothing – applying weights to each of the four years (1 for 2007, 2 for 2008, and so on) and then dividing the total by 10 – the sum of the weights – yields a projection of $44,500.
  • Regression analysis – there is a clear upward trend that would imply that 2011 profits should be higher than previous year’s profits. Regression analysis yields a projection of $142,500.

In this example, regression analysis not only yields the highest projected value, but it supports the fact that profits had been steadily increasing over each of the past several years.

Example: Projecting Damages From Theft of Customer Lists – Fluctuating Levels of Profits

Using the same facts as in the first example, suppose that profits were fluctuating up and down over the past few years:

chart3

Applying each of the four methods to calculate damages for 2011 provides the following results:

  • Mean – the average of 2007 to 2010 profits is $3,750.
  • Median – the median would be the point halfway between ($10,000) and $50,000 or 20,000.
  • Exponential smoothing – yields a projection of $5,500.
  • Regression analysis – yields a projection of $12,500.

In this example, the median yields the highest value. Because there is no clear trend of growth or decline and a wide range of swings in value, the mean may be the most supportable of the values.

The above calculations are made in a vacuum and clearly there is not enough information in the fact patterns to suggest the best option in each case. The illustrations do highlight some of the mechanics behind the damages calculation, and the impact of using different conventions.