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.

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.

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 Parts 1 and 2 of this three-part series, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, discussed frauds committed by trusted accounting employees, and how these frauds could have been prevented.  This week, he closes the series with a look at frauds by trusted members of management which he has investigated.

Fraud #1: The President (and 1/3 owner) of a family-owned retail business was a gambler.  He could be found at one or more Atlantic City casinos four or more days a week.  However, he ran short of money to support his gambling habit.  He knew the family business generated a lot of cash sales, so he schemed to use the company’s cash to finance his gambling.  He made sure all cash sales were manually recorded on numbered receipt pads.  He then made sure the pads were used in mixed sequence (of the six pads in use at any one time, no two pads were in sequence), so the receipt numbers could not easily be tracked.

Next, he fired the long-time bookkeeper and installed his new girlfriend as the bookkeeper.  She had no accounting background at all, and therefore depended on him to teach her bookkeeping and how to use the accounting system.   Finally, he made himself responsible for reconciling cash received to the receipts.  Then, each day, he took a handful of receipts and threw them in a desk drawer while simultaneously pocketing the cash amount of those receipts.  He gave the remaining receipts and cash to the bookkeeper for entry into the accounting system and deposit in the bank.

Over time, the business began to experience cash-flow problems (due to his fraud).  He hid this by slowing or even stopping payments to vendors, and then blamed the 2008 recession as the cause of their refusal to ship product to the business.  His scheme was discovered when he was out sick one day.  His brother, another 1/3 owner of the business, was looking for a document and, in searching for the document in the President’s desk, discovered the drawer with the hidden receipts.  By then, the President had taken over $750,000 from the business.

Since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight.  Also in this case, the other two business owners should have been suspicious of the President firing the long-time bookkeeper.  They should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures, train the bookkeeper, and produce monthly operating reports.  If this had been done, the President would not have been able to perpetrate his fraud scheme.

Fraud #2: The Vice President /General Manager of a family-owned business was the heir-apparent to run the business as the primary owner began to cut back on his involvement in the business.  However, he had only a minor ownership interest, and was supposed to share the profits of the business with other family members.  Instead, he schemed to keep most, if not all, of the profits for himself.  He began by charging significant amounts of personal expenses on his company credit card.  Since he approved credit card purchases, he was able to have these charged as business expenses of the company.

Next, he began to purchase inventory through this company, but for the benefit of his wife’s retail business.  He alone took control of how much the wife’s business was to reimburse the family-owned business for these purchases.  Over the course of several years, he had the wife’s business reimburse only a fraction of the inventory she used, but which was paid for by the family-owned business.  Next, he closed one of the company stores and installed his wife’s business in the store.  Although he stated his wife’s business would reimburse the family-owned business for the rent, he again only had her business reimburse a fraction of the total rent.

Finally, he set up another business to compete with the family-owned business, and began diverting sales to his new business.  His fraud was discovered after the company began to experience significant cashflow problems.  His attempts to cover-up his fraud caused him to have major disagreements with the primary owner.  Due to these disagreements, the primary owner fired the Vice President /General Manager.  After the primary owner stepped back into the business, he discovered the fraud.

As with the previous fraud, since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight. The primary business owner should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures and produce monthly operating reports.  If this had been done, the Vice President/General Manager would not have been able to perpetrate his fraud scheme.

Fraud #3: The General Manager of an automobile dealership owned only 15 percent of the business, but schemed to keep a greater share of the profits.  He purchased two small nearby businesses – a car wash and a used car lot.  Previously, the automobile dealership had sent each customer car it serviced and each used car it purchased to an auto detailer.  Now, the General Manager started to send each such car to his car wash.  He merely washed each car, but charged the automobile dealership for a full detail.

Next, he schemed to have the automobile dealership sell to his used car lot good quality used cars at large discounts, and to purchase from his used car lot poorer quality used cars at large markups.  His scheme was discovered when an employee overheard the General Manager discussing the huge profits that his car wash and used car lot were making at the expense of the automobile dealership.  The employee reported this to the dealership’s primary owner, and the General Manager was fired.

As with the previous frauds, since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight.   The primary business owner should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures and produce monthly operating reports.  If this had been done, the General Manager would not have been able to perpetrate his fraud scheme.

As can be seen from the frauds discussed above, when a business owner cedes active oversight to internal senior management, it is critical to employ an outside accounting or forensic accounting firm to provide a measure of oversight and independent reporting to the business owner.

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 against such fraud schemes, 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.

(NOTE: David Anderson’s forensic accounting blog will be on hiatus for the holiday season and will return on Monday, January 8.)

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.

Last week, in the first segment of a three-part series, forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, discussed payroll frauds committed by trusted accounting employees, and how the frauds could have been prevented.  This week, in Part 2, he looks at non-payroll frauds by committed by trusted accounting employees.

Fraud #1: The Controller of a regional retail chain began using the company’s petty cash fund (over which she had total control) to perpetrate her fraud.  Initially, she “borrowed” money from the $1,000 fund and left a personal check in the petty cash box for the amount borrowed.  After receiving her next paycheck, she repaid the “loan” and retrieved her check.  This went on for several months with the “borrowed” amount regularly increasing until she was taking almost the entire $1,000 amount each pay period.  To further her scheme, she persuaded the owner to increase the petty cash fund to $5,000.

As the scheme continued, her “borrowings” increased to the point that the amount borrowed exceeded her entire paycheck, and she was unable to repay the petty cash fund.  No problem, she then launched her next scheme.  She made copies of other employee’s previously reimbursed expense documents, and submitted these as her own (reimbursing herself through petty cash).  This scheme was discovered only when the Controller was away on vacation and the owner went into the petty cash box to pay the person who watered the plants in the office.  He discovered that less than $100 cash was left in petty cash along with over $4,900 in copies of receipts (one of which he recognized was from his most recent expense reimbursement request).

The owner should have initially been suspicious of the request to increase the petty cash fund to $5,000.  He should have demanded written documentation of why it was necessary for such a large increase.  Additionally, he should have conducted regular random surprise audits of petty cash, particularly on the day before a payday and on the day before a long holiday weekend (these are the most likely times to find petty cash fraud).  Had he done so, he could either have prevented the petty cash fraud or stopped it in its early stages.

Fraud #2: The same Controller as in the above fraud also engaged in an additional fraud scheme involving accounts receivable.  The retail chain had its own branded credit card for customer use in making purchases from the chain.  The Controller had previously been issued such a credit card, and the card balance reached a point where she was unable to pay the amount due.  To solve this problem, she simply issued a credit memo which wiped out the credit card balance (obviously the company had no internal controls over credit memos).

The Controller then expanded this scheme by identifying friends, family, and neighbors who also had the chain’s branded credit cards.  She approached these people with an offer to eliminate their credit card balances in return for cash payments (to her) of a percentage of the amount eliminated.  This scheme was discovered as part of the forensic examination Anderson conducted after the owner found the above petty cash fraud.

Because of the possibility of improper use, credit memos should be tightly controlled.  In this case, either the owner’s approval should have been required for issuance of a credit memo or at least approval by two different managers for such issuance.  Additionally, the owner should have required that a monthly analysis of accounts receivable be produced which included identification of all credit memos applied against accounts receivable.  Had such controls/procedures been in place, the fraud could have either been prevented or stopped in its early stages.

Fraud #3: The long-time bookkeeper for a personal liability law firm was responsible for all accounting activities, including writing checks from the firm’s escrow account and recording all transactions on a manual One-Write accounting system.  She began her fraud by writing checks to herself, but recording them on the One-Write system as having been written to various vendors.  Because of the large number of cases, she was able to spread out the improper payments so no one case would have too many vendor payments.

This fraud continued for years until one week when the bookkeeper was on vacation.  The owner received a call from a vendor complaining an invoice had not been paid (such a call would normally have been transferred to the bookkeeper).  Because the escrow account bank statements had arrived the day before, the owner started going through the paid checks to see if any of them were for this vendor’s invoice.  Instead he found multiple checks paid to the bookkeeper.  Our investigation found that this fraud cost the law firm over $500,000.

As with some of the previous frauds, the easiest way to have prevented this fraud or to have caught it in the early stages would have been for the owner to have had the escrow account bank statements sent by the bank directly to him so that he could spend a few minutes each month reviewing the statement and the cancelled checks.

Many business owners believe installing controls to prevent frauds are time-consuming and expensive.  In each of the above cases, installing relatively easy-to-implement and low-cost, or no-cost, controls could have prevented each of the above non-payroll frauds.

Next week, in the final segment of this three-part series, Anderson will discuss fraud executed by trusted members of management.

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 against such fraud schemes, 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.

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.

Fraud is most often committed by trusted employees who have “gone rogue.” They are usually able to commit these frauds because their trusted status has caused management to relax its oversight of their activities or because, as members of management, they can override internal controls.

This article is Part 1 of a three-part series addressing frauds investigated by forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia. It will focus on some payroll frauds committed by trusted accounting employees, and how the frauds could have been prevented. 

Payroll Fraud #1: The Controller of a real estate development company noted there was a “bug” in the new payroll software.  The bug caused the cash requirements report (used to determine how much was required to fund the payroll bank account) to show a higher total funding requirement than was necessary.  Rather than reporting the bug to the software company, the Controller funded the payroll bank account with the total shown on the flawed report, and, using out-of-sequence checks, paid himself the overage each pay period.  Because of his trusted status, the company’s owner never noticed the problem until several years later when the company experienced cash flow problems.  The discovered fraud exceeded $3 million.

If the owner had decided to have the payroll bank account statements (and corresponding cancelled checks) delivered directly to him, and spent a few minutes each month reviewing these documents, he would have noticed the large checks written to the Controller and would have discovered the fraud much earlier.  Alternatively, the owner could have required regular analyses of fluctuations in expenses.  In such a case, he would have noticed a sudden and ongoing sizeable jump in payroll costs, and could have investigated the cause.  In either case, the fraud could have either been prevented or discovered in its early stages.

Payroll Fraud #2: The newly hired Director of Finance for a municipal utility learned, among other responsibilities, she was wholly responsible for setting up employees with the utility’s payroll service, and for tracking (via a spreadsheet) employee vacation and sick pay.  Using these trusted capabilities, she started her fraud by informing the payroll service that she had a higher starting salary than she did.  She then based subsequent raises (which were rewarded as percentage increases) on this higher salary.  Additionally, because she alone was responsible for tracking vacations and sick pay, she regularly took additional vacations and sick pay over her actual earned vacation and sick pay.  This was magnified even further because she frequently worked overtime during weeks that she took the unearned vacation and sick pay.  As a result, some of her regular work hours were paid at overtime rates.  This fraud was only discovered when she retired, and, in reconciling her pension entitlement, the new Director of Finance noticed the difference in her original approved starting salary and the salary that was paid to her.

If the municipal utility had instituted certain procedures for handling the payroll, vacation and sick pay for senior executives, this fraud could have been prevented.  Such procedures would require either multiple signoffs for executive salary changes as well as for approvals of vacation and sick pay, or would have designed a specific executive to approve these items for another executive. 

Payroll Fraud #3: The long-time bookkeeper for a small professional services business was given total responsibility for processing payroll.  One of the features of the payroll process was that the company used the payroll system to reimburse employees for business expenses.  The bookkeeper realized this could enable her to receive reimbursements for non-existent expenses.  Experimenting with small amounts at first, she noticed that management was not reviewing payroll, and not picking up on these improper reimbursements.  She eventually increased the reimbursements to herself to many thousands of dollars per pay period (because she was also given total responsibility for the company’s accounting system, she was able to manipulate how the reimbursements were recorded in the company’s system). This fraud encompassed many hundreds of thousands of dollars and was only discovered when the company experienced cash flow problems and hired an outside consultant to help it improve its cash flow.  The outside consultant found the excessive reimbursements and reported them to the company.

Because the company was relatively small, if the owner had taken a few minutes each pay period to review the payroll and payroll funding reports, he would have noticed the increase in payroll costs and the unusual amount of reimbursements going to the bookkeeper.  This would have either prevented the fraud or caught it in its early stages.

You’ll note a common scheme in each of the above frauds.  Because the top executive or owner trusted the accounting employee, he or she failed to take the small amount of time necessary to review payroll activities.  This in turn enabled the perpetrator to execute the fraud.

Next week, Anderson will discuss non-payroll frauds perpetrated by trusted accounting employees who “went rogue”.

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 against such fraud schemes, 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.

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. 

The majority of asset misappropriation fraud cases involve cash, and sometimes inventory. Fixed asset fraud – most often equipment and furniture – can be just as common, and just as costly. Business owners and executives, says forensic accounting expert David Anderson of David Anderson & Associates, Certified Fraud Examiner in Philadelphia, must ensure their internal fraud deterrence and prevention programs also address protecting fixed assets from fraud.

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

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

So, what fraud deterrence and prevention measures can a company put in place to avoid these frauds? Certified Fraud Examiner David Anderson of the Philadelphia forensic accounting firm of David Anderson & Associates has the following recommendations for fraud deterrence and prevention measures a company can put in place to avoid these problems:

• Establish a fixed asset tracking program: Under this program, a scannable bar code label is attached to each fixed asset. The fixed asset information from purchase orders/invoices is then entered in a database.  All asset additions and dispositions should be entered into the database.
• Hold a periodic physical inventory, such as inventorying one-twelfth of the inventory each month: This will allow the inventory team to scan the bar code label of each selected item. If the bar code label is missing – assuming the company has used a reliable method of affixing the labels – or if the bar code scan does not match the item in the database, the company is able to investigate immediately.
• Track “retired” assets until they are disposed: This type of program will prevent or significantly reduce the likelihood of the schemes above.

In addition, the company should install tip lines, make sure that employees are aware of the company’s anti-fraud stance, and provide educational programs for management and employees which teach fraud deterrence prevention.

If you want to make sure your fraud deterrence measures include looking out for your fixed assets, you should think about speaking with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A Certified Fraud Examiner can examine your accounting and purchasing programs and procedures and make recommendations for enacting strong fraud deterrence measures that will help safeguard your company, Anderson said.

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.