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When Employees Go Rogue: Tales of Fraud and Fraud Prevention – Part 3

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

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

In 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.)

When Employees Go Rogue: Tales of Fraud and Fraud Prevention – Part 2

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

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

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.

When Employees Go Rogue: Tales of Fraud and Fraud Prevention – Part 1

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

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

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.

Are Your Business and Personal Finances Ready for Year-End?

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

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

With the winter holidays fast approaching, most of us are looking forward to Christmas, Hanukkah, Kwanzaa, New Year’s Day, and other such events.  But as the end of the year draws nearer, we also need to focus on those year-end financial activities that are important for both our business and our personal financial health.

Here are some of the items leading Philadelphia forensic accountant David Anderson says should be addressed before the end of 2017:

Business

  • Have you finalized a budget for 2018? If not, there is still time.
  • Have you discussed with your tax accountant what you can do to maximize your business deductions for 2017?
  • Have you cleaned up your accounts receivable? This includes collection efforts on past due receivables.
  • Have you made sure all your 2017 payroll, sales, income and other taxes are paid or will be paid on time?
  • Have you scheduled an end of year inventory count (if you have inventory)? Have you made plans to dispose of old and/or non-selling inventory?
  • Do you have old fixed assets that have been removed from use, but are still on your premises? If so, you should make plans to dispose of these also.
  • Is all your software updated to the latest version? This should especially apply to your security and anti-virus software.
  • Are you fully staffed for the coming year? If not, do you have a staffing plan in place?  Now is a great time to solicit and interview potential new employees.
  • Is your website current and updated? Have you removed employees, products, links, etc. that you no longer have?
  • Is your bank financing for 2018 in place? Have you spoken with your banker about getting the best rates and services?
  • Are all your insurances current and adequate (not too little or too much)?

Personal

  • Have you discussed with your tax accountant everything that needs to be addressed by the end of the year?
  • Have you made all your estimated payments for 2017 in amounts adequate to avoid penalties?
  • Have you maximized your retirement contributions for 2017? If not, there is still time to address these.
  • Have you reviewed the status of your retirement and non-retirement investments with your investment advisor and planned for any changes for 2018?
  • Have you reviewed your life, disability, long-term disability health, dental, vision, auto, homeowners, personal liability, etc. insurance with your insurance advisor(s) to make sure that you are adequately covered and have properly addressed the needs of your family and you?
  • Have you had your annual physical, dental, vision and other exams this past year? If not, you should schedule them as soon as possible.
  • When was the last time you updated your will, living will, and medical power of attorney agreements? You should review these with your attorney and other advisors and make the necessary changes as soon as possible.

The above list is not meant to be all encompassing, but rather serve as a reminder of the many items you may need to address before the end of the year.

I hope 2017 has been a good year for you and that 2018 will be even better.

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

About David Anderson & Associates

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

How Fraudsters, Non-Fraudsters Respond Differently in Interviews

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

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

A key part of any fraud investigation involves interviewing employees, customers, vendors and others.  These interviews, explain a leading Philadelphia forensic accountant, can help provide an understanding of the business, uncover potential fraud, frame the size and scope of the fraud, and identify potential fraudsters.

However – according to David Anderson, a Certified Fraud Examiner, the suspected fraudster(s) typically are the last to be interviewed because the certified fraud examiner wants to be able to confront the suspected fraudster(s) with all or most of the facts and other information order to elicit an admission.

Based upon his experience with such interviews, Philadelphia forensic accountant Anderson said he has observed some significant differences between fraudsters and non-fraudsters.  Some of these observations are:

  • Non-fraudsters, said Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley, are typically eager to provide information as part of the interview process. For example, Anderson said that when he has asked about areas of weakness that could permit someone to commit fraud, non-fraudsters will usually provide such information (of which they are aware), and even try to speculate about areas of potential weakness of which they have little or no knowledge. Fraudsters will typically claim that they are not aware of any such weaknesses, and that it is impossible for someone to commit fraud at the company.
  • Non-fraudsters are typically emphatic about how a potential fraudster should be punished. For example, they will state that the person should be fired immediately. Fraudsters will be significantly less emphatic.  Certified Fraud Examiner Anderson said they will often suggest that there might have been an acceptable reason as to why the potential fraudster would have committed the fraud.  They will also typically suggest that the company should be lenient with such a person, including giving that person a second chance.
  • Non-fraudsters do not typically hesitate in their answers to questions. As Anderson – a Philadelphia forensic accountant 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 – explained, fraudsters will be hesitant and may even repeat the interviewer’s question (to buy time to think about their answer), especially when the question starts to touch on areas related to their fraud.
  • Non-fraudsters, Anderson said, are also typically emphatic when asked if they have ever done anything improper. For example, the typically non-fraudster will immediately and forcefully say “No!” Fraudsters are typically less emphatic and may even deflect.  In one case, the fraudster responded (earlier in the interview), “Well, to be honest, I have taken home paper clips, pens and paper a few times.  And, I remember that once, there was a fifty-cent error on my expense reimbursement which I never told anyone about”.  (It was only much later in the interview that the fraudster admitted to having taken tens of thousands of dollars in a billing scheme).

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

About David Anderson & Associates

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

Business Valuation Experts Play Key Role in Collaborative Divorces

Posted by & filed under Blog Articles, Business Valuation, Company News, Expert Witness, Forensic Accounting, Fraud, Litigation Support, Marital Dissolution.

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

As a Certified Valuation Expert, David Anderson, of David Anderson & Associates, has served as a business valuation expert in many traditional divorces.  In such cases, he may be retained by the attorney for the out-spouse (the spouse who either does not have an ownership interest in the business at all or who has a non-controlling ownership interest in the business when the other spouse has a controlling ownership interest in the same business) or by the attorney for the in-spouse (the spouse who has either a controlling interest in the business, or a non-controlling ownership interest in the business when the out-spouse has no ownership interest).

In a typical traditional divorce, the in-spouse’s attorney may fight vigorously against providing information which the out-spouse’s business valuation expert has requested to perform the valuation.  Depending on the amount of rancor between the parties and level of antagonistic determination between the attorneys, Anderson said he may have to perform the valuation without all the relevant information which he believes is necessary for the valuation.  In the absence of such information, the business valuation expert may have to make reasonable assumptions regarding the missing information.

For example, if the out-spouse’s business deducts 100 percent of the cost of a company-provided vehicle, and the out-spouse does not provide mileage logs or other written documentation of business use of the vehicle, the business valuation expert may have to make assumptions regarding the percentage of personal use which is not considered a valid business expense.  Such assumptions, said forensic accounting expert Anderson, can form the basis of a difference of opinion between the out-spouse’s business valuation expert and the in-spouse’s business valuation expert (who is usually retained to analyze and rebut the opposing expert’s valuation).

In such situations, the parties often may expend significant time and incur significant costs in using these business valuation experts.  Especially when there are significant differences of opinion between the two business valuation experts, the experts’ fees and attorney fees can be even higher.  According to Anderson, both spouses may also come away with confusion and misunderstanding regarding how the relevant business’s value was determined because they may only speak with the expert retained by their attorney, and must rely upon the deposition and/or courtroom testimony of the opposing expert without being able to ask their own questions.

Collaborative divorce presents a significant alternative to traditional divorce.  While not for everyone, collaborative divorce gives each party and their attorneys the option to work together as a team.  As necessary, the team can be expanded to include financial specialists (such as business valuation experts), child specialists (to help with parenting plans and custody arrangements) and coaches (licensed mental health professionals who help the parties address emotional issues).  The goal of collaborative divorce is to help the parties determine the key outcomes of their divorce themselves as opposed to having a judge or third-party mediator determine those outcomes.

All the team members in a collaborative divorce, said Certified Fraud Examiner Anderson, have undergone specialized training which helps foster cooperation, respect and open exchange.  Yet, because each spouse is represented by a collaboratively trained attorney, he/she can feel confident that his/her views will be adequately considered, and his/her needs will be adequately addressed by the team.

So how does the role of the collaboratively-trained business valuation expert differ in a collaborative divorce?

  • First, the business valuation expert is retained by both parties as opposed to by just one party in a traditional divorce.
  • Next, because of the joint retention of the business valuation expert, both parties are more cooperative and better able to share all the necessary information needed by the business valuation expert. Thus, there is also usually less of a need to make assumptions.
  • Finally, Anderson explained, the business valuation report can be openly reviewed with both parties. Because this is a collaborative effort, the business valuation expert can be more open and informative with both parties, and stand ready to fully answer either party’s questions.  This helps to eliminate confusion and lack of understanding regarding the business valuation and business valuation expert’s process.

In a collaborative divorce, the cost for the business valuation expert can be less, because only one expert is retained instead of two, and because the cost of depositions and/or courtroom testimony can be eliminated.

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

About David Anderson & Associates

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

Fixed Asset Fraud Can Be Just as Costly as Cash or Check Fraud

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

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

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.

Bitcoin: The New Way to Receive Payment, Or Trouble in The Making?

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

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

Bitcoin and other digital currencies (such as Litecoin, Ethereum, Dash, and Dogecoin, among more than 700 others) often are described as the future of monetary transactions.

Bitcoin, 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, is the most well-known of the digital currencies, and is accepted as payment by such companies as Microsoft, Expedia, Newegg, Intuit, and PayPal.

However, just because these companies do, should you accept payment in Bitcoin?  This week’s blog by Certified Fraud Examiner Anderson will seek to answer that question.

Without getting too deep into the technical details, Bitcoin is a cryptocurrency, meaning it essentially exists electronically, relies upon electronic or digital wallets and electronic public ledgers to record transactions, and – because Bitcoins are associated with secure and private electronic addresses instead of identified digital “footprints” – Bitcoin transactions are anonymous.  Additionally, their value is not tied to any specific currency.

To obtain Bitcoin, one must set up a digital wallet and then purchase Bitcoin from a Bitcoin seller.  One can then make payments in Bitcoin for goods and services to vendors who accept Bitcoin, or one can convert Bitcoin to currency from a Bitcoin buyer.  Additionally, one can sign up with a digital wallet to sell goods or services in return for Bitcoins.  Bitcoin wallets are not insured by the FDIC.

Although there are more than 100,000 businesses worldwide who accept Bitcoin, most of these are located outside of the United States.  In July 2017, Bloomberg reported that just three of the top U.S. retailers accepted Bitcoin, and that overall acceptance by U.S. retailers was expected to decline.

In 2014, Circle Internet Financial Limited facilitated a “bank” for exchanging Bitcoins to and from currency, but it ceased doing so in December 2016.   In the United States, there are several vendors who facilitate buying and selling of Bitcoin.  Three of the more well-known are:

  • Coinsource.net, which operates 127 ATMs nationally, including three in the Philadelphia area. Coinsource.net charges an 8 percent fee to sell you Bitcoin and a 4 percent fee to buy your Bitcoin.  ATM withdrawals of cash are limited to $3,000 per day.
  • Coinbase.net, which requires you to link your credit card, debit card, and/or bank account to their service. All purchase or sales of Bitcoin incur a 4 percent transaction fee.  Currency conversions incur an addition 0.5 percent fee.
  • BitPay, which provides the user with a prepaid VISA card. Merchant fees are 1 percent.  Cardholder fees include a network use fee of approximately 5 percent; a currency conversion fee of 3 percent, ATM fees of $2 to $3 per transaction, and card loading fees of up to $5 per loading. ATM withdrawals are limited to $3,000 per day.

As of August 2017, there were 838 ATMs in the United States which facilitated Bitcoin transactions out of a worldwide total of 1,515 ATMs.

Bitcoin prices are not regulated by any country, and can fluctuate significantly.  During the past year, Bitcoin has increased from $600 per Bitcoin to over $4,900 per Bitcoin.  Along the way, Bitcoin’s dollar price has experienced rises and falls of up to several hundred dollars in a day.

To gain a better understanding of the risks involved in accepting payment in Bitcoin, 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 – interviewed Philadelphia federal criminal defense and white-collar crime attorney NiaLena Caravasos (https://nialena.com/).

While the discussion focused on the risks to attorneys and other professionals in accepting payment in Bitcoin, most of the points Ms. Caravasos made clearly are applicable to most businesses.

Ms. Caravasos began by asking the questions, “Why would someone want to or need to pay me in Bitcoin instead of by check or cash?”, “Why can’t the payor just convert Bitcoin into currency?”, “If your client was a farmer, would you accept payment in cows?” and “Why wouldn’t you suggest to your farmer client that she/he sell the cows to raise funds to use toward the payment of legal fees?”

She stated that, because of the lack of government regulation and anonymity of Bitcoin, the use of Bitcoin instead of check or cash could raise the issue of whether criminal activity was the source of the Bitcoin, and if the use of Bitcoin was related to money laundering.   Ms. Caravasos also questioned whether the IRS might soon issue guidance that requires all Bitcoin payments equivalent to $10,000 or more to be reported on Form 8300.

She stated that payments by check or credit card of $10,000 or more don’t require filing a Form 8300, but that if the IRS requires such a report to be filed for Bitcoin payments, this creates additional work for the party accepting the payment in addition to possible IRS inquiry regarding the payor of the Bitcoin.

Ms. Caravasos also noted that in Pennsylvania, attorney retainers must be held in IOLTA accounts (interest-bearing client trust accounts).  Since banks do not accept Bitcoin, attorney retainers can’t be paid in Bitcoin.

Additionally, Ms. Caravasos explained that the volatility of Bitcoin may create further issues down the line regarding client-held funds. Any unused portion of client funds held in IOLTA must be returned to the client at the end of the case but, if the value of Bitcoin has fluctuated wildly during the interim time when the client funds are being held in IOLTA after conversion to U.S. currency, this may raise additional problems regarding what amount is ultimately owed to the client.

She identified other risks associated with accepting payment in Bitcoin:

  • Lack of deposit insurance on Bitcoin;
  • Risk associated with the company providing the digital wallet, as most of these are small companies whose reliability and financial strength is not easily determined;
  • Risk associated with linking your credit card, debit card or bank account with a Bitcoin company, for the same reasons as above;
  • Volatility of Bitcoin price fluctuations, as noted above, Bitcoin prices are unregulated and can experience significant fluctuations;
  • Limitations on ATM cash withdrawals, such withdrawals are limited to $3,000 per day;
  • Bitcoin-related processing and conversion fees, these are higher than most merchant-related credit card fees;
  • Risk of increased scrutiny of law enforcement due to accepting Bitcoin payments.

Ms. Caravasos also noted that since Japan already subjects digital currencies like Bitcoin to anti-money laundering scrutiny, and Australia has announced its intention to do the same, it is likely that the United States also will do so soon. She pointed out that U.S. Senate Bill No. 1241, which is currently on the agenda of the Senate Judiciary Committee, contains provisions to regulate digital currencies, including Bitcoin, as part of anti-money laundering.

In conclusion, Ms. Caravasos stated that because the risks are so great at present, now is not the time to begin accepting payment in Bitcoin.

If you have questions about any finance or fraud issues, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com if you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley.

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.

There’s No Denying the Fact You Need Insurance Against Fraud

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

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

As noted in many of my prior blogs, the best “insurance” against fraud is having in place a working, comprehensive fraud prevention program which includes, among other things, anti-fraud policies and procedures, active management oversight, and regular fraud prevention training.

However, as the 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, I also strongly recommend that businesses and other organizations also have in place adequate fraud insurance to protect against unexpected fraud losses.

To obtain a better understanding of fraud insurance protection, I spoke with Matt Jakubowski and Kevin McCall of the Mount Laurel, N.J. office of Arthur J. Gallagher, a prominent global insurance, risk management, and consulting firm.  We focused on the fraud protection insurance that small and medium sized enterprises (generally those with less than $100 million in revenues) should have.

Jakubowski and McCall advised that most owners and executives of such enterprises are in denial that their organization can be the victim of fraud.  They often state that long-time trusted employees would never commit fraud against them (despite the fact, as I have pointed out in earlier blogs, that trusted employees are often the ones who commit fraud).

As a result, most such enterprises have only a standard property and casualty insurance package which typically provides property, liability, and auto coverage.  While such packages usually do not cover fraud, the insurance broker may include in the package a small coverage for employee theft ($15,000 to $25,000) and/or funds transfer fraud ($10,000 to $15,000).

If the enterprise grows over time, these small coverages may grow to as much as $100,000 as part of the standard package.   The problem with the small size of these coverages is that many frauds far exceed these limits.  For example, in the past year, I have investigated two frauds committed against small to medium sized organizations which exceeded $500,000, and a third which exceeded $2,000,000.

Another problem arises in the form of loss insured.  Many insurance brokers who may not be knowledgeable about these matters, may provide a Loss Sustained form.  The amount of insurance coverage under such a form only applies to fraud losses sustained from the time the policy or increased coverage begins.

An alternative form, called a Discovery Form, covers the total amount, including all prior acts, from the time that a fraud loss is first discovered.  Hence, an enterprise which previously had a $25,000 Loss Sustained form which was increased to $1,000,000 this year may only claim up to $25,000 in prior year losses, even if the fraud dates back several years.  The $1,000,000 limit would apply only to current year losses.

However, if the same enterprise had replaced the $25,000 Loss Sustained form with a new $1,000,000 Discovery Form, all prior and current year losses up to the $1,000,000 limit could be claimed.

Jakubowski and McCall recommend that to protect against fraud, enterprises have Crime Insurance policies that have been vetted by a Certified Fraud Examiner and that offer the following types of coverages:

  • Employee Theft: This is the most common coverage. Enterprises should be aware that insurance companies will require both documentation supporting the loss and that a police report be filed in order for them to pay claims under this coverage (Filing a police report does not necessarily trigger law enforcement action – that is the purview of district attorneys or U.S. attorneys).
  • Funds Transfer Fraud: This covers cash theft or theft of funds by a third party that has hacked into the enterprise’s bank accounts. Note that this coverage does not apply to voluntarily parting with funds (see the next bullet point below).
  • Social Engineering/Cyber Deception Fraud: This covers voluntarily parting with funds as the result of Social Engineering/Cyber Deception. The most common example of this is when an enterprise receives an e-mail that appears to be from the CEO, CFO or other senior executive which directs the enterprise to wire funds to a third party.  However, if such e-mail turns out to be fraudulent.  Jakubowski and McCall stated this type of fraud has become so pervasive in the past 18 months that insurance companies have begun limiting the maximum dollar amount covered, requiring a higher deductible, and charging a higher premium for this coverage.
  • Forgery and Alteration Fraud: This covers situations in which a check signature has been forged and/or the check amount has been altered.

Two additional types of fraud insurance coverage I have found in my work as 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 – that enterprises might want to consider are:

  • Network Security/Cyber Security: This requires a separate policy and covers costs related to the theft of PII (personally identifiable information) or PHI (protected health information), and is most typically used by retail operations, healthcare organizations, accountants, and others who maintain such information on their systems. The coverage pays for the costs of notifying the parties whose PII or PHI has been stolen as well as the cost of providing credit monitoring to those parties (up to the limits of the coverage).
  • Theft from Clients or Third Parties: This coverage applies to enterprises who are either holding funds for clients (such as in escrow accounts) or who have access to third party assets which could be stolen (for example, a janitorial firm that cleans offices).

Jakubowski and McCall also advised that relative to the dollar risks of losses from fraud, the cost of fraud insurance coverage (for example, $1,000,000) may only be a few thousands of dollars a year (compare this to the typical fraud loss which the Association of Certified Fraud Examiners estimates to average 5% of revenues).  They also stated that for enterprises which have fraud prevention programs along with regular employee training in place, the costs will typically be less.

Given the above, I strongly recommend that enterprises review their fraud insurance coverage to make sure that it is adequately protecting them against unexpected fraud losses. If you’re not exactly sure what type of policy you should get, speak with a Certified Fraud Examiner from an experienced firm that provides 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 if you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley.

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.

What Are Ponzi Schemes and How Can You Avoid Them?

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

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

We have all heard the term “Ponzi Scheme” in relation to Bernie Madoff and other investment scams, but just what is Ponzi Scheme, and how can you avoid being a victim of such a fraud?

The term “Ponzi Scheme,” 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, can be traced back to Charles Ponzi, an early 20th century Italian immigrant.

Interestingly, Ponzi didn’t even come up with the concept that bears his name, but instead, learned it from an early employer – a Canadian bank – that was using a similar scheme. Ponzi merely copied the ruse and used on a grander scale.

In 1919, Ponzi discovered money could be made using International Reply Coupons (IRCs), which were used to cover the cost of postage from one country to another.  Ponzi learned IRCs could be purchased cheaply in Italy and other European countries, and could be exchanged, said Certified Fraud Examiner Anderson, for U. S. postage stamps of a higher value. These then could be sold to the U. S. Postal Service or others. At the time, this was a completely legal way to make a profit.

However, Ponzi lacked the funds to make a significant profit from IRCs. To work around this, he set up a company to raise funds.  He promised investors a 50 percent return on their investment in 45 days, and delivered on that promise.  Based upon this initial success, Ponzi created another company to promote his scheme.

Initial investors also saw this significant return on their investment, and word about Ponzi’s investment returns spread like wildfire. Initial amounts invested with Ponzi’s company were $1,800 in the first month, $3,200 in the second month, $20,000 in the third month, and another $2.5 million in the next three months.  By the end of the seventh month, Anderson said, people were investing $1 million per day with Ponzi.

Ponzi was so busy handling new investments that he never got around to implementing his legal scheme to use IRCs.  Instead, he was paying off earlier investors with funds received from later investors.  Ponzi also realized early on that his IRC scheme was impractical to implement.

For example, just to produce profits for the first month investors – those who provided him with $1,800 — Ponzi would have had to purchase more than 50,000 IRCs in Italy and have them shipped to the U.S. for exchange and resale of the U.S. postage stamps.  For the $1,000,000 a day he was taking in by the end of the seventh month, he would have had to purchase approximately 28 million IRCs a day and have them shipped to the U.S. for exchange and resale of the U.S. postage stamps.

Of course, no one was really thinking about this.  Instead they were thrilled about the tremendous profits they were making on their investments and, instead of withdrawing their investments and profits, many were reinvesting these with Ponzi. This only added more fuel to the fire. When a financial writer wrote an article suggesting there was no way Ponzi could effectuate his scheme, Ponzi sued the writer for libel and won – at that time, the burden of proof was on the writer and the paper that published the article.

Things began to unravel for Ponzi during the eighth month of his scheme.  The noted financial journalist Charles Barron, who headed Dow Jones & Company, began to examine Ponzi’s scheme.  He quickly noticed that, based upon the investments received by Ponzi, Ponzi would have had to have purchased and exchanged more than 160 million IRCs.  However, the U. S Post Office reported that only about 27,000 IRCs had been exchanged, including IRCs purchased by other people for actual postage exchange, not millions upon millions.

Furthermore, Barron performed an analysis that showed the cost of purchasing an IRC, bringing it to the U. S., exchanging it for U. S. postage stamps, and selling those stamps would be more than the profit differential that could be realized from the IRC.

By the middle of the eighth month of his scheme, government officials had stepped in and audited Ponzi’s books, which along with newspaper reports revealed that Ponzi had less than $4 million in assets remaining from almost $25 million in invested funds.  Ponzi surrendered to authorities.  His investors ended up receiving less than 30 cents on the dollar.  Ponzi pleaded guilty to fraud less than eleven months after his scheme began, and was sent to prison.

As a footnote, after getting out of prison, Ponzi went to Florida and began selling swampland to investors, promising them a 200 percent profit in just 60 days.  He was convicted for this fraud and served additional prison time.

As can be seen from the foregoing narratives, 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, said a Ponzi Scheme generally consists of these characteristics:

  • An initial required investment for which the fraudster promises or guarantees significantly higher investment profits than the investor can obtain elsewhere.
    • In Ponzi’s case, he was offering a 50 percent profit in 45 days while most banks were paying 5 percent interest per year;
    • In Bernie Madoff’s case, regular returns, even in years when the stock market was significantly down;
  • A vague or highly complex description of the basis by which the profits will be realized.
    • In Ponzi’s case, the overseas purchase and exchange in the U. S. of IRCs;
    • In Madoff’s case, a complex proprietary stock and option trading strategy;
  • A seemingly legitimate investment vehicle.
    • In Ponzi’s case, IRCs;
    • In Madoff’s case, stock and option trades;
  • The impracticality of the actual investment methodology.
    • In Ponzi’s case, the need to purchase, ship and exchange millions upon millions of IRCs;
    • In Madoff’s case, the huge volumes of stock and option trades that would have been required to produce the claimed profits;
  • Payoffs of early investors at the rates promised or guaranteed, but only from the funds provided by later investors; and, finally;
  • The use of secrecy, threats, and influence to silence detractors.
    • In Ponzi’s case, his libel suit, among others;
    • In Madoff’s case, a threatened refusal to allow a potential investor to invest with him if that investor asked too many questions.

Any investment opportunity featuring these kinds of characteristics should be carefully vetted so you can avoid becoming the victim of a Ponzi Scheme.

If you suspect you have been offered, or might have accepted, an investment deal that contains some of these features, you might walk to speak 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 the deal and determine if you are working with a latter-day Ponzi or Madoff.

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 if you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley.

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.

‘Rule of Thumb’ Business Valuation Techniques Just Don’t Measure Up

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

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

Trade associations, some business brokers, and others may use what are known as Rules of Thumb to help business owners understand the “value” of their business.  While this may provide some general ballpark approximations of business worth, Philadelphia forensic accountant and Certified Valuation Analyst David Anderson said there are many problems with relying on Rules of Thumb.

As a result, Anderson – principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley – said there may be significant differences between the value developed using a Rule of Thumb and the value determined by a qualified professional business valuator using professional valuation standards.

Rules of Thumb are theoretical units of comparison.  They usually are expressed as a range of multiples of either sales or SDE (seller’s discretionary earnings, which equal the total of owner’s compensation and net profit).  For example, a Rule of Thumb for a certain industry may be that a business is worth 1.1 to 3.8 times sales or 3.5 to 6.4 times SDE.

Rules of Thumb generally presume the business being valued is an average business.  They may be based upon transactions that represent the sale of the assets of a business or, instead, that represent the sale of the equity of a business.  Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley – said Rules of Thumb also may be based on the presumption the business buyer is paying 100 percent of the purchase price in cash or, instead, on the presumption the business buyer is paying a combination of cash and debt or cash and a percentage of future earnings.

Unfortunately, most Rules of Thumb (including those in most business reference guides) provide limited information, if any, regarding the specifics of the underlying transactions which gave rise to the Rule of Thumb ranges.  Accordingly, said Anderson, a Certified Valuation Analyst in Philadelphia, the Rules fail to recognize differences in profitability, business lines, customer concentration, capital structure, management, location, and other important factors that can influence the sales transactions on which the Rules of Thumb are based.  Furthermore, local Rules of Thumb may differ from national Rules of Thumb.

Given the shortcomings of Rules of Thumb, most professional business valuation standards discourage using Rules of Thumb.  For example:

  • NACVA (the National Association of Certified Valuators and Analysts) professional standards state “Rules of Thumb are acceptable as reasonableness checks, but should not be used as a standalone method.”
  • AICPA (the American Institute of Certified Public Accountants) professional standards state “A Rule of Thumb is typically a reasonableness check against other methods used and should generally not be used as the only method to estimate the value of the subject interest.”
  • ASA (the American Society of Appraisers) professional standards state “Rules of Thumb may provide insight into the value of a business, ownership interest, security or intangible asset. However, value indications derived from the use of Rules of Thumb should not be given substantial weight unless they are supported by other valuation methods and it can be established that knowledgeable buyers and sellers place substantial reliance on them.”

Similarly, the courts rarely accept Rules of Thumb as a valuation method. Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, cited a recent case addressing this issue was In re:  Marriage of Hagar – 2010 WL 4807559 (Iowa App.) (Nov. 24, 2010).  In this case, a divorcing couple in Iowa had a disagreement regarding the value of a jointly owned dry cleaning business.  The husband’s expert made four “calculations” of the value of the business ranging from negative $120,000 to positive $79,329.   The expert testified:

“… this is not a valuation.  This was a computation utilizing Rules of Thumb that are documented as industry standards but not using the judgment, simply using calculations following each of four suggested formulas”

Furthermore, on appeal, the wife pointed out the husband’s expert’s use of Rules of Thumb and industry standards did not require the same professional judgment as a complete valuation.  In this matter, Anderson, a Certified Valuation Analyst in Philadelphia, said the appeals court rejected the husband’s expert for not using judgment and using Rules of Thumb instead of issuing a professional opinion of value.

Rules of Thumb can be useful for obtaining a ballpark range of value for a business.  However, if business value needs to be determined in any of the following situations . . .

  • Divorces
  • Shareholder Disputes
  • Economic Damages Calculations
  • Litigation
  • Tax Matters Such as Gift Taxes and Estate Taxes
  • Accounting Compliance Matters (For Audits) Regarding Goodwill Impairment; Purchase Price Allocation; And Other Fair Value Measurements
  • Sale, Purchase or Merger of a Business

. . . a professional business valuation is necessary.

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

 

About David Anderson & Associates

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

Forensic Accounting Measures to Combat Restaurant Fraud Can Nourish Your Bottom Line

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

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

The National Restaurant Association reports that each year restaurants lose between $3 billion and $6 billion to employee fraud.

Recent surveys, according to 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, have shown that approximately 75 percent of inventory shortages and 4 percent of sales shortages are due to employee theft.

In fact, approximately three-fourths of employees steal at least once and approximately one-half steal repeatedly.

Given these startling statistics, how can restaurants fight this fraud? Anderson, a Certified Fraud Examiner, wants you to know some of the more common types of restaurant fraud, and ways these different frauds can be prevented or minimized:

 

Cash Skimming: In these schemes, employees use various methods to divert cash.  These include such practices as:

  • Entering lower sales amounts or less expensive items into the cash registers than were sold and pocketing the difference;
  • Recording unauthorized discounts or refunds but keeping the difference,
  • Voiding sales and pocketing the proceeds; and
  • Giving back more change to an accomplice than that person is entitled to. For example, being paid with a $10 bill, but giving back change as if the person had paid with a $20 bill.
  • Among the ways to combat cash skimming are:
    • Utilizing a point-of-sale ordering and cash register system;
    • Requiring employees to enter their employee number when using the cash register;
    • Limiting each employee to using a particular cash register during his or her shift at restaurants with multiple cash registers; and
    • Installing cameras to record cash register usage.

Inventory Theft: In these schemes, employees use various methods to misappropriate inventory.  These include such practices as:

  • Outright theft of inventory;
  • Overpours of liquor. This involves serving more liquor than is recorded by the bartender and often results in a higher cash tip – and
  • Under-charging friends and family for meals. This is like the cash skimming schemes, but instead of pocketing cash, the friends and family receive more expensive meals than those for which they are charged.
  • Among the ways to combat inventory theft are:
    • Utilizing a point-of-sale ordering and cash register system;
    • Having a manager regularly count all inventory, or at least such more expensive items as lobster, steak, etc.;
    • Utilizing liquor control systems to provide precise pours and track liquor usage; and
    • Installing cameras to monitor employee exit doors to see if employees are leaving with inventory.

Payroll Fraud: In these schemes, employees either:

  • Clock other employees in or out even when the other employee is not present; or
  • Managers clock former employees in and out, and then split the pay with the former employee.
  • Among the ways to combat payroll fraud are:
    • Requiring multiple levels of approval for time sheets/time cards, including reconciling schedules with time sheets and time cards;
    • Having a third party – or the owner – hand out paychecks;
    • Using an outside payroll service; and
    • Installing cameras to monitor time clocks.

Of course, the most important way to combat restaurant fraud is to regularly inform employees that fraud and theft will not be tolerated, and that management is watching.

Some restaurant owners have told Anderson that many of these recommendations are too expensive for them to implement.  However, when they learn just how expensive restaurant fraud can be for them (for example, a restaurant with $1,000,000 in annual sales is likely losing $200,000 over a five-year period – using the above-mentioned 4 percent of sales lost to fraud number), they quickly understand that spending a fraction of that number can save them many thousands of dollars.

If you are experiencing restaurant fraud, or fear you might be, you should be working with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. When you need the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

 

About David Anderson & Associates

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

Forensic Accountants Can Help Businesses Recover from Hurricanes and Other Disasters

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

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

American businesses large and small suffered a double dose of damage this past month with the back-to-back hits of Hurricane Harvey in Texas and Hurricane Irma in Florida. Hopefully most, if not all, of these corporations had business interruption insurance to cover lost profits and extra expenses. However, engaging the services of a forensic accounting expert can help them effectively navigate the complex process of calculating lost profits and filing the necessary economic damage claim.

“The aftermath of a disaster is a trying time for any business,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, including development, implementation and management of comprehensive contingency and disaster recovery plans.

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

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

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

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

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

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

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

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

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

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

About David Anderson & Associates

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