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.

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.

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.

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 forensic accounting cases involving marital dissolution or disputes between shareholders or businesses, one of the most-often-abused financial categories – says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley – is meal and entertainment expense deductions.

Anderson often is asked, as a Certified Fraud Examiner, to review the reasonableness of certain expense deductions taken by a business.  Taking improper expense deductions can depress the income and value of a business (affecting the out-spouse in a divorce or a minority shareholder) or inflate the amount to be reimbursed (affecting an employee, contractor or another business), so it is important for a forensic accountant to scrutinize deductions.

Here are some of the most highly questionable meal and entertainment expense deductions/reimbursements he has uncovered in his work:

• Several thousands of dollars in payments to strip clubs – in this case, the majority shareholder claimed the strip clubs (one in Dallas, TX and one in Washington D.C.) were the only local places that served the kind of quality food befitting his customers. He further indicated the costs were so high (over $1,000 each time) because he was purchasing quality alcoholic beverages for his customers and himself.
• Having the business pay for overseas vacations for an extended family to countries where the company did not conduct business – in this case, the company paid for overseas vacations for the majority shareholders, their immediate families, their children’s families and their in-laws (none of the minority shareholders or their families enjoyed such privileges). The majority shareholders claimed these vacations were valid business trips because they were considering the potential of conducting business in these countries, and they took along extended family members, including infants and small children, to obtain a variety of viewpoints regarding conducting such business in the future.
• In another case, having the business pay for a vacation at a resort for the majority shareholder’s wife, college-age children and the family dog – in this case, the majority shareholder explained his wife’s presence by claiming he was meeting a client who would be bringing his own wife, and he felt it would be awkward if his wife were not there. He then explained he brought along his college age children because he did not trust them to be “home alone” in the family house.  Finally, he stated the family dog would be traumatized by being sent to a kennel, and since there was no one he could trust to take care of the dog in his family’s absence, he had no choice but to fly the dog out with the rest of his family.
• A separated but not yet divorced company owner had the company pay for his girlfriend to accompany him on a cruise (and additional three-day stay in the Caribbean). In this case, the cruise was tied to onboard continuing education courses offered to meet the owner’s professional continuing education requirements. The company owner claimed he needed to bring along a “scribe” to record key information from each of the courses he was taking, and his girlfriend offered to be the scribe.  He claimed the additional three-day stay in the Caribbean was really a payment to her in lieu of salary because if he had taken someone else as a scribe he would have had to pay a salary to that person.
• A Philadelphia-area retail business owner had his company pay for the season’s lift tickets for he, his wife and his three children (the youngest of whom was eight years old) at an expensive Vermont ski resort (near where he owned a vacation home). In this case, he claimed he and his family members often met people from the Philadelphia area at the resort, and his entire family was committed to talking up the family business. Accordingly, he considered the family’s lift tickets to be a reasonable marketing expense.
• Having the company pay for visits by the majority shareholder and his wife to their children who were away at college – in this case, the majority shareholder claimed each of his children had previously worked in the family business, and these trips were legitimate business expenses because he discussed the family business with each child on each trip.
• Having the company pay annually for a luxury box rental, food, and alcohol for the majority shareholder’s college fraternity brothers at a professional football game. In this case, the majority shareholder claimed this was a legitimate marketing expense even though not a single attendee had ever conducted business with or referred business to the majority shareholder’s company.
• Billing the client company for a $10,000 plus end-of-project party the subcontractor threw for his staff – in this case, the subcontractor claimed this was a necessary project expense because of how hard his staff had worked to complete the project on time – even though the contract did not provide for such.

Of course, Anderson said he also has uncovered many smaller questionable meal and entertainment expense deductions in his work.

If you are anticipating, or already are dealing with, a financial situation involving questionable meal and entertainment expenses, 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.

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.

A key part of any fraud or forensic-based investigation – says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley – is to interview people involved in the matter.

Here’s a first-person description by Anderson on how a Certified Fraud Examiner, such as himself, vets the information from, and performance of, interviewees in an investigation of financial malfeasance.

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As a forensic accountant, I must not only interview individuals who play key roles in a case I am investigating, but also determine his or her credibility.  In such situations, I have the same issues when judging credibility and reliability as a juror does when hearing testimony in court.

When documentation and independent verification is lacking, a forensic accountant must rely upon the credibility of these interviewees.  To determine the credibility and reliability of such persons, the forensic accountant must consider the factors detailed below.

To begin with, I consider the totality of what each person is saying to me, and ask myself if he or she has been consistent within each interview and across multiple interviews.  If the interviewee has been consistent, that is a point in favor of credibility. I also seek to determine if the interviewee’s information is consistent with other interviewees, and with documentation and other evidence I have gathered.  If these factors are consistent, I place more credibility in that interviewee.

Another key factor is the extent to which an interviewee requests me to focus or not focus my investigation in a direction or on a person.  I must also consider how that affects his or her credibility.

For example, if I have been hired by a family-owned business to investigate potential fraudulent activities on the part of a family member, and an interviewee is extremely negative about the family member, I must question whether his or her information is truly reliable or has been colored by interviewee’s animosity towards the other family member.

Additionally, if the interviewee requests I present findings that are inconsistent with documented information and/or information provided by other interviewees, this also affects my view of the interviewee’s credibility.

Other interview aspects I must also assess include:

• Inconsistencies in memory about an event – does the person display good memory about certain events and poor memory about others? What if the poor memories occur only for suspected items?  In one case, the interviewee identified the step-by-step procedures and bases for approval of certain valid transactions, but then could not remember why she approved certain improper transactions.
• Does the person act defensive when interviewed about suspected items, even when not accused of wrongdoing?
• Does the person claim others approved his or her improper actions? For example, in one instance, the interviewee claimed the company’s tax accountant authorized him to not report certain revenues on the company’s tax return.  In another instance, the interviewee told me a now-deceased executive had long ago informed him the certain improper transactions were acceptable to company management, and that was why the interviewee approved more recent improper transactions.
• Does the person promise to get back to me with documentation for certain transactions, but later fails to provide such while attempting to avoid speaking with me?

Only after considering such factors as I have detailed above can the forensic accountant determine whether to rely on such persons, especially when documentation and independent verification is lacking.

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If you’re not getting the answers, or results, you want in your internal investigations, maybe 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.

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

You are, no doubt, familiar with the parable of the Prodigal Son. One of two sons asks his father for his share of his inheritance now, squanders it, returns to his family, and is forgiven.  There are interesting similarities between this Biblical story and several recent fraud investigations.

In each case, said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, the fraudster was a family member who would eventually inherit a share of the family business.

It was not necessarily a son or daughter, but sometimes a brother, sister, cousin, uncle, aunt, or in-law. In a couple of cases, the fraudster was the designated “successor” to the owner; in others, it was one of several family members who stood to share in ownership of the business once the current owner or owners passed control to other family members.

Over the years, the fraudster had risen in authority and trust within the family business.  In the case of the designated “successors,” it was well known throughout each company that he or she would be assuming control in the future. Like the Prodigal Son, the fraudsters didn’t want to wait for their share of the inheritance, but wanted it now. In several of the cases, the fraudster needed the funds due to either a gambling problem or drug problem.

In other cases, said Anderson, a Certified Fraud Examiner who recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. the motivation was soaring personal debt – usually due to living beyond his or her means – or funds were needed to invest in or start a new business. Remember, the word “prodigal” means “wastefully extravagant,” quite a fitting term for a familial fraudster.

Due to the family relationships and positions of trust, as well as the as long-term experience in company operations, each of the fraudsters discovered ways he or she could take funds from the business with a low risk of discovery.  Some of the methods used were:

• Charging personal expenses on company credit cards – in such cases, the fraudster was the person responsible for approving credit card charges.
• Having the family business pay for purchases made by non-family businesses of which the fraudster was an owner or investor – again, the fraudster was usually the person responsible for approving such payments.
• Writing checks to himself or herself, but recording the checks as having been written to one of the family business’s vendors – in such cases, the fraudster had control of the bank accounts, bank statements and bank reconciliation process, so no one else was aware of the deception.
• Diverting revenues by either pocketing cash intended to be deposited or depositing checks to a different bank account under the control of the fraudster – in such cases, the fraudster controlled the bank deposit process as well as the revenue recording process . . . and the fraudster often had the ability to process “credits” to customer accounts.

Because of the fraudster’s family ties, employees who noticed problems or unusual activity were reluctant to step forward and inform other family members.

In a couple of cases, these Prodigal schemes were discovered early on. As in the parable, the fraudster apologized, repaid the small sum taken, and promised to “never do it again.” The company/family agreed not to take any legal action and continued to employ the fraudster.  However, in both cases, the fraudster was “good” for only a short period of time, and then resumed the fraudulent activities.

In a few other cases, the fraudster was dismissed from the company, but the company/family took no legal action. In still other cases, the company/family was initially reluctant to take legal action against the fraudster; however, once the extent of the fraud was known and the amount taken was large enough to overcome any family ties, the company/family ended up taking legal action.

The moral of the Bible story is that something lost now is found; to make sure your corporate profits are not lost, never again to be found, engage a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A Certified Fraud Examiner can examine your accounting and purchasing programs and procedures and make recommendations for enacting strong fraud deterrence measures that will help safeguard your company, Anderson said.

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.

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.

A recent fraud investigation of a privately held company focused on a CFO who had spent years following the directives of the majority shareholder to run the majority shareholder’s personal and/or nonexistent expenses through the company.

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, the CFO was directed to implement other schemes that the majority shareholder designed to defraud the minority shareholders.

After a few years, the CFO saw an opportunity to enrich himself by embezzling funds from the company. He did so to the tune of more than $7 million. When caught, he explained his actions by stating he was just doing the same thing that his boss did.

“Tone at the top” refers to the ethical atmosphere created by company management. The Association of Certified Fraud Examiners has established a direct correlation between the tone at the top and the risk of employee fraud in companies, said Anderson, a Certified Fraud Examiner who recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

If company management sends the message – either explicitly or implicitly – that fraud is acceptable to management, then some employees will rationalize that it is OK for them to commit fraud. Anderson said management may send this message by engaging in such fraudulent behavior as:

• Overstating revenues or understating expenses so that the company appears more profitable than it really is (financial statement fraud).
• Understating revenues or overstating expenses so that the company appears less profitable than it really is (tax fraud).
• Giving or accepting bribes, kickbacks or inappropriate gifts.
• Engaging in price fixing.
• Submitting false or inflated expense reports for reimbursement.
• Having the company pay personal expenses.
• Lying to employees, customers, vendors, regulatory officials or the public.

Because it is almost impossible for management to engage in such behavior without involving one or more employees (for example, having accounting employees submit improper entries to the financial reporting system; directing staff to pay knowingly false expense reports; or approving vendors who are not the lowest cost quality bidders), this fraudulent behavior becomes known to other employees.

Even if management is not committing fraud, its failure to communicate disapproval of employee fraud will lead employees to believe those at the top are indifferent to fraud. To prevent employee fraud, management must set the tone and actively communicate disapproval of fraud. This requires management to take the following steps:

• Communicate to employees what is expected of them.
• This means establishing policies and procedures to let employees know that fraud is unacceptable to management and that the company is taking active steps to prevent such schemes.
• In addition, employees should receive regular fraud and ethics training.
• Lead by example. Regularly demonstrate that management finds fraud unacceptable and will not engage in such violations.
• Provide a safe mechanism for reporting violations. This can include establishing a confidential hotline for reporting fraudulent activity.
• Reward integrity. Include acting with integrity in employee incentive programs.

By setting the right tone at the top, management can demonstrate ethical leadership in preventing employee fraud.

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

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.

NOTE: After this posting, my weekly blog will take a brief summer vacation hiatus, but I will be back in early August with more forensic accounting news, advice, and information. Thank you!