Blog

Avoid These Five Common Mistakes When Valuing a Business – Part Two

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.

Our two-part study of the most significant mistakes made while performing a business valuation concludes as Philadelphia forensic accountant and Certified Valuation Analyst David Anderson takes a closer look at three additional issues often encountered in this process.

Three: Relying on outdated business transactions and industry growth rates:

According to David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, recent business cycles saw peak transactions prices paid around 2000 and 2006.

However, due to more recent economic history, including the “great recession,” Anderson said prospective buyers would not expect to see comparable prices in the present.  Similarly, economic growth rates around those same time periods were much higher than currently expected growth rates, said Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley. Relying on this outdated transaction and growth rate information, he said, results in overstated business values.

Four: Failing to add back in the value of non-operating assets:

Many businesses have assets on their books that, said Anderson – a Certified Valuation Analyst in Philadelphia – are not used in current business operations.  Examples include: Cash and/or marketable securities over what is needed to meet working capital requirements, vacant land, investments in outside businesses, artwork (unless the business is a gallery), and antique vehicles.

Professional valuation standards, as explained by Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, call for identifying such non-operating assets, valuing them separately and adding them back to the value of the business (the logic being that a prospective buyer could purchase the business, operate it without these assets, sell these non-operating assets, and pocket the proceeds).

Five: Ignoring the capital structure of the business:

Equity investors typically require a greater rate of return to accommodate the risks they take investing in a business, Anderson explained. However, many businesses can borrow from banks and other lenders at considerably lower rates.  The company being valued may already have long-term debt at such a rate or it may be the norm for companies in the same industry to have a capital structure that includes long-term debt.

In such cases, said Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, the valuator must consider the overall capital structure of the company to determine the blended (or weighted average) expected rate of return (which will be lower than the equity rate of return alone).  Considering such a lower overall rate of return is likely to result in a higher equity value for the business than would be determined if the capital structure of the business were ignored, noted Anderson a Certified Valuation Analyst in Philadelphia.

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.

Avoid These Five Common Mistakes When Valuing a Business – Part One

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.

While, in most cases, a business valuation process follows proper professional procedures, there are times when a financial professional fails to follow accepted standards of practice. In this first of a two-part series, Philadelphia forensic accountant and Certified Valuation Analyst David Anderson takes a closer look at two of the five most frequently made business valuation miscues. The other three will be studied in Part Two.

One: Concentrating on just one approach (the income approach) for valuing a business:

Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, explains that valuation standards require a valuation professional to consider three different approaches for valuing the business – income approach, market approach, and asset approach.

Although the income approach is often the easiest, and least-expensive, approach to consider (the market approach requires researching public company transactions and utilizing costly databases; and the cost approach frequently requires the use of real estate, fixed asset and/or inventory appraisals as well as potentially requiring additional valuation analysis for intangible assets), Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley says it is not always the most reliable approach for all companies and all circumstances.

For example, a company with operating losses in some years may be deemed to have no value under the income approach, but it could have positive value under the asset approach and/or the market approach.  Additionally, says Anderson, a Certified Valuation Analyst in Philadelphia, a relatively new company or start-up (particularly a technology company) may not have sufficient operating history to which the income approach can be effectively applied, but may have a significant value as determined under the market approach.

Two: Ignoring normalization adjustments:

The unadjusted earnings of many privately held companies, according to Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, may not be comparable to other similar companies because they may be paying more, or less, than market-level compensation and benefits to their owners and officers.

Additionally, said Anderson, the owners may have had the business pay certain non-business costs, or the business may have received certain one-time revenues or incurred certain one-time costs that would not have to be experienced by a future owner.  As a result, Anderson, a Certified Valuation Analyst in Philadelphia, noted it is necessary to adjust to these revenues and expenses to make the business comparable to that of similar companies.

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.

Ferreting Out Highly Questionable Meal and Entertainment Expense Deductions

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 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.

A Declaration for Independence of Expert Witnesses

Posted by & filed under Blog Articles, Business Valuation, Expert Witness, 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.

Contrary to what some people think, expert witnesses in litigation are not supposed to be advocates for the side that hired them, but rather serve as independent experts applying their education and experience to the matter.

Instead, 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, it is the attorney who is supposed to serve as the advocate for his or her client.

Forensic accountants, business valuators and CPAs engaged as expert witnesses are subject to professional standards that generally require them to maintain their independence (there are some exceptions, such as those related to preparation of tax returns).  Additionally, expert witnesses may also be required by certain government regulations to maintain their independence.

In discussing independence, 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, said the professions generally identify two sub-categories of independence:

  • Independence in fact, and
  • Independence in appearance.

Independence in fact refers to the expert’s mental attitude regarding the matter.  It most often reveals itself in the expert’s reports and/or testimony.  It should not matter which side has engaged the expert.  The expert’s conclusions should be the same (subject to certain assumptions).  However, the expert’s independence in fact could be called into question if:

  • The expert has made certain assumptions (at either the request of the client or the attorney) that are clearly unreasonable and which benefit the side that engaged him or her. For example, if the expert has assumed that a mature business would have been able to grow its revenues at a 20 percent rate solely from its existing products for each of the next 10 years, or has assumed employees would accept a 50 percent wage decrease for the next ten years.
  • The expert asserts, without providing any corroborating evidence, certain questionable actions of the side that engaged him or her were reasonable. For example, testifying that certain funds improperly taken by an employee without authorization were advances on his or her inheritance because the employee expected to eventually inherit the business.

Independence in appearance, said Certified Fraud Examiner Anderson, refers to how an uninterested third party might view the expert’s independence considering certain facts.  For example:

  • Does the expert have a financial stake in the side that engaged him or her?
  • Does the expert have a familial relationship with anyone on the side that engaged him or her?
  • Is the expert currently performing work for the attorney on another matter or does the expert have an ongoing working relationship with client that engaged him or her?
  • Is the expert owed money by the side that engaged him or her? If so, is it possible that the expert’s report or testimony could be affected by the potential of non-payment in the event the client does not like his or her conclusions or testimony? This is one of the reasons Anderson said he requires upfront retainers and payment in full prior to releasing a draft report or testifying.
  • Does the expert have, or has the expert had, a past adverse relationship with one or more of the parties or attorneys on the opposing side?
  • Has the expert agreed to make certain changes to his or her report or proposed testimony due to pressure or specific direction from either the attorney or the client? This also touches on the concept of making unreasonable assumptions. A recent prominent Federal Tax Court case – Exelon Corp v. Commissioner – was lost, in part, to the expert doing just that.
  • Is most of the expert’s work performed for either plaintiffs or defendants – the so-called “hired gun” – and not a balance of both?

Independence is a critical aspect of being an expert witness.  The decider of fact – whether a judge, jury or arbitrator – will often consider the expert’s independence in deciding on the credibility of the expert.  As a result, expert witnesses must be independent in both fact and appearance.

If you are involved in, or are anticipating, a legal proceeding, either as a plaintiff or defendant, make sure you have an expert witness who truly is independent. David Anderson is a Certified Fraud Examiner with experience providing forensic accounting services in Philadelphia and the Delaware Valley.

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.

Properly Evaluating the Credibility of Forensic Investigation Interviewees

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.

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.

—–     —–     —–     —–     —–

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.

—–     —–     —–     —–     —–

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.

Beware The Prodigal Son – Or Daughter – Who Might Be Tending Your Flock

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

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

You 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.

Preventing Employee Fraud Starts with Your Corporate Culture

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.

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!

Protect Your Data from Fraud and Theft with More Than Just Passwords

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

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

In last week’s blog, I discussed how using secure passwords can help protect your data from fraud and theft. Passwords alone, however, will not keep your data secure. You need to address other issues that can potentially compromise your data. These include:

  • Access by former employees, former contractors and/or “guests” – Does your company remove ALL access capabilities (including both internal and external access) of employees or contractors who leave? How about guests who are granted temporary system access (such as temporary employees or visitors)? Some companies retain certain accounts for reuse by new employees, contractors, and/or guests. This allows a former employee, contractor, and/or guest to potentially access the company’s data.
  • Physical access – As with system access, does your company require and track the return of keys, keycards, and other access to your physical facilities? Are their access codes removed from the system? Even if you have done so, do you have policies and procedures in place (as well as training and enforcement) that prevent your employees and/or contractors from allowing someone else to simply walk into your facility with them? If not, your company could be at risk.
  • Secure backup – If you backup sensitive data files offsite, how secure is the physical facility or the service that you are using? If the offsite backup service or facility is not secure, your data could be at risk.
  • Software security updates – Do you have policies and procedures in place to ensure that all software updates – particularly those that are security-related – are installed as soon as they are received? If not, security exploits could be used against your systems.
  • Limitation on offsite use of data – Do you allow employees to store data offsite on laptops, tablets, and/or smartphones? If so, you are at risk of the devices being stolen and the data being compromised. (Every month, there are new reports of some major company or government agency suffering from the theft of a laptop, tablet, or cellphone that contained sensitive data.)
  • Locked file cabinets or rooms – Do you still maintain certain sensitive data in paper files? Is access to those files restricted by storage in locked file cabinets or rooms? If not, employees, contractors, and others could gain access to such sensitive data. Even worse, if such paper files are the only source of certain data, your company could be at risk of the data being removed or damaged (as by a fire or severe storm).
  • Socially engineered attacks – Even if you have implemented secure passwords as well as addressed all the issues above, a well-planned socially engineered attack can render these other safeguards useless. Is your staff well-trained in understanding what a socially engineered attack is and how to react to it? Have they been taught to watch out for suspicious phone calls and/or e-mails that seemingly have come from corporate executives or the IT department? If not, your company could be at risk.

Protecting your data from fraud or theft takes more than just changing passwords. It also requires analyzing other areas at risk, and implementing policies, procedures, and training to protect against those risks. If you feel you need assistance in these areas, contact a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley to conduct a computer security analysis and recommend a comprehensive fraud deterrence program.

If you require 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 has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

A Secure Password Can Help Keep Your Data Safe

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

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

The list of major corporations hit by a crippling data breach is legend; it seems no business is immune to computer hacking, large or small. One simple, oft-overlooked technique to help thwart these nefarious individuals is to create, and routinely update, secure access passwords.

“Having secure passwords is one of the most effective ways to protect your information and your identity,” 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, “yet, the most common passwords people use are still ‘password,’ ‘123456’ and, courtesy of the Jackson Five, ‘abc123.’  These people are incredibly vulnerable to identity theft.”

Anderson, a Certified Fraud Examiner, said another common problem is that people use same password for everything – their home and work computers, personal and business emails, bank accounts, online purchases, etc.  As a result, if just one password is stolen, the hacker can access all their accounts.

At the other end of the password security spectrum, he said, some companies and individuals create very complex and hard-to-guess passwords (for example, a$4QX3d%bGh87i9M).

“These passwords are obviously difficult to remember, especially if there is a requirement that they be changed every 60 to 120 days,” Anderson said.  “So, what do people do?  They write the password on a piece of paper and attach it to their monitor or desk where everyone can see it.”

What can you do to make sure your passwords are secure?  Anderson, 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, suggests the following fraud deterrence measures to help protect your identity:

  • Don’t use easily identifiable passwords such as those above, your birthday, your anniversary, your spouse’s name, etc. And don’t use the same password for everything.
  • Make sure that your passwords are at least 8 characters long (unless the system requires fewer).
  • Include a mixture of capital and lowercase letters, numbers, and special symbols ($, %, &, etc., if permitted).
  • Try to have some level of familiarity with the basis for each password so that it’s not too difficult to remember. For example, you could take the city of your birth (say, Chicago) and the year you started your business (say, 2007) to come up with the following password . . . Oga20Cih07C . . . This looks complicated, but it’s not. It’s Chicago spelled backwards in a group of three letters with the first letter capitalized, then the first two digits of the year, then repeat the pattern. After using this password a few times, it is easily memorized.
  • For systems that require four-digit pins, select a four-letter word that you will remember and convert it to numbers using the telephone keypad. For example, you might use your father-in-law’s first name (Alex) to come up with 2539, or if you hail from Utah, you might want to use 8824. If you don’t use birthdays, anniversaries, street numbers or the last four digits of your phone number, it would be hard for someone to guess these converted numbers.
  • Consider using a password manager. Your antivirus software may already contain a password manager, or there are several online password managers. You create a single strong password to log into the password manager, and it stores all your other passwords.  As a result, you need to memorize only one strong password.
  • Keep the written record of your password in a secure location. Don’t tape your password to your computer or your desk. And never share your passwords with other people.

Anderson recalled one fraud investigation he conducted that traced a data breach back to a busy company president who gave his email password to his executive assistant so that she could screen his email.  When she was out sick, the company hired a temporary employee to take her place and gave her the password.  The temporary employee shared the password and login information with her boyfriend, who stole confidential company information directly from the president’s emails.

If you aren’t sure that your passwords are strong enough to protect you and your company or if you aren’t confident that your employees are using secure passwords and keeping them in a safe place, it’s time to contact a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley to conduct a computer security analysis and recommend a comprehensive fraud deterrence program.

If you require 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 has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.

Why the Date of Valuation Matters When Valuing a Business

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

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

One of the key factors in performing a business valuation is to determine the date of the valuation.  There can be different bases upon which the valuation date is determined.  For example:

  • For a marital dissolution, the valuation date can be the date of marriage (for determining the pre-marital business value) and/or date of separation or date of filing of divorce complaint (for determining marital business value), and/or a current date (for determining ability to pay);
  • For financial statement presentation purposes, the valuation date can be the date of acquisition (for purchase price allocation) or the end of the financial statement year (for determining goodwill impairment or purchase price impairment);
  • For gift taxes, the valuation date can be the date of the gift;
  • For estate taxes, the valuation date can be the date of death or the date six months after the date of death;
  • For insurance claims and damages litigation, the valuation date can be the date of the incident that gave rise to the claim occurred (for determining valuation of total loss value) and/or the date the impact of the damaging incident ceased (for determining period of loss and lost value during that period);
  • For business acquisitions, sales and/or mergers, it can be any mutually agreed-upon date.

The selection of the valuation date is critical because, among other things, a business valuator can only consider factors that were known or knowable as of the valuation date.  This means that certain key subsequent events may or may not be considered in valuing the business.  The following illustrate how this impacts the business value:

  • In the case of Hurricane Sandy which hit New Jersey and New York on October 29, 2012, the selection of a valuation date could have a major impact. For example, if the valuation date of a business affected by Hurricane Sandy was October 29, 2012 or later, then the effects of the hurricane would be considered in valuing a business which was destroyed by Hurricane Sandy.  But what if the valuation date was a few days earlier?  If the valuation date was October 28, 2012, it is reasonable to expect that the business would have been affected by Hurricane Sandy only 24 hours later.  But what if the valuation date was October 23, 2012, when all but one of the storm models predicted that the storm would head out to sea?  Or October 24, 2012, when three of the storm models predicted that the storm would hit the East Coast around the Delaware-Maryland-Virginia peninsula and the rest predicted that the storm would head out to sea?  This determination would be critical if the business had been destroyed by Hurricane Sandy.
  • In a divorce, if the spouse’s business was declining, static, or growing slowly as of the valuation date, but three months later landed a large lucrative contract, should the impact of that contract be included in the valuation? In this case, several factors would determine whether it was known or knowable as of the valuation date that the contract would be awarded.  For example, if the contract was awarded based on a Request for Proposal that was sent out by the customer ten days after the valuation date and this was the first time that the spouse’s business had ever submitted a bid to this customer, it would tend to point to the award not having been known or knowable as of the valuation date.  Alternatively, if the Request for Proposal and proposal had been submitted several months before the valuation date, if the spouse’s business had been selected as one of two finalists before the valuation date, and if the spouse’s business had previously won one or more contracts from this customer, it could be reasonable to assume that as of the valuation date it was known or knowable that the spouse’s business was likely to win the contract.

These are just examples, of course. The forensic accounting professional acting as the business valuator in such situations must consider all the specific facts surrounding the valuation date to determine whether a critical post-valuation date event was known or knowable as of the valuation date.

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 with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner, and a Certified Valuation Analyst.

Getting Personal with Expenses in a Divorce-Related Business Valuation

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

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

Determining the equitable value of a business at the center of a divorce case can be a tricky circumstance to begin with; however, the situation can be even more vexing if the two sides disagree on the application of personal expenses to the ledger sheet of that business.

In such cases, most attorneys turn to a forensic accounting expert who also is business valuation expert and has served as a marital dissolution accountant to determine the appropriateness of those expenses and, subsequently, a fair value for the business.

“We’ve all been in situations where we know to rely on a professional with experience in the matter at hand.  Handling a business valuation in a divorce proceeding is one of those situations,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley.  “The spouses may not agree on the value of the business, and their attorneys may have partisan opinions as well. What it boils down to educating everyone involved on how a forensic accounting expert addresses valuation issues in a divorce.”

Anderson, a Certified Valuation Analyst and marital dissolution accountant in Philadelphia and the Delaware Valley, said there are four distinct business valuation issues that surface regularly in marital dissolutions. They are:

  • The cost of the in-spouse’s services to the business being valued (the in-spouse is the spouse who owns the business interest being valued as opposed to the out-spouse who does not have ownership in the business);
  • Personal goodwill and its impact on the business being valued;
  • The presence, and impact, of unreported cash sales; and
  • Personal expenses charged to the business.

This article, the last of a four-part series, will explore the issue of personal expenses charged to the business.

Anderson said it is common for in-spouses to charge non-business-related expenditures to a business and just as common for them to become an issue in a divorce case.  Anderson, a business valuation expert whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, said a forensic accountant must analyze the expenditures and deduct them from the business’ expenses.

“I had one extreme case in which an attorney in-spouse charged his business more than $150,000 for shore house renovations that included the addition of a movie-screening room,” said Anderson, a Certified Valuation Analyst forensic accounting expert in Philadelphia and the Delaware Valley.  “The attorney claimed he needed a comfortable, presentable place to work when he visited the shore house, and that business-related visitors needed to see an upscale home office that fit his reputation.  I reduced the expenses of the business by the entire cost of the renovation.”

In another case, explained Anderson, a divorce accountant and business valuation expert who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, said the in-spouse was a wholesale distributorship owner who attended semi-annual meetings of a trade association.  The in-spouse always brought the out-spouse (because some colleagues also brought their spouses) and their two children (because they did not want to pay a babysitter).  The in-spouse charged the business for the cost of travel, hotel rooms, meals and entertainment (including tickets to amusement parks, museums, etc.) for the out-spouse and two children — the same amount that Anderson later deducted from the expenses of the business.

“There is no limit to the creativity some in-spouses will employ in justifying the personal expenses they charged to their businesses,” said Anderson.  “Most divorce accountants have heard it all.  That is not to say there are no legitimate reasons for charging seemingly personal expenses to the business.  There are.  And it is the forensic accountant’s job to figure out which expenses are justified and which are not.

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

About David Anderson & Associates

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

Cash Transactions Can Be Tricky When Valuing a Business in a Divorce

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

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

The decision to end a marriage is a messy affair that becomes undoubtedly more complicated when the division of property includes a business that must be valued, especially when claims of unreported cash transactions taking place in that business are involved.

In these cases, determining a fair value for the business is best left in the hands of a forensic accounting expert who has experience serving as a marital dissolution accountant and a business valuation expert.

“The issues that have to be considered in a business valuation during divorce proceedings are complex and numerous,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley. Such issues can be particularly thorny, he emphasized, when the business in question may or may not have had unreported cash sales.

The overall valuation process, he said, “usually begins in an educational vein as the forensic accountant explains to the spouses and their attorneys how a forensic accounting expert addresses valuation issues in a divorce.”

Four key business valuation issues arise repeatedly in marital dissolutions, said Anderson, a Certified Valuation Analyst and marital dissolution accountant in Philadelphia and the Delaware Valley. These valuations issues are:

  • The cost of the in-spouse’s services to the business being valued (the in-spouse is the spouse who owns the business interest being valued as opposed to the out-spouse who does not have ownership in the business);
  • Personal goodwill and its impact on the business being valued;
  • The presence and impact of unreported cash sales; and
  • Personal expenses charged to the business.

This article, the third of a four-part series, will explore the issue of unreported cash sales and their impact on business valuation.

During divorce proceedings, an out-spouse often will tell the divorce accountant the in-spouse’s business has unreported cash sales, explained Anderson, a divorce accountant and business valuation expert who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The forensic accountant must then determine if the claim is true, and, if so, uncover the amount of the unreported sales.

This task is accomplished by performing a variety of analyses, including:

  • Investigating deposits into the in-spouse’s bank and investment accounts to determine how many of the deposits were cash;
  • Analyzing the gross margin of the business (sales less the cost of sales) and comparing that gross margin to industry averages; and
  • Searching for missing invoice or receipt numbers (very often the in-spouse will complete an invoice or receipt for a cash sale, but not record it on the books of the business).

Other specific analyses also may be required depending on the type of business, said Anderson, a Certified Valuation Analyst forensic accounting expert in Philadelphia and the Delaware Valley.  These analyses will allow a forensic accountant to confirm or deny the out-spouse’s claim, and, if confirmed, estimate the amount of the unrecorded cash sales that need to be added to the business’ revenues, he said.

“I once had a case in which the out-spouse told me her husband kept cash from unrecorded sales in his dresser at home,” recalled Anderson, a business valuation expert whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “I actually went to the home and counted the cash in the dresser as part of my forensic investigation.”

The final post in this four-part series examining the valuation issues forensic accountants consider in divorce cases will deal with personal expenses charged to the business.

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

About David Anderson & Associates

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

Thinking of Hiding Cash Transactions? Forensic Accountants Will Find 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, fraud deterrence, litigation support and expert witness testimony services in Philadelphia and the Delaware Valley.

Some owners of businesses that receive payment in cash for a significant amount of sales (primarily retail businesses) hide some or all such sales by pocketing the cash and not entering the sales into their books and records. Their primary motivations are:

  • – To pay less in taxes; and/or
  • – To show reduced cash flow, profits and business value to divorcing spouses or to shareholders who are not employed in the business (often called non-operating shareholders).

As a firm that offers forensic accounting services in Philadelphia, we often are called in to analyze the books, records, and operations of such businesses to determine whether – and, if so, how much – cash sales are not being reported. As part of my fraud investigation, and as a Certified Fraud Examiner, our Philadelphia forensic accounting firm employs many of the same fraud deterrence techniques as the IRS and other taxing authorities to identify non-reported cash sales.

Here is a sampling of some of the techniques that forensic accountants use:

  • Analysis of tax returns and financial statements over a multi-year period: One form of analysis is to compare key operating data over a multi-year period, and look for unusual trends. For example, in the case of a retail gardening business, I noted the business had been averaging about $600,000 to $800,000 sales per year with a slight upward trend until the year immediately before the owner commenced divorce proceedings. In that year, sales dropped to about $450,000. The next year, sales recovered to around $600,000, and the following year sales jumped to over $700,000. This was a potential indicator of unreported cash sales.
  • Analysis of tax returns and financial statements in comparison to industry statistic: Forensic accountants have access to industry statistics that can be compared to the financial information reported on a company’s tax returns and financial statements. For example, a pizza restaurant with between $3 million and $5 million in sales will typically have a gross profit in the range of 65 percent to 72 percent of sales. If the pizza restaurant I am investigating has been averaging a gross profit in the range of only 45 percent to 50 percent, this can be a strong indicator of unreported cash sales.
  • Comparison of inventory records with sales records: In the case of a retail beauty products business, I analyzed the inventory records of certain high-value beauty products – including expensive perfumes – and compared those records to the recorded sales of those high-value beauty products. I was only able to trace about 50 percent of the inventory reduction to recorded sales. The owner was unable to explain the other 50 percent inventory reduction. Her initial claim was that her staff must have stolen the other 50 percent, but she then was unable to explain how the staff members obtained access to the locked cage where the products were stored after I determined she was the only one with a key to the locked cage.
  • Analysis of employee time records versus recorded sales: In analyzing the sales of a catering business, I noted multiple instances in which employees were paid for working certain catered events for which no sales were recorded. I then contacted each of the customers for these events, and learned that each had paid cash.  In this case, I could obtain the actual amount paid from each customer.

As a Certified Fraud Examiner offering forensic accounting services in Philadelphia, some of the other fraud deterrence techniques I have used include observation – in which I have someone observe the number of customers and/or product deliveries that occur during a specific length of time and then compare that information with the number of sales recorded in the company’s accounting system – and interviews with present and former employees, although I have noted that interviews with present employees can be very sensitive because such employees may not want to cooperate for fear of losing their jobs.

Of course, while such techniques can be a strong indicator of unreported cash sales, forensic accountants still must perform other procedures and analyses to validate the amount of such unreported cash sales.  But in the end, if the owner is hiding cash sales, a forensic accountant who also is a Certified Fraud Examiner and is conducting a fraud investigation is very likely to find them.

If you require 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 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.