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Forensic Accountants Help Jurors Understand Complex Information

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

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

The task of explaining complex matters to jurors and presenting them with reams of financial information can seem nearly impossible.  In most cases, individuals serving on a jury have little to no understanding of financial analysis or statements and the job of introducing complex spreadsheets and large amounts of data can be intimidating and mind boggling.

However, it’s a key role played by forensic accountants called on to offer expert witness testimony to make even the most complicated financial data understandable.

“Presenting complex financial information in a way that allows jurors to grasp its meaning can have a significant impact in the presentation of a case,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley.  “It is the financial data that often can make a difference between winning a case and losing a case, or between a significant jury award or a paltry one.”

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, recalled one case in which he was asked to prepare detailed financial reports for a jury and provide expert witness testimony during the trial.  Anderson said the case centered around a claim by his client (the plaintiff) that the actions of the defendants had caused the client to lose sales and, therefore, profits.  (Note:  The company name, amounts and dates in the examples below have been changed to protect client confidentiality.)

As a result of a thorough analysis of the data, Anderson’s report to the plaintiff’s counsel included the following three spreadsheets

 

 

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“Imagine yourself sitting on a jury and being confronted with these schedules,” said Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia.  “The columns of numbers would have been difficult to remember and even harder to understand.  And they would not have had the intended impact on the jury.”

Anderson did not present the schedules as they appeared in his report to the counsel, but instead reduced the information to a simplified set of color-coded charts:

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“These charts made it much easier for the jury to see the impact of the defendant’s actions and to visualize the amount of losses suffered by the plaintiff in each quarter,” said Anderson, a forensic accounting expert in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.

Anderson said another method of getting the point across to a jury is with the strategic use of color and the intensity of the color.  Another chart from Anderson’s expert witness testimony before the same jury was the following:

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“The dark blue color evokes a feeling of strength as opposed to the light blue color, which appears to be weaker,” explained Anderson, a forensic accountant who provides litigation support services in both civil and criminal cases. “It’s this strategic use of color that can leave the subtle impression in the jurors’ minds that my loss calculation for the plaintiff is stronger and, therefore, more reliable than the defendant’s loss calculation.”

These are just two examples of how a forensic accountant providing expert witness testimony can assist in the successful presentation of a case to a jury.

If you require litigation support services or expert witness testimony in Philadelphia, or require the 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 services, 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 provided expert witness testimony in the Greater Philadelphia area and served as a forensic accounting consultant on both civil and criminal cases.

Calculating the Value of Forensic Accountants in Termination, Discrimination Cases

Posted by & filed under Blog Articles, Company News, Expert Witness, Forensic Accounting, Fraud, Fraud Deterrence, Litigation Support.

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

In many wrongful termination and employment discrimination, attorneys depend on forensic accountants to calculate damages and, if necessary, provide expert witness testimony.

“Whether you are dealing with wrongful termination or employment discrimination, the methodology for calculating damages is similar,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley.

“The key basis for calculating damages is the difference between what the plaintiff would have earned over his/her lifetime had the wrongful termination or employment discrimination not occurred and the actual and expected earnings of the plaintiff after having experienced the wrongful termination or employment discrimination,” explained Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley.

Anderson outlined the steps of the damage calculation this way:

  • To begin with, the date the damages started is determined. This typically is the date that the plaintiff was allegedly wrongfully terminated or the date that the employment discrimination allegedly began.
  • Next, the wage or salary rate and associated benefits as of the beginning date of damages are identified.
  • Then, these rates and benefits are extrapolated through the normal date of retirement, or another date if there is a reasonable basis to assume that the plaintiff would have retired earlier or later than normal retirement age.
  • This is followed by identifying the actual wage or salary rate and associated benefits earned by the plaintiff from the beginning date of damages until the date of the damages calculation.
  • The forensic accountant must then extrapolate these rates and benefits through the normal date of retirement, or another date if there is a reasonable basis to assume that the plaintiff would have retired earlier or later than normal retirement age.
  • Finally, the difference between the two different extrapolations are calculated.

Anderson, a forensic accounting expert in Philadelphia whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, said the extrapolations rely upon several assumptions, including:

  • What the expected career path of the plaintiff would have been had the wrongful termination or employment discrimination not occurred.
  • What the actual and expected career path of the plaintiff is due to the wrongful termination or employment discrimination. Typically, the wrongfully terminated person will have a period of unemployment and is likely to have to take a lower-level position or a position paying less, etc. Similarly, the person experiencing employment discrimination will either have a harder time finding employment or, if already employed, will have a slower or lower career path.
  • What the associated wage or salary and benefits growth rates would have been for each of the above.
  • What the associated benefits would have been for each of the above. This includes insurances, pension or profit-sharing benefits, 401-K contributions and company matches, etc.
  • What mitigating steps the plaintiff has taken or is expected to take to obtain employment, and the reasonableness of those steps. For example, if the plaintiff previously was a high-powered executive, what is the plaintiff doing to find alternative employment? Also, what is a reasonable amount of time for finding a new job? If the plaintiff has found a new job, is it comparable to what would be expected?
  • The rate to use to discount the differences back to present value. Please note that under Pennsylvania law, neither inflation-based wage increases nor discounting to present value are allowed.
  • Any applicable permitted interest on past differences.

Anderson, a forensic accountant whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, including expert witness testimony in Philadelphia, said the forensic accountant/expert witness generally will rely on an associated report by a qualified employment and compensation expert regarding the expected career paths and associated salaries over time, unless the forensic accountant/expert witness also is a qualified expert in that area.

If you need help in calculating damages for wrongful termination or employment discrimination cases, or if you require the services of a forensic accounting expert in Philadelphia and the Delaware Valley for any other reason, 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 services, 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 provided expert witness testimony in the Greater Philadelphia area and served as a forensic consultant on both civil and criminal cases.

Before Selling Your Business, Learn Its True Value

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

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

Selling a house is an important decision, one that’s not made capriciously but undertaken only after solid research and planning and consultation with industry experts.

Selling a business is a very similar process. You’ve invested time, money, and sweat equity into your company and you want top dollar when you put it on the market. As you do your research and make your plans, strongly consider working with a forensic accountant experienced in business valuation to maximize the benefits of the transaction.

“Whether selling a house or a business,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm providing business valuation services in Philadelphia and the Delaware Valley, “you must understand the value of what you are selling.  Hire a good broker, have your records and physical structure in order, and be prepared to address issues or questions from potential buyers.”

Anderson, a forensic accounting expert in Philadelphia who also is a Certified Valuation Analyst, offers these guidelines to help business owners prepare for a sale:

Determine the Worth of Your Business

To make sure your expectations are realistic, you need a reasonable idea of what your business is worth, Anderson said.

“Unfortunately, websites like Zillow that cater to home sales don’t exist for the sale of businesses and there simply aren’t other readily available sources to provide you with that information,” said Anderson, a business valuation expert in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “Your best bet is to use a professional business valuator.”

Anderson said most businesses don’t need a full business valuation, but can instead use a less expensive calculation of value to get a general idea of what their business is worth.  However, Anderson, a Certified Valuation Analyst and forensic accounting expert in Philadelphia, said while a calculation of value may be less expensive, it also is less reliable than a full business valuation, and generally cannot be used in litigation.  It is a perfectly reasonable tool to use to determine the worth of a business, but, he said, the business owner needs to understand its limitations.

Find a Good Business Broker

Unless a business owner has extensive industry contacts and experience in selling businesses, Anderson said sellers should work with a business broker.

“Just as you would do with a real estate broker you hire to sell your home, you’ll want to interview the business broker. Check references and have the broker analyze your business before you agree to hire them,” said Anderson, whose company specializes in business valuation services in Philadelphia and the Delaware Valley.

Get Your Books and Records in Order

This is a crucial step in the process, Anderson said, because your business broker and any potential buyers are going to want to examine your books and records as part of their due diligence.

“Just as you would get your house ready for showings,” he said, “you need to do the same for your books and records.”

Among Anderson’s recommendations:  Collect financial statements, general ledgers and income tax returns for the past five years; secure copies of all leases, contracts and agreements; and gather organized documentation of any intangible assets or intellectual property.  Business owners also must assure their books accurately reflect the financial position of the company, he said.  This includes writing off old accounts receivable, adjusting inventory for obsolete and slow-moving items, removing retired fixed assets from the books, making sure all liabilities and debt are accurately reflected on the books, and identifying non-business and/or one-time expenses that have been recorded.

It’s often a good idea to have an independent expert, such as a forensic accountant, review your books and records to make sure you haven’t missed anything, said Anderson, a Certified Valuation Analyst and forensic accounting expert in Philadelphia.

Get Your Business Premises in Order

Beyond the books and records, Anderson said business owners should take a critical look at their actual business premises.  Among his recommendations:  Straighten up and organize; dispose of obsolete inventory, old furniture, and retired equipment; make repairs and perform maintenance so the facilities are in working order and look fresh; and be sure you have keys to all locks.

“These are the same things you would do when you are selling a house,” said Anderson, a business valuation expert in Philadelphia who specializes in providing a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “Making sure your physical premises are in top shape will help you get the best possible price for your business.”

Prepare for Questions

Anticipate what buyers will ask and have the answers ready, Anderson said. “This will speed up the due diligence process and impress buyers by showing them you truly know your business,” said Anderson, an expert in business valuation services in Philadelphia.  “Be prepared to discuss employees, customers, vendors, products and services, industry trends, and your vision for the future of the business.”

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

About David Anderson & Associates

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

Forensic Accounting Strategies for Cash Flow Maximization

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

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

Many small businesses engage in an ongoing struggle to keep sufficient cash on hand to finance operations, pay debts, and provide income to the owners. If your company could use some assistance in this area, a forensic accountant in Philadelphia has several strategies you can employ to maximize cash flow.

“Even the most savvy and organized small business owners can experience cash flow problems from time to time, said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. “There definitely are ways, however, that you can squeeze cash out of sales, assets, and business debts to maximize your available cash.”

Here are some of Anderson’s top cash flow recommendations:

  • Get cash up front from customers: Attorneys, consultants, and others do it. You should too, especially if the sale is for services, if you must purchase materials to fulfill the order, or if there is more than a month between the date the customer places an order and the product is delivered or service is completed, said Anderson, a forensic accounting expert in Philadelphia.   Depending on the size and type of the order, you should ask for anywhere from 10 percent to 50 percent of the sales price up front, he said.
  • Offer customers a discount for faster payment: Many companies offer a one or two percent discount for payment within 10 days of the original invoice. Such an offer, Anderson said, can motivate customers to pay you quickly. Of course, you need to consider the impact of such discounts on your profitability and ensure that your sales price includes the impact of the discounts, he said.
  • Accept credit card payments: Some customers may not have adequate cash in their bank account to pay quickly, but they do have business or personal credit cards they can use, said Anderson, a forensic accountant in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley. You’ll pay a small fee of about 3% to the credit card company, he said, but you’ll get paid faster by accepting credit card payments.
  • Stay on top of your past due accounts: How long do you let a customer’s account go past due before you pursue them for payment? The answer should be not at all, Anderson said. Consider establishing a policy of calling customers five days prior to the due date to remind them that the payment is coming due. And, wait no more than two days past the due date (allowing for the customer to have mailed the payment on the due date) to begin calling the customer, Anderson recommends. Remember, the squeaky wheel gets the oil, he said.
  • Consider factoring your accounts receivable: If your industry has payment terms that extend beyond 30 days from the invoice date, or if your sales are for relatively large amounts, consider selling your accounts receivable, or invoices, to a third party. By factoring your accounts receivable, your invoices are paid much faster, said Anderson, a forensic accounting expert in Philadelphia. Remember to consider the cost of factoring and how it impacts upon your profitability, since factors can charge a significant fee, he noted.
  • Squeeze more cash out of your inventory: When was the last time your analyzed your inventory to determine if you have too much of certain items, slow-moving items, or obsolete items? Consider discounting these items to turn them into cash. Or, Anderson said, you may prefer to sell slow-moving or obsolete items to liquidators or scrap dealers at drastically reduced prices. Sure, you won’t make much, if any, profit from selling these items (particularly the slow moving or obsolete ones), but they aren’t producing cash if they’re just sitting on the shelf, he said.
  • Do the same with your older fixed assets: Most businesses have an inventory of retired fixed assets that aren’t being used and are just taking up space. Consider selling these assets to liquidators or scrap dealers, said Anderson, a forensic accountant in Philadelphia. You’ll free up space and maybe some cash, too.
  • Negotiate longer payment terms with vendors: Have you ever had a customer ask to stretch out his or her payment terms? You are a customer, too, Anderson reminds business owners. It never hurts to ask, particularly when you won’t get paid by your own customer for 30 or more days, he said. In that scenario, it’s likely your vendor will understand and allow you to stretch out your payments.

“These are just some of the strategies that you can use to increase your cash flow and make it easier to keep your business going, pay your debts and keep your own income consistent,” said Anderson, a forensic accounting expert in Philadelphia.

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

About David Anderson & Associates

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

When Tip Lines Don’t Work

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 programs and forensic accounting services in Philadelphia and the Delaware Valley. 

In last week’s blog, Certified Fraud Examiner David Anderson reported that tips remain the most frequent source for the discovery of fraud, explaining companies using tip lines – either telephonic or online – were generally able to reduce the length and duration of frauds.

However, some companies report tip lines have either been ineffective or are largely unused.  Why is this?  Based upon Anderson’s experience as well as that of his colleagues, four main reasons have been identified:

Lack of Adequate Communication and Employee Training:

In one instance, Anderson said he discovered the client’s approach to utilizing a tip line was to send an e-mail to all employees advising them that a tip line had been put in place, and then putting up posters throughout the workplace to inform them of the tip line number.  While this may have seemed adequate, employees had many questions that went unanswered.

When Anderson conducted a survey of employees regarding the tip line, many had no idea their tips would be anonymous; no idea of how the investigation of their tips would work; and no idea of how they would be informed of the results of the investigation.  After instituting employee training and frequent communication regarding the tip line (including adding a FAQ section on the company’s intranet), use of the tip line increased.

Improper Investigation of Tips:

Addressing such issues as who is assigned to conduct the investigation and how it is reported, Anderson said, can be keys to the success of a tip line.

In one instance, he was brought into a company to analyze why their tip line wasn’t been used by employees.  One of the key things he learned, Anderson said, was that rather than using an outside forensic professional to investigate the tips, the company assigned the task to a junior human resources manager.  The manager’s primary method of investigation was to immediately confront the target of the tip with the accusation contained in the tip.  He reported that not a single target acknowledged the alleged fraud.  He would then prepare a report, and since the targets denied the fraud, he would close out each case as being unsupported.

In another instance, the company would assign the head of a department to investigate the alleged fraud in the department.  When the head of purchasing was assigned to investigate his own mentee for alleged fraud, he found that no fraud had occurred (without, Anderson said, actually conducting an investigation). In both of these instances, employees who reported fraud through the tip line grew discouraged when nothing was done about the fraud.  This, in turn, contributed to their reluctance to use the tip line in the future.  Companies who use properly trained outside forensic professionals to investigate the frauds find that employees are more willing to use their tip lines.

Real or Imagined Retaliation:

In the case of the aforementioned head of purchasing who was charged with investigating alleged fraud of his mentee, the department head was aware that his mentee had been feuding with another employee.  He guessed (correctly as it turned out, Anderson said) that this other employee had reported the fraud.  He then began a campaign to terminate the reporting employee.  After this employee was terminated, rumors circulated that the departed employee had been terminated because she reported fraud on the company’s tip line.  This had a chilling effect on other employees who then became extremely reluctant to report suspected fraud.   If employees perceive that reporting on the tip line is not truly anonymous and/or that they might face retaliation, the tip line will fail.

Failure to Follow-Up with The Tipster:

There needs to be a mechanism to keep the tipster informed, first, that the investigation is ongoing (until it is resolved); and, second, to provide the employee with a general answer concerning the final outcome.

“Based upon your tip,” Anderson suggested this potential conversation could go, “we investigated, found it to be credible, and have taken visible (the specifics revealed depend upon advice from counsel) steps to resolve the fraud” or “We investigated and found no support or insufficient support to take action (the detailed reasons revealed depend upon advice from counsel).”

Without this type of information flow, the tipster may be left guessing as to whether anyone is investigating their allegation, and whether or not it is worth reporting suspected fraud.

It’s not just enough to implement a tip line to fight fraud.  Companies must make sure that they are adequately training and educating employees about the tip line; assigning properly trained outside professionals to investigate tips; preventing potential or actual retaliation for tip reporting; and keeping the tipsters informed as to the progress of the investigation.

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

About David Anderson & Associates

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

NOTE: David Anderson’s blog will be on hiatus next week for the holidays, but will return on Monday, January 2, 2017

Tips Still the Most Common Way Fraud Is Discovered

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 programs and forensic accounting services in Philadelphia and the Delaware Valley. 

Many people believe that if their financials are audited or reviewed, then any existing fraud will be discovered.  However, national statistics have consistently showed that only around four to five percent of frauds are discovered because of an audit or review.  In fact, nearly twice as many frauds are discovered purely by accident.

Instead, approximately 40 percent of frauds are discovered via tips.  These tips come in through telephone tip lines, web-based tip applications or via direct e-mails, phone calls or letters written to company officials.  Almost 50 percent of all tips come from company employees.  Another 40 percent of tips come from customers or vendors.

“Employees can be your first line of defense against fraud,” said Anderson, a Certified Fraud Examiner. Employees may see fraudulent or suspicious activity, but may be reluctant to be identified as the source of a tip, either because they fear retribution from other employees or because they’re not absolutely sure that fraud is occurring.”

So how do you encourage employees to come forward?  The best way is with an anonymous tip hotline or web-based tip application.

“Employees are far more willing to report illicit activity if their anonymity is protected,” Anderson said. “The anonymous tip hotline provides them with the vehicle they need to do the right thing and bring the fraud to the attention of people in charge.”

Companies do not have to set up the tip hotline or web-based application themselves, Anderson said. Third-party companies will step into set up and operate the hotline or applications for a reasonable fee and will maintain the employee’s confidentially.  In fact, having an outside party manage the hotline further assures employees their identity will not be revealed to anyone other than designated parties by something they say or by speaking with someone who recognizes their voice.

Companies that provide tip hotlines for their employees typically find both the duration of fraudulent activity and amount of the losses are reduced by 50 percent.

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

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

About David Anderson & Associates

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

Look for Fraud in Every Corner of Your Business

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.

When asked to cut costs during a recent business downturn, the Director of Operations at a large national financial services firm did a good job.

A very good job, in fact.

It was such a good job that he saved the company more than $150,000 a year by centralizing the nationwide purchase of office supplies.

The problem was, the company only saw $50,000 of those savings each year as the Director pocked the other $100,000 for himself.

“The fraud perpetrated by this trusted employee was ingenious in that the very program he initiated to save the company money was, in fact, the same program that allowed him to siphon a significant amount of money out of the company and into his own hands,” 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 company was thrilled that the program performed as well as the Director said it would.  There was not a single person in the company who had any reason to suspect illicit activity.”

The fraud investigation found that the Director of Operations could set the wheels in motion on the fraud from the very beginning.  He negotiated a deal for a significant discount on office supplies with a major office products company that would become the sole supplier of office products for the company’s more than 100 offices in all 50 states, Anderson said.  He then set up a system that allowed each office to submit a requisition for office supplies monthly.

As the requisitions came in each month, the Director consolidated them into a single order with deliveries scheduled for each office.  He then used the monthly invoice from the office products supplier to assign costs to the applicable offices and forward the approved invoice to the corporate accounts payable department for payment, 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.

During the fourth year of the program, a newly hired accounts payable clerk was processing the latest invoice when she noticed an oddity.  One of the shipments had been delivered to a small eastern Montana town that was near her own hometown, but it was charged to the Helena office more than 300 miles away.

Anderson said the clerk reported the discrepancy to the Corporate Controller, who contacted the Helena office to inquire about the shipment.  The Helena office manager denied any knowledge about the shipment and denied receipt of the items shipped.  Suspicious, the Controller checked all the shipments on that month’s invoice and found that while some shipments went to company offices, many them went to locations nowhere near company offices.  He took the information to senior management and a forensic accounting expert was engaged to conduct a comprehensive fraud investigation.

What the fraud investigation uncovered — and the Director of Operations admitted — was that once the agreement with the office products supplier had been negotiated, the Director set up his own website to sell office supplies at discounted prices.  As buyers placed orders and paid for them through the website, the Director forwarded the orders to the office products supplier to fill.  When the monthly invoice arrived from the supplier, the Director assigned the cost of each invoiced shipment to the nearest company office.  So, the Helena office — the only office in Montana — was charged for all shipments to Montana, both those ordered by the office and those ordered on the website by unrelated companies or individuals in Montana.

The Director admitted to the forensic accounting expert that his website transactions exceeded more than $100,000 per year, meaning he had shaved $450,000 off the company’s office supplies expenditures over the three years, but stole $300,000 of that for himself.

“He really was very good at his job,” Anderson said.  “He also, unfortunately, was a crook.”

Had the alert accounts payable clerk not noticed the discrepancy with the Montana shipment, Anderson said the theft might have continued much longer.  He added that the entire scheme could have been short circuited simply by having the accounting department assign the invoice costs to each office instead of allowing the Director of Operations to do so.

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.

Firm Forensically Finds Phony, Fraudulent Vendors

Posted by & filed under Blog Articles, 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 fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

A relatively successful and difficult to uncover scheme used by deceptive employees to steal money on the job is creating phony vendors. These non-existent suppliers receive payments for services never rendered or goods never delivered.  There are, however, fraud deterrence steps organizations can take to help find these fictional foes of your business.

“It really is a popular tactic among fraudsters,” 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’s not easy to root out phony vendors, but there are things you can do to help identify them.  Ultimately, you might need to seek professional help to make sure all your vendors really are legitimate.”

Anderson said it helps your efforts in finding out if you are paying phony vendors if you understand how an employee goes about building this house of cards in the first place.

The first thing a fraudster must do is establish a vendor name, either by creating a new one that has not been entered the accounting system or by using an existing vendor already in the system but for whom there has been no activity for a year or more.  Anderson said savvy fraudsters will invent service or supply vendors because it is more difficult to determine whether the services were performed and because supplies are sometimes expensed and not tracked in a company (When was the last time you checked your thumb tack supply?)

Next up, the fraudster sets up a bank account in the name of the phony company, Anderson said.  Because banks require proof that a company exists, fraudsters often use their own home address and phone number or a post office box in their town.  Finally, the fraudster creates and submits invoices from the phony vendor, arranges for the company to pay the invoices, receives and deposits the company’s checks, and withdraws the funds for personal use.

“There are two things you can do to see whether any of your vendors might be bogus,” said Anderson, a Certified Fraud Examiner who encourages companies, non-profits and government offices to enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  “These procedures are not foolproof, but they will uncover most phony vendors.”

First, Anderson said, run a vendor activity report for the past three or four years and identify both new vendors with less than a year of activity, as well as vendors with a gap in activity (for example, a vendor your organization stopped using in 2012 then again started paying in 2014).

Vendors who fit these criteria should be contacted to verify their validity, but the contact should be made by a manager who is not in the accounting department or in the department that purchased from these vendors, or by an independent third party such as a firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

Anderson said the second procedure is to analyze three pieces of vendor information against the same three pieces of employee information:  mailing addresses, phone numbers for both landlines and mobile phones, and for vendors with post office box addresses, zip codes.  In large cities, you also will need to look at the location of the post office box.

If an employee used a home address or phone number on the bank account for the bogus company or on the invoice from the phony company, the accounting system will show a match.

Post office box matches often warrant further analysis.  A payment that goes to a bank-owned post office box usually gets sent to the business center in larger cities.  If you find that the post office box is in a small town or in a non-business section of a large city, you will want to investigate further.

“This step in a fraud investigation can take a lot of time if it is performed manually,” said Anderson, who uses special data analysis software to significantly reduce the time it takes to match addresses, phone numbers or zip codes.

If you already suspect your organization is paying invoices to phony vendors, it is likely in the best interest of your company, non-profit or government office to hire a Certified Fraud Examiner to conduct a comprehensive fraud investigation.

“Don’t wait until you have paid out thousands and thousands of dollars to non-existent vendors,” Anderson said.  “Take the time to make sure every vendor in your system really is a vendor.”

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 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.

Proposed U.S. Treasury Regulation Could Significantly Change Business Valuations

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 business valuation, fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

For nearly 100 years, business valuators have used Fair Market Value to define the value of business interests.  Fair Market Value, as defined by the U.S. Treasury Department is “the amount at which a property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.”

Under the Fair Market Value methodology, explained Anderson, a Certified Valuation Analyst in Philadelphia, business valuators have recognized that interests in non-publicly traded businesses require discounts for lack of marketability and lack of control.

The lack-of-marketability discount recognizes that, to sell an interest in a non-publicly traded business, a seller would have to incur added costs – such as marketing costs and business brokerage fees, due diligence costs, business “clean-up” costs, and opportunity costs due to the length of time it will take to sell the business interest.  These expected costs are incorporated into the discount for lack of marketability.

Similarly, the lack-of-control discount recognizes that a buyer of a non-controlling interest will not have the right to make the company pay dividends; force liquidation; determine compensation, especially to officers and shareholder employees; and control expenditures that may benefit other shareholders.

Accordingly, a buyer of a non-controlling interest would expect to pay less for that interest.  This price differential is incorporated into the discount for lack of control.  The combined discounts for lack of marketability and lack of control typically reduce the Fair Market Value of a business interest from the proportionate value by between 15 percent and 70 percent.

Business valuators have used these Fair Market Value principles to value business interests subject to federal estate, gift, and generation-skipping transfer taxes.  Tax planners have long used such valuations as part of plans to transfer interests between older and younger generations of family-owned businesses to maintain family continuity.

Now, the U.S. Treasury has proposed an entirely new methodology to apply to these transfers.   The proposed change in Internal Revenue Code section 2704 would replace Fair Market Value with “Minimum Value,” which essentially is the value of the business interest without applying either the discount for lack of marketability or the discount for lack of control.

Why is the U.S. Treasury Department proposing these changes?  Primarily because certain Treasury officials believe 1) the normal costs of selling a non-publicly traded business interest are eliminated when transferring such interests from one family member to another, and 2) because family members usually will act in concert – a non-controlling interest that is part of a family whose total interests provide control – and will not experience the same limitations as a non-controlling interest that is not part of such family.

Business valuators are concerned this proposed regulation is not only in conflict with the existing U. S. Treasury definition of Fair Market Value, but also could create the potential for multiple conflicting values for the same business interest.

For example, suppose a business owner wanted to gift 10 percent of his stock to his son and another 10 percent of his stock to a charity.  Under the proposed regulation, the value of the gift to his son would be higher than the value of his gift to the charity.  Furthermore, estates could also face multiple conflicting values depending upon whether business interests would remain in the family or be sold to outsiders.

Business valuators also are concerned adoption of this proposed regulation could be the beginning of a change in the way that all business interests are valued.

The Treasury Department is holding a hearing this December 1 regarding this change.  Professional valuators from such organizations as the National Association of Certified Valuators and Analysts and the American Institute of Certified Public Accountants plan to speak at the hearing regarding their concerns about the proposed changes.

This column will keep you up to date as this issue continues to unfold.

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.

Meet the New Socially Engineered Fraud: The CEO Scam

Posted by & filed under Blog Articles, 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 fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

John Jenkins was a hardworking and loyal corporate controller for Zest Products, a mid-sized wholesale distributor of cleaning products.  So, when he received an email from Howard Robertson, the CEO – who was out of town at the time – directing him to immediately wire $40,000 to a new vendor, he unhesitatingly did so, and confirmed it in an email.  It was only after Howard returned from his trip that he questioned John’s email.  They both came to the realization John had been duped by a new type of socially engineered fraud – the CEO scam.

This past April, Anderson, a Certified Fraud Examiner in Philadelphia, wrote a blog about socially engineered frauds.  In it, he discussed how these frauds are primarily perpetrated through the phone or emails which seek to obtain passwords or other private/personal information that the scammer can use to exploit the victim. The CEO scam works in much the same way.

The CEO scammer begins by calling the company – and/or visiting its website – to obtain information about the CEO and the firm’s financial and accounting staff to discover who might have access to bank accounts.  Included in this information are the email addresses of the individuals who will be scammed.  The scammer also may call or email the CEO to determine when the CEO is out of the office. Think how many of us post an automatic “out-of-office” email response when we are away.

The scammer next “spoofs” the CEO’s email address – in the example offered above, the scammer could have used easily obtainable spoofing software to make it appear as if the email came from Howard – and sends the email request to the target, requesting an immediate wire transfer of funds.  Sometimes, the scammer will embellish the email with a discussion of how this is part of a top-secret project – such as secret negotiations to buy another company, or to sell part of the company, or for development of a new product line. This embellishment is meant to further hide the fraud. While most CEO scams are one-shot deals, some scammers may try this multiple times to see how long it might continue to work.

Here are some basic steps to help prevent your organization from being victimized by the CEO scam:

  • Make sure your CEO, other senior executives and accounting/financial staff are aware of the scam.
  • Add additional controls to any wire transfer requests. For example, if Zest Products had a procedure that required the controller to verbally confirm the request with Howard – by, for example, calling Howard’s cell phone – the scam would have been discovered before it could be completed. Other controls can include requiring signed requests for all wire transfers, or for those over a certain dollar amount.
  • Advise employees to not reveal the CEO’s schedule or location to unknown individuals, and never in response to an email. This means that if they do send an email response, they should do so by composing a new email message and not just hit “Reply.”
  • Consider adding additional security software to verify the actual sending address of incoming emails.

Taking these few precautions can make your company less vulnerable to the CEO scam.

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

About David Anderson & Associates

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

Substitution Schemes and How to Avoid Them

Posted by & filed under Blog Articles, 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 fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

Although most fraudsters go after cash because it is easier to misappropriate, more and more organizations are being hit with misappropriation of inventory and fixed assets (equipment, furniture, computers, vehicles, etc.).

In this article, Anderson, a Certified Fraud Examiner in Philadelphia, focuses on one key type of such misappropriation – substitution schemes.  Simply put, he explains, the fraudster in these schemes substitutes a less expensive item of inventory or a less expensive fixed asset for the actual item, and then sells the misappropriated item for personal profit.

Here are some examples of substitution schemes:

  • The Parts Department manager of a large auto dealership purchased cheaper aftermarket auto parts and substituted them for the auto parts purchased from the manufacturer. He then sold the manufacturer’s parts to other auto dealers, pocketing the cost difference.
  • The Technology manager at an advertising agency was responsible for implementing a computer replacement program that required him to replace existing high-end Apple computers with new ones every two years. He was supposed to remove the advertising and design software from each replaced computer and sell it to a used computer dealer.  Instead, he purchased cheap, older-model used Apple Computers, substituted them for the replaced computers (which were then sold to the used computer dealer), and sold the replaced high-end computers (with the advertising and design software still on each computer) via a website he set up.
  • A trusted employee at a commodities broker was given access to the company’s precious metals safe, and over time replaced dozens of 10-ounce platinum bars (worth approximately $10,000 each) with 10-ounce silver bars (worth approximately $180 each). Part of the reason he could get away with this substitution scheme was that the bars were stacked, looked almost the same to the casual observer, and he made sure that the top several bars were platinum ones.
  • A Fortune 1000 company furnished its New York City sales office with over $500,000 worth of artwork. Although the company was audited, because there were no financial transactions handled by the New York City sales office, and because its total fixed assets (including the artwork) were low relative to the company’s total fixed assets, the auditors never even visited the New York City sales office.  Responding to a tip provided on the company’s fraud hotline, forensic accountants found that employees of the New York City sales office had substituted cheap artwork (including, in one case, a paint-by-numbers piece that had been painted by a child) for the more expensive artwork.  Most of the replaced artwork had been sold off by the employees, although several pieces were found in their homes.
  • The owners of a financially failing paper products company removed tens of thousands of dollars of paper products from their boxes, filled the boxes with trash and used paper, and resealed the boxes. After the bank took over the failed company, it hired an auctioneer to sell off the boxes of inventory.  Only after the auction did buyers discover that they (and the bank who had to reimburse them for their purchases) were the victims of a substitution scheme.

So, how can your business avoid becoming the victim of a substitution scheme?  Here are some basic steps:

  • For inventories, implement a scheme of classifying inventory items by their relative value and frequency of sale. High dollar and high volume medium dollar inventory should have the top classification, followed by medium dollar and high volume low dollar inventory, and at the bottom, low dollar inventory.  Employees from a separate department (usually the accounting department or, if it is not practical to use internal employees, from an outside company such as a forensic accounting firm) should conduct periodic physical checks of the inventories based upon the classification.  For example, checking the highest classification biweekly or monthly; checking the middle classification bimonthly or quarterly, and checking the lowest classification at least annually.
  • For fixed assets, institute a fixed asset tracking system. Under such a system, each fixed asset is tagged with a bar coded label.  The system will have a database that separately identifies each fixed asset with date purchased, description of the fixed asset, purchase price, location of the fixed asset and the bar code label number.  Then, as in the above inventory checking methodology, institute a periodic checking of fixed assets based upon dollar values (highest dollar value items most frequently, lowest dollar value item least frequently).  This regular checking should include retired or replaced fixed assets that are still on the books.
  • For fixed assets that are being disposed/sold, again have employees from a separate department or third party company inspect the assets prior to sale to ensure that the assets being sold are the correct ones, and are in the condition the company expects.

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

About David Anderson & Associates

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

Take Some Time (Off) to Help Prevent Fraud

Posted by & filed under Blog Articles, 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 fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

While your fraud deterrence program should be on the job 24/7, you should require your employees to regularly take vacations.

It’s not only good for their emotional health and morale, but also a key anti-fraud component in your firm’s financial safety program.

Industry experts report a mandatory vacation policy reduces an organization’s median dollar loss to fraud by 33.3 percent and cuts the median length of time a fraud occurs by 40 percent, 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.

“Fraudsters work very hard to conceal their fraud,” Anderson said. “It requires a great deal of time and attention on a consistent basis to maintain the cover-up.  Very often, an employee’s illicit activities are uncovered only when he or she is on vacation or out sick.”

In fact, it is the very act of maintaining the cover-up that makes these employees seem like the most loyal, dedicated, hard-working employees on the payroll.

“They never miss a day of work,” said Certified Fraud Examiner Anderson. “They never take vacation.  They’re often the first ones at the office in the morning and the last ones to leave at night.  They work evenings, weekends and holidays.  They even come to work when they are sick.  From all outward appearances, they are an owner or manager’s dream employee.  What they really are doing is working hard to hide the fraud.”

Two recent fraud cases illustrate how a mandatory vacation policy can separate dream employees from fraudsters.

  • In one case, an employee created a phony service vendor with a phony address. The employee then produced phony invoices for non-existent services that the company paid.  At work, the employee intercepted the check before it was mailed and then deposited it in a bank account set up by the employee.  The fraudulent activity was discovered when the employee took a vacation day on the day a check was mailed to the phony vendor.  When the envelope was returned as undeliverable, a manager tried to contact the vendor and discovered that not only the address, but also the phone number was phony.  A fraud investigation ensued, and the employee was caught.
  • Another case involved a manager who was engaged in a skimming scheme — intercepting and diverting cash payments before they were entered into the company’s accounting system. The manager went on vacation, forgetting that he had left incriminating evidence in his desk drawer.  The manager filling in for him found the incriminating evidence and turned it over to senior management.  In this case, Anderson was engaged to perform a comprehensive fraud investigation and found that hundreds of thousands of dollars had been diverted by the fraudster.

“Forensic accountants love vacations,” said Anderson, who recommends every organization enact and maintain a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. “All sorts of fraudulent activities can surface during an employee’s absence.”

Anderson said most anti-fraud experts recommend employees be required to take at least one full week off from work and that their work activities be covered by someone else while they are gone.  This simple step prevents an employee from covering their tracks, he said.

Do your employees, and yourself, a favor; enact a mandatory vacation policy.  They will return to work more relaxed, and you can relax a bit as well because you will have instituted the most pleasant of anti-fraud controls.

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

About David Anderson & Associates

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

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

Posted by & filed under Blog Articles, Business Valuation, Company News, Litigation Support.

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley. This is the second of two blogs on how to accurately and fairly calculate financial damages and losses.

The valuation of damages is designed to put the harmed party back into the same economic position that would have existed if the harm had not occurred. The most difficult part of that equation is to project the economic conditions one would have expected without the harm. An analysis of historical results is often used to assist in making that forecast.

In my last blog post, I discussed the pros and cons of four of the most commonly used methods to analyze a series of events, namely the mean, the median, exponential smoothing and regression analysis. This post will present two examples and show how each method impacts the damages calculation under each.

Our first example involves projecting damages from the theft of customer lists when subsequent sales show an upward trend:

Hypothetical ABC Co. is a distributor of household cleaning products to small retail stores. Although sales and profits fell during the beginning of the financial crisis in 2007, since then both have steadily increased.

At the beginning of 2011, the national sales manager left ABC and took with him all of the contact information for ABC’s customers. He then went to work at a competitor and ABC experienced a drop in sales and profits. ABC has sued to recover damages from 2011 for lost profits caused by this theft of customer lists.

Net profits from 2007 through 2011 were:

chart2

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

Mean: The average of 2007 to 2010 profits is $20,000 (the sum of the four year’s profits divided by four).

Median: There are two midpoints – ($5,000) and $35,000 – so the median would be the point halfway between the two, or $15,000.

Exponential Smoothing: Applying weights to each of the four years (1 for 2007, 2 for 2008, and so on) and then dividing the total by 10 – the sum of the weights – yields a projection of $44,500.

Regression analysis: There is a clear upward trend that would imply that 2011 profits should be higher than previous year’s profits. Regression analysis yields a projection of $142,500.

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

Our second example projects damages from the theft of customer lists when there are fluctuating levels of Profits:

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

chart3

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

Mean: The average of 2007 to 2010 profits is $3,750.

Median: The median would be the point halfway between ($10,000) and $50,000 or 20,000.

Exponential Smoothing: Yields a projection of $5,500.

Regression analysis: Yields a projection of $12,500.

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

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

If you require the services of a business valuation expert 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, 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, a Certified Valuation Analyst and a business valuation expert in Philadelphia.