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

Posted by & filed under Blog Articles, Business continuity, Company News, Forensic Accounting, 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 first of two blogs on how to accurately and fairly calculate financial damages and losses. 

When calculating damages for future periods – such as for lost profits, loss of income in wrongful death cases, etc. – experts are often charged with expressing an opinion as to what would happen in the future but for the wrongful act. These projections typically rely upon either industry trends or on the historical operating results of the injured party. Four of the most commonly used projection conventions when relying upon the operating results of the injured party are: the mean, the median, exponential smoothing and regression analysis. This blog post will define each of these conventions and discuss the pros and cons of each.

The Mean

The mean describes the central tendency of a set of numbers and is calculated as the arithmetic average. When there is only a limited amount of historical data available and no clear trend of growth or decline exists, relying upon the mean may be the most reliable method to project future periods. However, if more historical data is available and/or there is a clear trend of growth or decline shown in the historical data of the injured party, then using the mean will render projections that are less reliable or indicative of the future than other projection conventions and will be difficult for the expert to defend.

The Median

The median also represents the central tendency of a set of numbers, but in this convention it is calculated by reference to the middle number after the set of numbers are arranged in order by value from highest to lowest. Because the inclusion of extreme outlying values (e.g., if the historical data is 5, 6, 8, 9, 40) can render distorted projections, relying upon the median may be the most reliable convention to project future periods. However, once again when there is a clear trend of growth or decline, using the median will produce projections that are less reliable than exponential smoothing or regression analysis.

Exponential Smoothing

The mean and the median conventions treat each observation equally. The exponential smoothing convention (also known as weighted averaging) assumes that the oldest observation should receive the least weight and the most recent observation should command the most weight in projecting future performance. It applies a weighting factor to each historical observation and then calculates an arithmetic average of the weighted historical observations.

For example:

david-for-10-17-16

 

Use of exponential smoothing can be particularly effective if sufficient historical data exists and there are no extreme outlying values.

Regression Analysis

Regression analysis uses mathematical calculations to fit a line or curve to a set of historical numbers. The more common form of regression analysis used to project future periods is known as trend-based regression analysis or least squares analysis. This methodology seeks to fit a straight line to a set of historical numbers and then project future periods along that line. Like exponential smoothing, regression analysis can be particularly effective if sufficient historical data exists and if there are no extreme outlying values.

When calculating future damages based upon historical information, experts may rely upon a variety of conventions and projection methods. This post has discussed four of the most commonly used conventions – the mean, the median, exponential smoothing and regression analysis. In the second part of this two-part series, I’ll provide specific examples and show how each method impacts the damages calculation under each example.

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.

To Survive a Disaster, Have a Recovery Plan in Place

Posted by & filed under Blog Articles, Business continuity, Disaster Recovery, Forensic Accounting.

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.

Hurricane Matthew, in addition to tragically killing more than 900 people this past week, is believed to have caused between $4 billion and $6 billion in damage in the Caribbean and southeastern United States.

Yes, that’s billion with a “B.”

Countless buildings – including many homes and businesses – were destroyed and while most homeowners and business operators here in the U.S. probably had insurance to cover the financial loss, what about the loss those businesses suffered involving sales orders, customer lists, software programs, business contracts, and other critical documents and data?

A well-prepared, up-to-date disaster recovery program can help a firm stay in business or get back to business sooner than companies without such plans in place. As high as 80 percent of companies affected by a disaster never reopen or shutter their doors within two years of reopening.

“The businesses that do survive are the ones who prepared in advance for something they fervently hoped would never happen,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, including development, implementation and management of comprehensive contingency and disaster recovery plans.  “Creating a business continuity plan is just smart business.  It greatly enhances the chances that your business will survive the disaster and that your livelihood — and that of your employees — will be protected.”

Anderson said some business owners think they are covered as long as they have purchased insurance and backed up their computer files.  But a comprehensive contingency and disaster recovery plan covers myriad details of a business’ operations, some of them not always obvious.  And every business, no matter how big or small, needs to have a business continuity plan in place, Anderson said.

Can your business survive a disaster?  Ask yourself these questions:

  • Are both your electronic and paper business records protected? Is vital information backed up in case a computer hard drive crashes?
  • If one or more of your offices or production facilities are severely damaged or destroyed, where will you relocate?
  • What steps need to be taken to resume operations and how fast can you be up and running again?
  • Do your employees know what to do and where to go?
  • Do you have adequate insurance to rebuild your business?
  • How do you assure your customers will keep paying you?
  • Will your vendors continue to extend credit to you?
  • How will you replace key employees injured or killed by the disaster?
  • Are you prepared with step-by-step procedures to react to different types and severities of disasters?

Having a comprehensive contingency and disaster recovery plan (business continuity plan) in place can minimize your financial loss and help your business survive a disaster.

If you are in need of a comprehensive contingency and disaster recovery plan or require 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.

Time Is Money, So Don’t Delay When Hiring an Expert Witness

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

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.

It’s surprising how many trial attorneys wait until the last minute to engage the help of forensic accounting experts for litigation support services.

Lawyers clearly understand the value such experts bring to their cases, said Certified Fraud Examiner David Anderson, but the timing of when an attorney brings in such an expert can have a direct bearing not only of the level of success, but also on whether the case is won or lost.

“The earlier a forensic accounting expert is called in to consult,” he said, “the greater the chances the expert will be able to contribute information crucial to winning.”

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, said forensic accounting experts who are engaged too late in the process often cannot have the impact on the case the attorney needs.

Recently, Anderson said he was asked by an attorney to provide expert witness testimony in Philadelphia for ongoing litigation.  The attorney’s client, a minority shareholder in a medium-sized distribution business, claimed the majority shareholders were taking outsized salaries and benefits; paying significant salaries and benefits to family members who performed little or no work; paying exorbitant office rent to entities owned by the majority shareholders; and running personal expenses through the business.

The attorney said he and his client expected to resolve the litigation without going to trial, but that didn’t happen and, when Anderson was called in, the deadline for an expert report was just two weeks away. Complicating matters was the fact that discovery had closed several months before.

One potential positive, according to the attorney, was that the minority shareholder had the company’s federal income tax returns for the past five years. This, he told Anderson, should be enough for the forensic accountant to create a comprehensive report detailing the transgressions of the majority shareholders.

Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, agreed to examine the tax returns and let the attorney know that same day if he would be able to produce the rushed report that was needed.

“Unfortunately, certain schedules were missing from the returns, and the information presented was in summary form – merely totals of overall expense categories with no specifics, said Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley.

“For example, individual employee wages were not shown and there were no details for benefits, travel, professional fees, meals and entertainment and other categories the minority shareholder suspected were being inappropriately paid by the company,” he said, adding that “a $50,000-line item for ‘Miscellaneous Expenses’ appeared on one year’s return, but with no breakdown.”

Without the full accounting detail that is often not found in the income tax returns, but instead in the company’s accounting records and detailed financial reports, Anderson was unable to produce the comprehensive report the attorney needed to assure a win in the case.

Engaging a forensic accountant for litigation support services at the very beginning of a case can help attorneys establish the foundation of the case and determine the most effective course for the litigation, said Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.

Forensic accounting experts such as Anderson provide litigation support services and expert witness testimony for both plaintiffs and defendants in civil cases, as well as both prosecutors and defense attorneys in criminal cases.

Early involvement allows the expert witness to provide advice in areas such as:

  • Assistance in identifying and formulating arguments for the complaint (if for the plaintiff)
  • Initial evaluation of the plaintiff’s claims and identification of the information or testimony needed to support those claims
  • Assistance with preparation of discovery requests and interrogatories, including identifying the format(s) for delivery of the requested information (for example, if requesting detailed accounting system information, identifying acceptable formats for the delivered information so that it can be analyzed in a timely and cost-effective manner)
  • Analysis of the complaint and assistance with identifying arguments for the response (if for the defendant)
  • Assistance with identification of individuals to be deposed
  • Preparation of a report identifying and calculating damages or business value
  • Follow-up on information delivered in response to discovery requests and responses to interrogatories in order to identify either missing information or additional information needed
  • Assistance with development of questions for the deponents, including for the expert witness’s own deposition
  • Preparation of rebuttals for opposing expert reports (if necessary)

“Engaging a forensic accountant from the start provides expert analysis of your case before the discovery and deposition phases are closed,” Anderson said.  “In any financial dispute, the insights and advice of a forensic accounting expert can make the difference between winning and losing the case.”

If you 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, 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.

Keeping Non-Profits and Charities Safe from 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 non-profit organizations and charities spend most of their time helping people and providing valuable services, fraudsters often are busy helping themselves to the valuable financial assets of these groups.

The leaders of these houses of worship, youth sports teams, volunteer fire companies and other such groups, in most cases, focus on their mission and leave the financial operations to volunteers, 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.

Since these volunteers, Anderson said, often have other commitments, they generally are able to devote only a limited amount of time towards these duties. This, he said, puts these organizations at a much higher than normal risk of fraud.

As a result, they must rely on a few trusted employees and volunteers to oversee their operations and to handle their finances. With such limited resources, explained Anderson, a Philadelphia forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, most small to medium-sized non-profits are not able to effectively implement the necessary internal financial and accounting controls to adequately protect against fraud.

Furthermore, he added, most organizations such as these are often unable to afford an audit or other external examination of their books and records.

The result is that certain unscrupulous employees and volunteers can take advantage of these weaknesses and embezzle funds.  Here are just three examples:

  • The bookkeeper for a Montgomery County, Pa., church was convicted of embezzling more than $150,000 from the church.
  • A 45-year non-paid member of a Chester County, Pa., volunteer fire company was convicted of embezzling more than $300,000 from the fire company.
  • The chief operating officer of a Philadelphia non-profit for the homeless was indicted for charging more than $75,000 in personal expenses on the non-profit’s credit cards.

So, what can a small to medium-sized non-profit organization do in order to protect itself from fraud?  Here are a few suggestions:

  • Arrange for at least two members of the internal financial review committee to receive copies of the organization’s bank statements directly from the bank before any reconciliation takes place;
  • Require all checks to receive two signatures;
  • Seek help from volunteers who are in government or law enforcement, or who are attorneys, to conduct background checks for new and existing employees (in accordance with the law);
  • Create an internal financial review committee of three or more knowledgeable people (with backgrounds in forensic accounting, accounting and/or business finance) to review the finances of the organization on a regular basis, such as quarterly or semi-annually.(Steve, make this the first “bullet” point)
  • Whenever large amounts of cash are collected (for example, weekly offerings collection or concession stand sales), require two or more people to jointly oversee the counting of the cash and preparation of deposit slips;
  • When employees of volunteers resign or leave their positions, immediately remove them from computer system access and from bank signatory cards/credit cards/debit cards, etc.;
  • If fraud is suspected, immediately engage outside counsel. Such counsel can best advise the organization as to the steps to take to protect itself from potential litigation and to properly investigate the suspected fraud, which may include retaining a forensic accountant to conduct the investigation.

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.

Need short-term help with accounting issues? You might need an outsourced CFO

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

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 number of businesses in the small-to medium-size range often have an accounting manager or controller take care of routine financial matters. For the vast majority of transactions, this can suffice.

However, what happens if a short-term situation arises and these highly competent, hard-working individuals do not have the level of skills required to deal with this change? What happens when the more specialized services of a Chief Financial Officer (CFO) are needed, but the company can’t afford to pay for this type of expertise, or doesn’t need a such a position filled on a permanent basis?

That’s an easy question to answer: Bring in an outsourced CFO.

“Good, experienced controllers and accounting managers are very well suited for activities such as preparing monthly, quarterly and annual financial reports; paying vendors; collecting accounts receivable, and handling payroll and payroll tax reporting,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of outsourced CFO services and other forensic accounting services in Philadelphia and the Delaware Valley.  “But for more complex, specialized issues, a company really needs the expertise and knowledge of a CFO.”

These activities might include such outsourced CFO tasks as:

  • Obtaining bank loans and/or lines of credit
  • Raising additional funds through issuance of equity or hybrid securities
  • Investor relations
  • Insurance, including liability and property and casualty insurance
  • Employee benefits, including health care insurance, dental, vision, 401-K plans, profit-sharing plans, etc.
  • Cash management and short-term investments
  • Human Resources issues, including employee manuals, policies & procedures, training, job succession, etc.
  • Regulatory and compliance reporting of both financial and operational matters
  • Budgeting and long-range financial planning, including strategic plans
  • Information technology, including computer security, systems life-cycle planning, systems maintenance and enterprise software
  • Disaster recovery planning
  • Assisting company ownership in exit strategy planning

While these are the types of matters that are best left in the capable hands of an experienced CFO, Anderson said bringing aboard a full-time CFO is often not an option for small- to medium-sized businesses.

“CFOs can be not only difficult to find, but also quite expensive,” said Anderson, a forensic accounting expert in Philadelphia who provides outsourced CFO services in Philadelphia and the Delaware Valley.  “Many CFOs also expect that part of their compensation package will include an ownership interest in the company and that is something most business owners are reluctant to offer.  The outsourced CFO is the perfect solution for a small- to medium-sized businesses.”

An outsourced CFO is hired on a contract basis for as long or short a time period as the business needs, Anderson said.  Some businesses will engage an outsourced CFO only for the time it takes to complete specific projects.  Other companies contract with an outsourced CFO for an extended period of time to work a certain number of days per week or hours per month, he explained.

“Using outsourced CFO services in Philadelphia or anywhere in the country gives small- to medium-sized businesses access to the knowledge and experience they need whenever they need it,” said Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley.  “Companies get all the benefits of having a CFO on staff, but they don’t have to pay top-dollar salary and compensation packages that include benefits and bonuses, nor do they have to worry about relinquishing a partial ownership interest in the company.”

If your business is in need of outsourced CFO services in Philadelphia and the Delaware Valley or any other forensic accounting services in Philadelphia, 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 in Philadelphia and the Delaware Valley.  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.

Arbitrating Inheritance Battles an Important Role for Forensic Accountants

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, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

“She has more pie than I do!”

“It’s his turn to do the dishes!”

“Why do they get to stay up late and I don’t?”

Sound familiar? They’re typical kid arguments, especially prevalent in multi-child families. Eventually, Mom or Dad or Grandma or Grandpa would need to jump in and mediate. Eventually, siblings outgrow such obsessive and possessive behavior and learn to get along and share.

Or do they?

One of the least recognized and, in ways, most valuable services of a forensic accountant is helping families fairly and equitably settle trust or estate issues.

“Unfortunately, there rarely is a family member who can step in as the ultimate arbiter to settle the conflict,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm.  “Instead, the unhappy beneficiaries often turn to the courts to resolve the dispute, ending up in litigation that can be very contentious and very expensive.”

Anderson said, in many cases such as these, families turn to a forensic accounting expert to analyze the management and administration of the trust or estate and to account for the assets and transactions.

“Perhaps one or more beneficiaries, who often are siblings or other relatives, believe the fiduciary (trustee or executor) is mishandling the trust or estate’s finances, is improperly taking funds from the trust or estate, or has improperly or unevenly distributed assets or income of the trust or estate.

“A forensic accounting expert has no stake in the matter and is not a family member.  He or she is concerned only with the facts of the matter at hand,” said Anderson, who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “As a result, both the beneficiaries and the fiduciary can be confident that the forensic accountant’s report will be independent, fair and unbiased.  Engaging a forensic accounting expert to settle the conflict is less contentious and less expensive.”

Anderson said a forensic accountant’s report typically identifies the specific documents that govern the administration of the trust or estate and cites specific passages from those documents regarding management of assets, distribution of funds, payment of fees to and expenses of the fiduciary, and related matters.  The report identifies the period of time examined, provides a schedule of assets of the trust or estate at both the beginning and end of the time period, and lays out (in either detail or summary form) the transactions of the trust or estate.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, said the report outlines the forensic accountant’s findings regarding the fiduciary’s management of the trust or estate relative to the trust documents, and whether any transactions are in conflict with the governing documents.  The forensic accountant will review the report with the beneficiaries and the fiduciary and answer any questions regarding the findings.

While the cost of engaging a forensic accounting expert to analyze the handling of a trust or estate is usually significantly less than the cost of actual or threatened litigation, it is the lessening or neutralizing of the emotional aspects of the dispute that can be even more appealing to families.

“A forensic accountant’s involvement reduces the contentiousness,” Anderson said.  “Family members tend to acknowledge that the dispute is in the hands of a professional whose independent analysis will bring peace of mind to everyone involved.  The forensic accountant is, in effect, the ultimate arbitrator we grew up with.  It’s the next best thing to Mom and Dad.”

Anderson recommends that beneficiaries and fiduciaries engage the services of a forensic accounting expert at the first sign of a dispute — before the matter escalates and family relationships are destroyed.

“Don’t let suspicions of mismanagement fester until things have gotten so bad that there is no hope of repairing the relationship,” said Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “Family is important.  Bring in a third party as soon as a conflict arises.”

If you require 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.

Forensic Accountants Help Keep Divorce Proceedings Equitable

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

The end of a marriage never is easy. Besides the obvious emotional issues and possible child custody decisions, there are assets that need to be equitably divided, whether they were brought into the relationship or were earned during the marital period.

In such situations, a forensic accounting expert can help devise and navigate the route to a financial settlement that works for all parties involved.

“Marital dissolution can be a long, involved and costly process,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and other litigation support services in Philadelphia and the Delaware Valley.  “A marital dissolution accountant is uniquely qualified to analyze even the most complicated portfolio a couple can build during a marriage and help both sides resolve key financial issues.”

Anderson, an experienced marital dissolution accountant in Philadelphia and the Delaware Valley, said forensic accounting experts can assist in divorce cases in such areas as:

  • Identifying and valuing the couple’s assets at the date of marriage
  • Tracking and accounting for each spouse’s financial activities during the marriage
  • Identifying and valuing assets of the spouses at the date of separation or other applicable dissolution date
  • Searching for hidden assets or hidden income
  • Analyzing each spouse’s income and personal expenses to determine support and alimony
  • Accounting for post-separation transactions of each spouse.

“When couples wed, they each bring assets into the marriage,” Anderson said. “There may be securities, real estate, ownership interests in private businesses and other investments.  Or they may own a home or a vacation house, or perhaps cars, motorcycles, boats or airplanes.  And, of course, there is personal property, such as furniture, antiques, collectibles and artwork, to be considered.”

Anderson, a divorce accountant who provides such forensic accounting services in Philadelphia and the Delaware Valley as marital dissolution and other litigation support services in Philadelphia, said many states allow each spouse to retain the assets they brought into the marriage.

The problem, he said, is that in many marriages, some or all of the couple’s assets may have been sold during the marriage with the proceeds invested elsewhere, or the proceeds from the sale of one spouse’s pre-martial assets may have been commingled with funds of the other spouse.  Attorneys rely on forensic accounting experts to sort out these transactions and account for the assets each spouse brought into the marriage.

The analytical skills of a marital dissolution accountant also can be invaluable when couples use marital income to acquire new assets together during the marriage, or when they use marital income to invest in a business that one spouse brought into the marriage.  In the latter case, Anderson said, the spouse who was not involved in the business before the marriage would be entitled to share in the increased value of the business that occurred during the marriage.

Divorce accountants often are asked to identify and account for the couple’s total assets and to value them as of the date of separation or other applicable dissolution date as this information is crucial to the divorce settlement, Anderson said.

An already-complex marital dissolution can become contentious when one spouse accuses the other of failing to list certain assets or income.  In these cases, a forensic accounting expert will launch an investigation to determine if the assets or income actually exist, said Anderson, a marital dissolution accountant in Philadelphia.  The divorce accountant will examine public records, analyze both bank and investment account statements and review income tax returns for evidence of the missing assets or income.

One case in which Anderson served as a marital dissolution accountant providing litigation support services in Philadelphia involved a spouse who claimed her husband owned commercial real estate in Philadelphia.  By analyzing the couple’s income tax returns and brokerage accounts, Anderson was able to identify a property tax deduction that was taken on the income tax return, as well as regular monthly payments made to a brokerage account.  He said the payments did not come from either spouse’s employer or from any of the couple’s known bank accounts.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, discovered that the husband’s limited liability company owned a building in Philadelphia and that the checks being sent to the brokerage account were rent checks from the building’s tenant.

Forensic accounting experts also are called on to analyze the income and expenses of each spouse to assist the court in determining how much support and/or alimony one spouse must pay another.  A divorce accountant also may be needed to analyze income earned by the spouses after the date of separation, or other transactions involving marital assets that the spouses engaged in after the date of separation.

“Unwinding a marriage often can be a mind-boggling process involving complex financial matters that are best left to a forensic accounting expert to evaluate,” said Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “Putting the financial issues into the hands of a marital dissolution accountant can ease tensions in sometimes stressful situations and keep things moving toward an amicable resolution.”

If your divorce case would benefit from the expertise of 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.

Strangers in Strange Lands: Avoiding Fraud on Foreign Soil

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.

You are looking to expand your company by either opening an office or manufacturing facility abroad, or you want to start selling your products beyond U.S. borders.

There are, of course, many logistical factors to be considered, not the least of which is understanding which types of payments to foreign government officials are allowed and which are considered fraudulent.

“In today’s global economy, failing to understand the laws that affect business operations in a foreign country can land your company in a heap of trouble,” 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.  “There are laws both in the United States and in foreign countries that you have to be concerned about.”

A forensic accounting expert, Anderson said, can help you navigate this complex international maze and work with you to establish internal policies and procedures as part of a comprehensive fraud deterrence program. Such actions, he said, can protect your company from unwittingly participating in fraudulent financial activities abroad.

Anderson offered as an example a U.S. company that wanted to open a new factory in Thailand.  Although the company’s product was sold in Great Britain and other countries, this would be the company’s first factory operation outside the U.S.

The factory was two months from opening, he said, when the general manager of the Thailand subsidiary called the U.S. parent company with the news that the provincial governor in Thailand had just told him there was a two-year backlog in approving factory licenses.  The provincial governor also said that if the company paid him a “fee” in cash, he would be able to expedite the process and issue the license by the time the factory was ready to open.

“The senior executive in the U.S. was in a quandary,” 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 company needed to get the factory open on time, but, if it made the payment to the provincial governor, was it breaking any laws?  Was making a payment to get a license issued faster a violation of the Foreign Corrupt Practices Act and, therefore, an act of fraud?”

The Foreign Corrupt Practices Act of 1977 and its 1988 amendments (FCPA) make it a crime, Anderson said, for a business or its officers, directors, employees, agents or shareholders to bribe a foreign official for the purpose of influencing that official in order to obtain or retain business. However, he said, the law does permit facilitation payments.

Facilitation payments are payments to foreign officials to expedite routine governmental actions — such as processing papers, issuing permits or other normal procedures — that the officials are bound to perform anyway.  Facilitation payments are not intended to influence the official’s decision, only the timing.  The payment to the provincial governor met the FCPA’s definition of a facilitation payment, meaning the company had no risk of violating U.S. law.

Unfortunately, the U.S. law wasn’t the only law the company had to worry about.  Because the company sold its product in Great Britain, they also were subject to the provisions of the United Kingdom Bribery Act of 2010 (UKBA), which holds that all payments to foreign officials — including facilitation payments — are illegal.

Under the UKBA, it doesn’t matter where the payment is made.  As long as a company does business in the UK, any facilitation payment in any country in the world is still illegal, Anderson said.  However, the U.S. company discovered that the UK agency charged with enforcing the law — the Serious Fraud Office — primarily focused on situations it deemed to be “serious or complex.”

Counsel to the U.S. company advised that “serious or complex” situations generally involved significantly large payments and/or multiple payments for the same purpose, neither of which was the case with the facilitation payment in Thailand.  Anderson said the company made the payment, documented and recorded it in its accounting system, received the factory license and opened the factory on time.

“Companies need to be careful when operating on foreign soil,” said Anderson, a forensic accounting expert with experience in both fraud investigations and fraud deterrence programs.  “As with the case of the U.S. company opening a plant in Thailand, you don’t necessarily need to have physical operations in a country to be subject to their laws.”

If your company operates in foreign countries or sells products overseas, or is thinking about doing so, it might be time to contact a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.   A forensic accounting expert can design a comprehensive fraud deterrence program that includes policies and procedures regarding financial activities in foreign countries, 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.

Untrustworthy ‘Trusted’ Employees Can Strike at Any Time

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.

Every company or organization has them: “Trusted” employees.

These are the long-time, seemingly loyal men and women whose work and tenure has earned them a high degree of trust from their employers/business owners.

However, said Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates, you never should forget that these “trusted” employees can pose a significant fraud threat to businesses and organization.

“They may be family members, employees who have worked their way up the management ladder over the years, employees who are hardworking and who put in long hours, and/or employees who have contributed to the past success of the business,” he said.

Because of this “trusted” status, Anderson said, business owners and senior managers tend to exert lesser oversight over these employees than they do over the typical employee.

Most “trusted” employees are worthy of the trust they have earned.  However, a number of other “trusted” employees have used the trust and lack oversight to commit fraud.  Over the past year, investigations of “trusted” employees conducted by David Anderson & Associates have identified the following frauds perpetrated on their employers:

  • Use of employers’ business credit cards to charge personal expenses
  • Use of expense reimbursements to have the business pay for personal expenses or non-existent expenses
  • Manipulation of payroll to take improper salaries and bonuses
  • Use of vacation, personal and sick days in excess of those earned
  • Running purchases for their own personal business through the purchase accounts of their employer, and having the employer pay for these purchases
  • Diverting customer cash payments to themselves, and covering up the diversion by manipulating the employer’s accounting system
  • Removing inventory from the employer’s warehouse, and covering up the diversion by manipulating the employers accounting system
  • Diverting customers and sales from the employer’s business to their own personal or a friend’s business
  • Selling the employer’s fully depreciated assets to a third party and pocketing the proceeds.

In each case, Anderson said, the employer had no fraud deterrence program in place.  These companies could have significantly reduced the likelihood of fraud occurring if management had instituted such procedures as:

  • Regular top management or third party consultant review of credit card statements and expense reimbursement requests
  • Regular top management or third party consultant review of payroll journals
  • Regular top management or third party consultant review of monthly bank statements and monthly financial statements
  • Regular periodic review of operations by top management or a third party consultant
  • Instituting an anti-fraud policy, disseminating it to all managers and other employees, and holding periodic training sessions on spotting and report fraud
  • Letting all employees know that top management does not condone fraud, and is actively watching out for it.

“Trusted” employees continue to be a problem for employers who provide reduced oversight to them.  However, Anderson said, by instituting relatively simple and relatively inexpensive fraud deterrence procedures, management can significantly reduce the risk of such “trusted” employees becoming untrustworthy.

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.

It’s Your Choice: Pay to Deter Fraud, Or Pay Fraud Losses

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

We rotate and change the tires on our cars, we have insurance on our homes, we try to eat healthy and stay active.

Why? To prevent bad things from happening in the future.

It’s the same for a business owner and business fraud, 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 makes much more sense, he said, to implement anti-fraud measures now to save you from incurring big losses later.

So, Anderson rhetorically asked, why don’t more businesses, non-profits and government offices implement fraud deterrence procedures?

“My experience shows that there are two main reasons more organizations don’t have fraud deterrence programs,” he said, “and they boil down to management not understanding how easily fraud occurs or how easily and cost effectively it can be prevented.”

Anderson said the initial issue is that business leaders don’t believe fraud ever could occur in their organization. Most managers feel their employees are trustworthy and loyal and also because they believe that they would inherently somehow “know” if fraud was occurring.  Secondly, he said, owners and executives think, incorrectly, that fraud deterrence programs are expensive and time-consuming, making the cost outweigh the benefit.

“In reality, given the appropriate opportunity, even the most trustworthy and loyal employees can find themselves under pressure to commit fraud,” said Anderson, a Certified Fraud Examiner.  “In fact, it often is the most highly trusted employee who turns out to be the fraudster.”

He said management is generally so focused on running its business that it has neither the time nor the inclination to examine financial details that might reveal evidence that fraud is occurring.

On the cost issue, Anderson said organizations need to understand that the median cost of fraud has been set by the Association of Certified Fraud Examiners at approximately $145,000 for each occurrence.  But basic fraud deterrence procedures – such as management review of financial reports; a fraud hotline; a code of conduct; mandatory vacations; job rotation, and surprise audits – cost significantly less than that.  Even with the addition of fraud deterrence training for managers and employees, the cost remains significantly lower than the median cost of just one case of fraud, he said.

“We all take preventative measures to forestall bad things from happening,” Anderson said.  “We brush with fluoride to prevent tooth decay.  If a faucet or pipe starts to leak, we call the plumber before it worsens.  And we spend $40 to change the oil and oil filter on our car to avoid paying hundreds or thousands of dollars in engine repair bills down the road.

“Establishing anti-fraud controls is the same thing,” Anderson said.  “If you engage a Certified Fraud Examiner to design a cost-effective fraud deterrence program for your organization now, you are greatly lessening the chances that you will be the victim of a more expensive fraud in the future.”

If you have reason to suspect that fraudulent activity is already occurring in your business, non-profit or government office, Anderson recommends that you immediately request a comprehensive fraud investigation be conducted by a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  The longer you postpone a fraud investigation, the greater your losses are likely to be, he 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 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.

An Overview of Business Valuation – Part V

Posted by & filed under Blog Articles, Business continuity, Company News, Marital Dissolution.

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 final installment of a five-part series in which Anderson reviews the basics of business valuation.

The process of determining the worth of a business is a complicated one.  A business valuation expert must undertake a series of preliminary steps to set the groundwork and then consider the value of the business from three very distinct approaches before forming a professional opinion as to the initial value.  With this process completed, there remains just one final step: considering potential adjustments to the initial value.

“The process is complex,” said David Anderson, 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.  “There are myriad factors that must be considered and weighed by the valuator to reach the point of establishing initial value.  But that initial value still is not accurate until possible adjustments to the value are taken into account.”

Anderson said business valuation experts must consider four types of potential adjustments:

  • Non-operating asset adjustments
  • Control adjustments
  • Marketability adjustments
  • Other adjustments

Non-operating asset adjustments involve assets and associated liabilities that are not part of the normal operations of a business, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley.  As an example, Anderson explained, a food processing company may own a collection of artwork that is not related to its business operations.  Or, a computer consulting firm may own an office building (with a mortgage) that it does not use, but leases out to other companies.

Valuators may remove these assets and liabilities from consideration during the business valuation process in order to more accurately assess the worth of the actual business operations, Anderson said.  But once the initial value of the business has been established, these assets and liabilities must be taken into account because they are owned by the business and therefore affect its overall value.

Control adjustments may be warranted if a business valuation expert is considering the value of some, but not all, of the shares of a business, Anderson said.  If the shares being valued would give a buyer control of the business, they carry a higher value than other shares.

For example, Anderson said, a buyer would have control of the company if either the shares are more than 50% of the total or they give the buyer more than 50% of the total voting rights (assuming a simple majority is all that is required).  However, if the shares represent a “minority interest” in the company, the buyer would not have control or significant influence in company operations.  Under that circumstance, Anderson said, the buyer is likely to demand a price adjustment known as a discount for lack of control.  The specific discount (usually a percentage of the price per share) is typically based on data from sales of shares in publicly held corporations.

Marketability adjustments come into play when privately held businesses are being valued, Anderson said.  Typically, there are no readily available public markets for privately held businesses.  As a result, it is more difficult to sell shares in a privately held business because it likely will take longer and cost more to find a buyer.

A buyer of shares in a privately held business, therefore, is likely to demand a price discount known as a discount for lack of marketability.  The specific discount (usually expressed as a percentage of the value of the business or of the price per share) is typically based on the valuation method(s) selected by the business valuation expert, information regarding marketability discounts of comparable companies, and the particular facts and circumstances of the business being valued.

Other adjustments that the business valuation expert must consider to determine if they are applicable include:

  • Built-in gains discount
  • Blockage discount
  • Key person discount (also known as personal goodwill discount)
  • Restrictive agreement discount
  • Investment company discount
  • Lack of voting rights discount

Once all of the potential adjustments have been applied as necessary, the business valuation expert can finally arrive at a final value for the business.

“As you can see, the process of valuing a business is quite involved,” Anderson said.  “When a business valuation is made for tax, divorce or litigation purposes, the best way to properly protect the rights of the persons for whom the valuation is being performed is to have the valuation conducted by a qualified, experienced business valuation expert who follows professional business valuation standards.”

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.

An Overview of Business Valuation – Part IV

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

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 fourth of a five-part series in which Anderson reviews the basics of business valuation.

Business valuation experts must undertake a series of preliminary steps to set the groundwork for determining the worth of a business.  Once those steps are complete, valuators must consider three very distinct approaches to valuing a business.

In earlier postings, David Anderson, principal of David Anderson & Associates, explained the first three steps of the business valuation process — determining the standard of value, deciding on the premise of value and normalizing financial statements.

In this fourth installment of the series, Anderson reviews the three most commonly used approaches to valuing a business:  the Income Approach, the Asset-based Approach and the Market Approach.

“Professional business valuators are required to consider all three approaches,” said Anderson, a business valuation expert in Philadelphia and the Delaware Valley.  “In the end, a business valuation expert must use his or her judgment to determine the best approach or combination of approaches to arrive at a business valuation that is as fair and accurate as possible.”

The most common approaches a business valuation expert will consider are the three noted below:

Income Approach values a business by using one or more methods to convert anticipated economic benefits (earnings or cash flow) into a single present amount.  There are two primary methods under this approach:

Capitalization of Earnings/Cash Flows Method, which is used when there has been a steady level of historical growth, and the

Discounted Earnings/Cash Flow Method, which is used when there have been fluctuations in historical growth and when the company can reasonably project earnings for the next five or more years.

Asset-based Approach values a business by calculating the value of net assets, which is the difference between total assets and total liabilities.  There also are two primary methods under this approach:  the Book Value Method, which calculates the net asset value as shown on the books of the business – typically at historical cost, and the Adjusted Net Asset Method, which adjusts the value of assets and liabilities to the fair market value as of the valuation date.

Market Approach values a business by comparing it to sales of similar businesses.  There are four primary methods under the Market Approach:  analyze transactions of comparable publicly held companies; analyze transactions of comparable privately held companies; analyze prior transactions involving shares of the company itself, and lastly, analyze the ability of the company to pay shareholder dividends and compare that to dividends paid by comparable companies.

“The specific methods used depends on the facts and circumstances surrounding the business being valued,” said Anderson, whose company – David Anderson & Associates – is a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley. “For example, if there are no comparable market transactions or an insufficient number to be meaningful, the Market Approach may not be useful.”

Once the value of the business has been set under each of the approaches, the business valuation expert must determine whether one of the values is the best representation of the true value of the business or if a weighted blend of the values provides a more accurate final business value, he said.

Anderson gives the example of valuing a startup business with little profitability.  The Income Approach might yield a very low value because the startup hasn’t had time to show historical growth, while the Market Approach might result in a considerably higher value based on the sale of comparable businesses.

“Under this scenario, some valuators would select the Market Approach as being most indicative of value and others might choose a blend of the Income Approach and Market Approach with a higher weight on the Market Approach,” he explained.  “It all comes down to the professional judgment of the business valuator, based on his or her experience and knowledge about the business being valued.”

At this point, the complex process of business valuation is nearing the end.  But there is still one major step remaining before a final determination on the worth of a business can be made: consideration of certain adjustments for non-operating assets as well as control, marketability and other adjustments.  Anderson will explore these adjustments in the next and final installment of “An Overview of Business Valuation.”

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.

An Overview of Business Valuation – Part III

Posted by & filed under Blog Articles, Business continuity, Company News, Marital Dissolution.

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 third of a five-part series in which Anderson reviews the basics of business valuation.

Determining the worth of your business can be quite complicated. Before the actual business valuation can begin, a number of steps must be taken.

“The value of a business often depends on the earnings it generates,” said David Anderson, a business valuation expert in Philadelphia and the Delaware Valley and principal of David Anderson & Associates.

“Small business owners” he said, “have a fair amount of latitude in choosing how they report the financial operations of their business, often selecting alternative accounting practices that lessen their income tax obligation.”

In two earlier posts, Anderson explained the first two steps of the business valuation process — determining the standard of value and deciding on the premise of value.  This third in a series of articles examines the steps a business valuation expert sometimes must take to bring a company’s financial statement on an equal footing.

Because of these alternative practices, he explained, a business valuation expert frequently needs to adjust the historical financial statements before implementing selected business valuation approaches and methods.  Making these adjustments is often referred to as “normalizing” the financial statements.

“Normalizing the financial statements should provide the valuator with a more economically realistic picture of the value of the assets and the financial operating results of the business,” Anderson explained.

These financial statement adjustments represent estimates and often fall into one of the three categories as noted below:

Comparability adjustments are intended to make the company more comparable to guideline companies or companies within the industry group that were used in comparative ratio analyses.  For example, if the company being evaluated used the last in, first out (“LIFO”) inventory method of accounting while the industry group uses the first in, first out (“FIFO”) inventory method, this adjustment would give a valuator a clearer picture of how the company’s financial statement compares to others in its industry.

Non-operating or non-recurring adjustments are removed from the income statement because they are either unrelated to the business operations or unlikely to recur in the future.  Non-operating assets or liabilities are elements of the balance sheet that are removed so a more appropriate value of the operating company may be determined.

These assets or liabilities are then added or subtracted to the resulting computed value to arrive at the total equity value of the company.  An example of these types of adjustments would be the costs associated with discontinuing a portion of the business.

Discretionary adjustments are those expenses that are usually under the sole discretion of management, or more typically, the owners of the business.  Often these expenses are between the company and the owners of the company (i.e., related party transactions).  These adjustments are most appropriately made when valuing a controlling interest in the company and they generally represent the difference between the actual recorded book expense and the expense that would be incurred if transacted between the company and an independent third party.

Examples of these types of adjustments include: Officer’s and owner’s compensation, owner’s perquisites, entertainment expenses, automobile expenses (e.g., personal use of company cars), compensation to family members, and other related party transactions.

Once these three types of “normalization” adjustments have been made to the financial statements, the business valuation expert can begin to analyze the value of the business under each of the different valuation approaches and methods, Anderson said.

In upcoming weeks, Anderson will continue to explore the process business valuation experts undergo to determine the worth of a business.

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.