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.

Almost every organization is responsible for collecting and remitting taxes. These taxes, which occur on the Federal, state, county or local levels, can include payroll taxes – such as income tax, Social Security tax, Medicare tax and unemployment tax – as well as sales taxes, excise taxes, fuel taxes and others.

“These taxes belong to the governmental taxing authorities,” said Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates, “and should not be used by the business at any time for any reason.”

He explained these tax types often are referred to as “trust fund taxes,” evoking the concept that the organization is holding the tax monies “in trust” for the government because they have been withheld from tax payers by the business.

Some organizations which are experiencing cash flow or financial difficulties have used these funds for financing operations, Anderson said, instead of timely remitting the funds to the governmental taxing authorities.

Their logic, he said, usually is that if they can’t continue to operate, then they will have to lay off employees – which would cost the taxing authorities both payroll taxes and unemployment payments – and they will lose sales – which, similarly, would cost the authorities sales taxes, excise taxes and fuel taxes.

However, taxing authorities believe the taxes become their property the minute the organization withholds them from employees or collects them from customers, said Anderson.

The failure to remit these collected taxes in a timely fashion, he said, can result in penalties and interest being charged to the organization.  In addition, such failure can trigger trust fund penalties of up to 100% of the unpaid taxes, a practice commonly known as the “100% Penalties.”

Under these penalties, Anderson said, not only is the organization responsible for the unpaid taxes, but also any person – termed by the law as “Responsible Persons” – who can effectively control the finances or determine which bills should or should not be paid and when.

Under the law, he said, the term “responsible person” is very broad and can include employees and shareholders/partners, as well as others outside of the formal organization – including, potentially, sureties and lenders.  Additionally, taxing authorities don’t have to wait to see if they will be paid by the organization; they can, Anderson said, go after the responsible persons at any time.

As if the 100% penalties aren’t enough, the fraud deterrence professional said, taxing authorities also can pursue criminal fraud complaints if they view that the owners – or officers, in the case of non-profit organizations – have used the unpaid taxes to benefit themselves.  This includes compensation, fringe benefits, expenses paid on their behalf, distributions or dividends, loan repayments and retirement plan contributions.

A failure to remit taxes collected on behalf of governmental taxing authorities in a proper and timely fashion, Anderson said, can have significant and dire consequences.  One way to avoid this issue in the case of payroll taxes is to employ a professional payroll service to withhold and pay such taxes.

In addition, many of these same companies offer similar services for sales, excise and fuel taxes.  Organizations in financial need should consult their professional advisors and other financial companies – such as lenders, factors, floor plan providers, etc. – in order to find other ways to finance the operations of their organizations without resorting to the improper use of collected and withheld trust fund taxes.

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.

(Editor’s Note: David Anderson’s weekly blog will be on hiatus next week for the Independence Day holiday. His column will resume Monday, July 11.)

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.

Serial crimes, such as murder and arson, have certain characteristics in common with fraud.

According to Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates, serial fraudsters tend to start out “small” and their initial crimes may occur in a hasty and sloppy manner.

As time progresses, he said, they learn from their “mistakes”, and the crimes are better planned and better designed to avoid detection of their involvement in the crime.  In addition, Anderson noted, the time period between incidents of the serial crimes may get shorter and shorter as their need for gratification gets stronger and stronger.

There may also be a sudden halt in the serial criminal’s activities or an unusually long period of time between the crimes, he explained, that often is attributed to such factors as incarceration (for another crime), treatment or some other disruptive influence.

Over his years of work as a fraud deterrence expert, Anderson said he has found similar characteristics in frauds. Here are just two examples:

“In one case, the Controller of a medium-sized business found herself short of funds going into a three-day holiday weekend,” he said, going on to say “her solution was to ‘borrow’ from the company’s petty cash.  Because she didn’t consider herself to be a criminal, she actually left a signed personal check payable to the company for the amount that she “borrowed”.  The next payday, she paid back the funds and took back her check.”

Anderson said the Controller, a month or two later, once again found herself short of funds for several credit card bills.

“She again ‘borrowed’ funds from petty cash,” Anderson said, continuing the explanation, “this time a larger amount, and again left a signed personal check payable to the company for the amount that she ‘borrowed’.”

The cycle, he said, continued at shorter intervals and for larger amounts until she had ‘borrowed’ the full amount of petty cash and was unable to pay it back from her next paycheck.  Her ‘solution’ to this problem was to submit phony expense documentation (such as copies of already reimbursed expenses and phony receipts obtained from the Internet) to cover the ‘borrowed’ amounts she was unable to repay.

“However,” Anderson said, “she feared the sudden jump in her reimbursable expenses would be noticeable, so she began using other methods to obtain funds including paying phony vendors, ghost employees – keeping certain terminated employees on the payroll and splitting paychecks with them – and accounts receivable fraud — writing off the accounts receivables of friends, neighbors and family members who had purchased items from this business – in return for a portion of the written-off amounts.”

Anderson, a Certified Fraud Examiner, said his company’s investigation showed that over time, the amounts and frequency of the fraud grew until it was discovered.  This pattern of growth in amount and frequency, he said, was fairly typical of other frauds the firm has investigated.

In another recent case, Anderson said one family member of a family-owned retail business began embezzling funds from customer invoices for which the customers paid cash.

Because the company had a manual cash register system, the family member removed both cash and the corresponding invoices from the deposit slips and invoices he provided to the accounting clerk who entered the information into the company’s QuickBooks accounting system. He additionally hid the cash shortages by delaying payments to vendors (telling them that business was bad).

“When I investigated the fraud,” Anderson said, “interviews with employees revealed that this family member frequently gambled in Atlantic City.  This led me to suspect that his embezzlement was tied to his gambling losses.”

Because the family member in question was a member of the comp clubs at each of the four casinos at which he gambled, Anderson said he was able to obtain documentation of his daily cash winnings and losses from each casino.  His embezzlement activities generally mirrored his gambling losses.

“During my initial investigation,” Anderson said, “I also noted an 11-month break in his embezzlement activities.  When I matched his embezzlement activities with his gambling wins and losses, I noted that during that same 11-month period, he had consistent net gambling gains from the casinos.  Since he was winning, there was no need for him to embezzle funds.  However, once he lost all of these gains, he went back to embezzling funds again.”

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.

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.

Opportunity – the ability for fraudsters to carry out the misappropriation of cash or other company assets – is one of the three key elements necessary for fraud to occur, and it is an element that organizations often can eliminate by enacting strong anti-fraud controls as part of a comprehensive fraud deterrence program.

In its 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) found in almost 30 percent of identified fraud cases, the opportunity that allowed fraud to occur existed solely because the organization lacked the proper internal controls.  In almost another 20 percent of fraud cases, the opportunity for fraud existed because of a lack of management review.

“None of these frauds would have occurred if management had taken adequate preventive steps to eliminate the opportunity,” said Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates. “No matter how much pressure an employee is under to steal or how much they can rationalize their illicit actions; they cannot successfully carry out the fraud if the opportunity to do so doesn’t exist.”

Strong internal controls work to safeguard assets, ensure reliable financial reporting and make the organization compliant with laws and regulations, Anderson said.  Some of the more common internal controls include separation of duties (requiring more than one person be involved in processing and recording financial transactions); regular management review to provide oversight; and independent checks or audits, either with an internal audit department or external auditors to provide additional oversight, he said.

Reviewing monthly bank statements and monthly financial statements on a regular basis are critical factors of a strong management review process, Anderson added.

The ACFE report, which is derived from a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud, also identified two other situations in which organizations can unintentionally foster opportunity for fraud, Anderson said.  These are:

• Overriding of existing internal controls, which was responsible for 20 percent of fraud cases.  Fraud investigations indicate these situations occur when a more senior person, usually in management, persuades an employee to ignore or circumvent internal controls.  For example, a manager may ask an employee to print a check for a dollar amount that requires two levels of approval without proving the approvals were obtained.  Or an auto dealership employee may allow a customer to leave without paying for car repairs made by the dealership.
• Poor tone at the top, a key factor in almost 10 percent of reported frauds.  Fraud investigations show employees take their cues from their supervisors.  If management engages in questionable behavior, such as overriding existing internal controls or running personal expenses through the company, it sends a message to the employee that such behavior is tolerated.

“It’s clear that companies can significantly reduce the chance of fraud occurring by eliminating the opportunity for it to occur,” said Anderson, a Certified Fraud Examiner and an ACFE member.  “It’s not a terribly difficult thing to do.  By enacting a fraud deterrence program with strong internal controls, you are taking a proactive approach to protecting your company.  You simply don’t let the fraudsters get away with it.”

Strong internal controls, regular management review and a strong anti-fraud message that is delivered by word and by action all are important components of comprehensive fraud deterrence programs created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley, he added.

In the coming weeks, Anderson will continue to share findings from ACFE’s 2016 Report to the Nations, the results of a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud.  The Association of Certified Fraud Examiners is the world’s largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

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.

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.

With the arrival of Memorial Day, another summer of fun and vacation has begun.  Those employees with vacation homes at the shore or in the mountains will begin regular weekend visits.  Work will slow down or fall behind as employees take vacations, and employers scramble to cover their vacant positions.

While summer is generally fun for all of us, it is especially fun for fraudsters, according to Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates. That fun, he said, comes in two distinct areas: Workplace Fraud and Vacation Fraud.

Workplace Fraud

As employers shift schedules to account for employees on vacation, Anderson said they can unwittingly open up increased risk of fraud.  This potential fraud arises from several sources:

• Employees who do not normally perform a sensitive financial job may be drafted to fill in for the vacationing incumbents;
• These “fill-in” employees may not be familiar with fraud deterrence measures in place, and may fail to perform or enforce them;
• These same employees may be provided with passwords and other access rights to computers and/or software to which they normally do not have access;
• When incumbents return from vacation, they may not change their passwords and/or technical staff may not remove the access rights of the employees filling in for the incumbents;
• Reconciling bank accounts and other fraud deterrence measures may be delayed due to backlogs created by vacations;
• Management may relax fraud investigation and oversight as well as forensic accounting measures due to either employee vacations, their own vacations or both.

To avoid these risks, Anderson said management must take steps to ensure:

• “Fill-in” employees are properly trained in not only the incumbent’s job but also the applicable fraud deterrence measures;
• Technical staff sets up separate passwords and access rights for the “fill-in” employees, and promptly removes these access rights as soon as the incumbents return to work;
• Bank reconciliations and other fraud deterrence measures continue to be applied and performed on an uninterrupted or a delayed basis; and
• Management continues to exercise either an increased level of oversight or at least the same measure of oversight as it does the rest of the year.

Vacation Fraud

Fraudsters know people on vacation have relaxed vigilance regarding their debit and credit cards and other personal financial information.  Anderson said an increasing number of fraudsters are using skimmers and other measures to obtain this information.

In particular, the use of skimmers has increased.  Skimmers are electronic data collection devices that are placed over ATM card slots, credit card slots and on credit card swipers.  They have become smaller in size and less noticeable to the point that it can be difficult to ascertain whether or not a skimmer has been placed on the device you are using.

While Anderson said people generally are aware if something appears different in the ATMs and other devices they regularly use at home, relaxed vigilance on vacation and unfamiliarity with ATMs and other devices at vacation locations put individuals at greater risk of having their card and other personal financial information stolen. To emphasize this point, Anderson shared a personal experience:

Last summer, Anderson was on vacation in Asheville, North Carolina.  On the Sunday his family was leaving, he went to the ATM at a local bank and withdrew funds.  Unbeknownst to him, fraudsters had placed a skimmer on the ATM machine. Anderson only learned of the theft of his debit card and PIN information on Monday night when he went online to check his bank account and noticed a strange charge made in Washington state approximately 12 hours after he had withdrawn funds from the ATM.

Anderson subsequently learned the fraudsters had used his debit card and PIN information to purchase an iPhone in Washington state.  When he contacted Ashville bank officials the next day, they checked the ATM and found there was no skimmer on it.  However, they later notified him they had had a number of complaints during the week about people who had used their ATM and had fraudulent charges appear on their debit cards.

Bank officials told Anderson they had instituted a new procedure to check the ATM at the end of their business day and first thing the next morning to see if there was a skimmer on it.  However, they admitted they would have no way of knowing that fraudsters had placed and then removed a skimmer outside of normal banking hours unless they reviewed hours of tapes from each ATM every day.

In the future, when he is on vacation, Anderson said he will only use an ATM that is in a bank’s lobby and only during normal business hours.  He also said he will only use his debit card as a credit card to avoid entering my PIN number.  In addition, he said he is determined to have a higher level of vigilance whenever he uses his debit or credit card out of town . . . and he strongly recommends others adopt this same practice.

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.

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.

Performing a formal financial audit annually is thought by many to be the most effective means of fraud detection and fraud deterrence.

It isn’t.

Less than four percent of all fraud is detected by a formal financial audit.  In fact, nearly twice as many frauds are discovered by accident than by formal audit.

So what is the best way to detect and prevent fraud?  You might be surprised.

The 2016 Report to the Nations from the Association of Certified Fraud Examiners (ACFE) shows tips are responsible for uncovering fraud more so than any other method.  More than 39 percent of all frauds were exposed as the result of information provided by tipsters.

And who were the main source of these tips?  By far, it is a company’s own employees, the ACFE report said.  A surprisingly high 52 percent of all frauds reported via tips came from company employees.

“Employees can be your first line of defense against fraud,” said David Anderson, of David Anderson & Associates. “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 through the use of an anonymous tip hotline.

“Employees are far more willing to report illicit activity if their anonymity is protected,” said Anderson, a Certified Fraud Examiner and an ACFE member.  “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 themselves, Anderson said. Third-party companies will step into set up and operate the hotline 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 by something they say or by speaking with someone who recognizes their voice.

In addition to tip hotlines, the 2016 ACFE Report shows many companies also are providing mechanisms for receiving tips through e-mail and/or through their websites.

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.

In the coming weeks, Anderson will continue to share findings from ACFE’s 2016 Report to the Nations, the results of a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud.  The Association of Certified Fraud Examiners is the world’s largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

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.

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.

So you’ve been the victim of fraud.

You knew something was amiss.  You hired a Certified Fraud Examiner.  A thorough fraud investigation uncovered the fraud and identified the perpetrator.  You fired the fraudster — or punished them internally — and implemented stronger anti-fraud controls and forensic accounting measures as part of your overall fraud deterrence program.

So it’s over, right?

Not quite.

“You really need to refer the matter to law enforcement,” said Anderson. “Simply ridding your organization of the offending employee isn’t the answer.  You are effectively letting him or her off the hook, and allowing that employee to move on to potentially victimize another unsuspecting organization.”

While the majority of organizations victimized by fraud do refer the matter to law enforcement, the number may be lower than you might think.

In its 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) – the world’s largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide – found that only 58 percent of fraud cases were referred to law enforcement.  The remaining 42 percent were not.  This finding represents a downward trend from each of the previous two Reports.

Of the cases referred for prosecution, more than 76 percent resulted in a guilty plea or a conviction.  Only about two percent resulted in an acquittal.  In most of the other cases, law enforcement declined to prosecute.

With such a high percentage of convictions and guilty pleas, why did so many companies decline to seek prosecution?  The ACFE survey – a biennial global survey on the costs, schemes, perpetrators and victims of fraud – identified the top four reasons:

• Nearly 39 percent said fear of bad publicity kept them from referring the case to law enforcement;
• More than 35 percent thought internal punishment was sufficient;
• More than 23 percent reached a private settlement with the fraudster, and
• Almost 19 percent thought that referring the case to law enforcement and helping with prosecution would be too costly.

Anderson, a Certified Fraud Examiner and an ACFE member, strongly encourages companies, non-profits and government offices to refer fraud cases to law enforcement.  He said he is particularly reluctant to advocate for internal punishment without criminal consequence.

“Internal punishment alone means the fraudster not only evades criminal prosecution, but also gets to keep his or her job,” Anderson said.  “Now, you have an employee who not only is skilled at committing fraud, but also has learned from the mistakes he or she made that led to the discovery of the fraud.  The result is that the person often ends up further defrauding the organization.”

He recalled a case in which a company controller who committed fraud was allowed to remain in his job by agreeing to repay the stolen money through regular payroll deductions.

After some time passed, Anderson was retained by the company to conduct another fraud investigation, which found that the controller was again defrauding the company in a variety of ways, including having instructed the payroll department to stop the payroll deductions designed to repay the previous fraud.  The company terminated the fraudster, but again declined to prosecute.

“I have no doubt that today the employee is working at another company and perpetrating a fraud there,” he said.

There also is a key benefit to your fraud deterrence efforts that comes from referring fraud cases to law enforcement, Anderson said.

“Seeking prosecution of a fraudster is one of the strongest fraud deterrence messages you can send,” he said.  “It tells every other employee that fraud will not be tolerated and, in fact, will be prosecuted to the fullest extent of the law.”

Anderson recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

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

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.

Do you know your employees?

Do you understand how they function on the job or the scope of their interpersonal relationships at work?

Do you know what personal challenges or difficulties they face at home?

If these questions are raising concern for you and the financial health of your organization, then maybe it’s time to learn more. Understanding your employees is a key component to an effective fraud deterrence program.

“There are certain behavioral signs and personal situations that are red flags for fraudulent activity,” said Anderson. “They are signs something might be wrong.  Understanding them is another fraud deterrence tool that can protect your organization.”

In its 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) identified some of the more frequently occurring behavioral signs and personal situations that should raise red flags at companies, non-profits and government offices.

The report, a biennial global survey on the costs, schemes, perpetrators and victims of fraud, found that a key red flag is employees who live beyond their means, Anderson said.

Look, he said, for a significant change in lifestyle – a lower-level employee who suddenly starts driving a luxury car, wearing designer clothes or taking expensive vacations.  In more than 45 percent of fraud cases, the survey said, coworkers and others noticed the fraudster had adopted a more extravagant lifestyle.

Another off-the-job red flag is employees who are experiencing financial difficulties, Anderson said.  Perhaps a family member or close relative is suffering through an expensive illness.  Or, maybe the family’s primary breadwinner is unemployed.  Look also for an employee who complains about mounting debts or foreclosure proceedings on his or her house — or might actually have lost the home. In 30 percent of frauds, the perpetrator was struggling with personal financial difficulties.

On the job, look for employees, particularly those in purchasing or operations, who are unusually close to a vendor or customer, he said.  Perhaps they regularly socialize with that person or receive tickets to baseball games, the theater or other events.  Look for a salesperson who spends an inordinate amount of time with a customer’s employee.  Fraud investigations found this type of activity in 20 percent of fraud cases.

Another on-the-job red flag is employees with control issues, Anderson said. Perhaps the employee insists on being the only one to perform certain duties or gets overly defensive when a coworker tries to get involved in his or her job.  In one case he investigated, Anderson said the fraudster was the only employee in the company who could process payroll.  The employee actually had to be taken from the hospital in an ambulance in order to run payroll on one occasion, Anderson said.  The ACFE report found that nearly 15 percent of frauds involved an employee with these types of control issues.

Other important behavioral red flags identified in the report, he said, include a “wheeler-dealer” attitude; divorce or other family problems; substance or gambling addictions; and constant complaints about inadequate pay or lack of authority.

“This is not to say that every employee who displays one of these signs is intent on defrauding the company,” said Anderson, a Certified Fraud Examiner and an ACFE member.   “They may be suffering through a difficult personal situation, but managing it nonetheless.

“Or,” he continued, “they may have hit it off really well with their customer or vendor and developed a mutually beneficial, but perfectly above-board, relationship.  But it would benefit you to know whether that is the case or not.  You could end up helping your company, your employee or both.”

In upcoming posts, Anderson will continue to share results from the ACFE’s 2016 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

Anderson said he believes the most effective protection for every organization comes from a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

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

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, 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.

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 perpetrators of fraud come in all shapes and sizes, demographically speaking.  But fraud investigations throughout the years have been able to pinpoint the more typical characteristics of a fraudster, and some of the results are surprising. The Association of Certified Fraud Examiners (ACFE) collected extensive data about the people who commit fraud during the association’s biennial international survey to study the costs, schemes, perpetrators and victims of fraud.

“Understanding the traits of the average fraudsters isn’t going to allow you to look at your employees and pick out who is and who isn’t going to steal from your organization,” said Anderson, an ACFE member.  “But understanding who these people are is another important component of a comprehensive fraud deterrence program.”

Although most people believe fraudsters are career criminals, Anderson said, latest findings from the ACFE’s 2016 Report to the Nations showed more than 88 percent of fraud perpetrators never had been charged or convicted of a fraud; another six percent had been charged but not convicted.  Almost 83 percent of fraudsters never had been punished or terminated by a previous employer for fraud-related conduct, and an additional eight percent had been terminated but never punished.

Another surprise involved the tenure of the employee committing the fraud, Anderson said.  More than 42 percent of fraud perpetrators had been with their company between one and five years – neither a very short time nor a very long time.  Less than eight percent had tenure of under a year, while 23% had tenure of more than 10 years.

Not surprisingly, Anderson said, was the finding that the higher the position the employee held, the greater the loss.  Frauds carried out by a regular employees caused a median loss of $65,000, while those carried out by a managers caused a median loss of $173,000 and those carried out by owners/executives caused a median loss of $703,000.

Fraud investigations have found 55 percent of all fraud perpetrators were between the ages of 31 and 45 and that men were more than twice as likely to be the perpetrator as women.  Also, the older or the more educated the perpetrator, the higher the loss tended to be, usually because these people were higher up in the organization.

“It definitely helps to understand the portrait of a typical fraudster,” said Anderson, a Certified Fraud Examiner.  “But remember, in reality, frauds are committed by all kinds of employees — men and women; young and old; low-level and high-level; well-educated and less-educated; long-time and short-time, and those with and those without a history of committing fraud.  You need to be sure you have adequate anti-fraud controls in place to protect your organization from perpetrators of any type.”

Anderson said he believes the most effective protection for every organization comes from a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

Over the next several weeks, Anderson will share findings from ACFE’s 2016 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

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.

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.

Fraud investigations worldwide reveal that asset misappropriation, corruption and financial statement fraud are the three main types of fraud, according to the Association of Certified Fraud Examiners (ACFE).

The ACFE has identified these three key types of fraud in its biannual Reports to the Nations, the results of global surveys conducted biennially to study the costs, schemes, perpetrators and victims of fraud.  The recently released 2016 Report confirms these three types remain the most frequently conducted frauds.

“Asset misappropriation is by far the most common type of fraud, but financial statement fraud, while not nearly as common, is a far more costly type of fraudulent activity,” said Anderson, an ACFE member.

According to the ACFE, asset misappropriation — or the theft of cash or other assets such as inventory, supplies or company equipment — occurs in more than 80 percent of reported fraud cases. Because some fraud investigations find that more than one type of fraud is committed within the same incident, the total of the three types exceeds 100 percent. The median dollar loss reported from asset misappropriation is $125,000, the 2016 ACFE study noted.

Corruption occurs in more than 35 percent of the reported fraud cases, the report found.  Fraud by corruption involves misusing one’s influence (such as persuading someone to use a particular vendor or hire a particular person) or violating one’s duty to one’s employer (such as purchasing from a vendor whose price is more expensive or whose product is inferior, or hiring a less qualified employee). The ACFE said the median dollar loss from corruption is $200,000.

Financial statement fraud represents only 10 percent of the reported cases of fraud, but the median dollar loss from this type of fraud is $975,000, the ACFE report says.  Fraud investigations have shown that financial statement fraud occurs when a person intentionally misstates or omits material information from an organization’s financial statements, according to the ACFE.

The report explained that financial statement fraud can be perpetrated against a lender (by overstating a company’s sales, profits or assets in order to get a loan); an acquirer (by overstating a company’s sales, profits or assets in order to get a higher acquisition price); or shareholders/the public (by overstating a company’s sales, profits or assets in order to boost a company’s share price).

“Regardless of the type of fraud, it is clear that organizations today are at high risk of loss due to fraud and that every business, government entity and organization must have a strong fraud deterrence program in place to combat it,” said Anderson.

A comprehensive fraud deterrence program developed by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help protect your organization, Anderson said.  At the first hint of suspicious activity, Anderson urges organizations to contact a Certified Fraud Examiner to conduct a thorough fraud investigation and end the fraudulent activity.

During the coming weeks, Anderson will share more findings from ACFE’s 2016 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 75,000 members in more than 150 countries worldwide.

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.

David Anderson is 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.

As a Certified Fraud Examiner, I belong to the Association of Certified Fraud Examiners (“ACFE”).  This international organization has more than 75,000 members in more than 150 countries throughout the world dedicated to fighting fraud through rigorous fraud investigation and fraud deterrence programs.

Every two years, the ACFE conducts a global fraud survey to study the costs, schemes, perpetrators and victims of fraud.  This month, the ACFE released its 2016 Report to the Nations, detailing the results of its latest survey.  In the next several blog articles, I will present updates to previous articles which were based upon the 2014 Report to the Nations.  First up, the latest trends in anti-fraud controls installed by businesses and other organizations.

The 2016 Report identified the fastest growing anti-fraud control as use of confidential hotlines for reporting fraud.  The implementation rate grew by almost nine percent in the past two years to more than 60 percent – meaning that more than 60 percent of businesses and other organizations currently use these hotlines.  What also is new is that more businesses are using not just telephone-based hotlines but also are providing for confidential reporting of fraud via their websites and/or e-mail.

The next fastest growing anti-fraud control is the implementation of fraud training for employees.  Approximately 52 percent of all businesses and other organizations provide this to their employees – an increase of nearly 8 percent from the 2014 survey.

Other anti-fraud controls whose implementation has increased by more than 5 percent during the past two years include:

• Adoption of an anti-fraud policy
• Adoption of a code of conduct
• Increased management review of operating results
• Surprise audits
• Fraud training for managers and executives

What all of these anti-fraud controls have in common is that they show a “tone at the top” which says management does not condone fraud and is committed to fighting it.  None of these anti-fraud controls is overly expensive, especially in light of the continuing fact that the cost of fraud to the typical company is approximately 5 percent of revenues.

Look for more details on these and other findings from the ACFE 2016 Report to the Nations in my next series of blogs.

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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.

The Fraud Triangle is a troika of troublesome tendencies – Opportunity, Pressure and Rationalization – that often are present when fraud is taking place. 

In previous posts, David Anderson of David Anderson and Associates, a Certified Fraud Examiner offering forensic accounting services in Philadelphia, has mentioned that if at least one of the three factors can be eliminated, the potential for fraud and the need for a fraud investigation is either significantly reduced or goes away. 

In this article, Anderson takes a closer look at the final leg of the triangle – Rationalization.

Rationalization is the mental process that a potential fraudster goes through to justify committing the fraud.

“Without being able to rationalize to oneself why it is OK to commit the fraud,” said Anderson, who provides forensic accounting services in Philadelphia, “a potential fraudster with the opportunity and pressure will not proceed. “

Anderson said examples of rationalization can include:

• I’m only temporarily “borrowing” the money to meet my financial obligations, and I intend to pay back the “loan” in full;
• I’m not being paid what I am worth, so I’m making up the difference through fraud;
• The company makes a lot of money, so it won’t be missed/ be affected by the small amount I am taking;
• The owner/management is committing fraud, so why shouldn’t I?
• I have been “wronged” by the company/owner/management, so this is how I can get back at them.

Owners/managers can influence the rationalization process and discourage the rationalization to commit fraud by taking several anti-fraud steps:

• Provide anti-fraud training to all employees which, among other things, includes specific statements that committing fraud is wrong and unacceptable; that management is dedicated to preventing fraud; and that encourages employees to be on the lookout for fraud;
• Establishing a “hotline” which allows employees to confidentially report suspected fraud;
• Establishing a “tone at the top” that demonstrates that management is committed to fighting/preventing fraud (and not merely paying lip service to the fraud);
• Establishing policies and procedures which allow an employee to pursue complaints about being “wronged” (real or imagined);
• Letting employees know that management is watching and is implementing such anti-fraud measures as surprise audits and regular management reviews.

Taking these steps as well as steps discussed in the previous two articles (establishing strong internal controls and getting to know one’s employees better) are all part of dismantling the three legs of the fraud triangle.

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.