Despite increasingly stringent fraud deterrence measures, fraudulent activity in retail operations such as stores and restaurants continues to pose a significant problem, with the retail industry estimating a loss of nearly $3.2 billion to fraud in 2014.

“Technological improvements and greater oversight have made it more challenging for fraudsters to steal cash and inventory from retail establishments,” 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.  “But the incidence of fraud persists in the retail world because of the sheer number of opportunities to commit fraud and the never-ending determination and creativity of fraudsters to circumvent anti-fraud controls.”

This post will examine some of the most common retail fraud schemes carried out by employees and offer recommendations that can reduce the success of those schemes.

Cash Register Schemes:

The simplest of the cash register schemes is the outright theft of cash from the till, said Anderson, a forensic accountant who also is a Certified Fraud Examiner in Philadelphia.  This fraud is easily combated by reconciling the cash in the register to recorded sales.  Anderson said some retailers — fast food restaurants, for example — perform reconciliations several times a day.

Other cash register schemes include those in which an employee “short-rings” or “no rings” a sale — records a lower amount than the actual sale or records a $0 sale to open the register.  The employee then pockets the difference between the actual sale and what was rung up either at the time of the sale or later when no one is looking, explained Anderson, a forensic accounting expert in Philadelphia who recommends that every organization adhere to a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

Dishonest bartenders run a similar scheme in which they serve a number of drinks to a customer, but ring up only one or two of them, Anderson said.  What usually happens in these cases is that the bartender receives an inflated tip from the customer in return for undercharging the number of drinks.

Retailers have been fighting cash register schemes in a variety of ways, said Anderson, a forensic accounting expert in Philadelphia who has conducted numerous fraud investigations.  The first is the use of an electronic cash register and the requirement that each purchase be scanned into the register.  Similarly, Anderson said, restaurants require the wait staff to enter every customer order into the system to facilitate meal preparation.  These measures prevent employees from ringing up purchases for less than the actual sale amount.

Many bars have installed electronic systems that measure the amount of alcohol poured from each bottle.  At the end of the shift, management can reconcile the number of pours with sales to verify that the pours are being properly rung, Anderson explained.

Inventory Schemes

Inventory schemes involve the outright theft of inventory, as well as tag switching, according to Anderson, a forensic accounting expert in Philadelphia.  Anderson said tag switching occurs when an employee works with an accomplice who switches the price tag on an item with that of a less expensive item, or the employee pretends to scan the more expensive item but instead scans an inexpensive item twice.  The more expensive item is either sold to a third party (with the co-conspirators pocketing the profit) or is returned to the store by the accomplice for a refund, explained Anderson, who also is a Certified Fraud Examiner in Philadelphia.

Retailers have been using security tags on inventory for years to prevent outright theft by both employees and customers, said Anderson, a forensic accountant whose fraud investigations have uncovered fraudulent activity in many different types of businesses.  Retailers also employ several other methods to combat outright theft and tag switching.

Anderson said these include requiring a person who is returning an item to produce the original sales receipt; granting only store credit for those without sales receipts (making it harder for the fraudsters to convert the return into cash); and daily inventory tracking for expensive items (for example, tracking 50-inch televisions so that any discrepancy between inventory and sales is identified in the same day).  Retailers have also installed surveillance cameras to combat employee and customer fraud.

“The belief that ‘Big Brother is watching’ often is enough to significantly reduce the incidence of retail fraud, even if security personal doesn’t have time to actively review the tape recordings or if the cameras aren’t really recording anything,” said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

To stem the loss of cash or inventory from your store or restaurant, it may be time to engage a forensic accountant to analyze your fraud controls and enact stronger fraud deterrence measures that will adequately protect your retail establishment and lessen the chances of theft.

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.

As fraudulent activity goes, it was a seemingly miniscule theft — a mere $2,000 pilfered decades ago.  Hardly worth raising an eyebrow.  But the case of Mark Jenkins is a prime example of how a seemingly innocuous case of fraud can mushroom into a major theft, requiring a forensic accountant to conduct a fraud investigation and calculate the loss.

“Like so many fraud cases, the story of Mark Jenkins is a cautionary tale,”  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.  “Companies need to have comprehensive fraud deterrence measures that cover employees at every level.  No employee should ever be able to manipulate documents to his or her personal advantage.  The opportunity simply should not be there.”

The story of Mark Jenkins, whose name has been changed to protect both his confidentiality and that of his former employer, begins in 1989 when Mark was named Controller of a small West Coast subsidiary of MegaGiantInternational Corporation, according to Anderson, a forensic accounting expert in Philadelphia. It was a dream job but for one thing — the starting salary was $2,000 less than Mark had asked for. He accepted the position anyway.

On his first day on the job, Mark learned that one of his responsibilities was to provide wage and salary changes to the payroll department in New York City.  There was no approval process, no signature required, no checks and balances, explained Anderson, who also is a Certified Fraud Examiner in Philadelphia.  Mark was simply to report the changes.  And so he did, reporting his own salary at $2,000 more than it really was.  Now, it really was his dream job.

Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, said the $2,000 salary bump was the only fraud Mark Jenkins ever committed at his company.  In fact, he went on to have a stellar career at MegaGiantInternational Corporation.  He rose steadily through the ranks, being promoted to Controller of a larger subsidiary in the same division; to Division Controller; to Group Controller; and finally to Group Chief Financial Officer, Anderson said.

Over his 25-year career, Mark received an average of 8% per year in salary increases and an average of 10% in annual bonuses, said Anderson, a forensic accounting expert in Philadelphia.  Additionally, the company provided a 3% 401-K match each year and also made an average 8% contribution each year for Mark to its profit-sharing plan.  In December 2014, at age 66, Mark retired.

The discrepancy in Mark’s starting salary was discovered when the company conducted a payroll reconciliation to assure Mark’s pension records were accurate, explained Anderson, a forensic accountant and Certified Fraud Examiner in Philadelphia.  A forensic accounting expert subsequently was engaged to determine the extent and impact of the fraud.

So, what did Mark’s little fraud end up costing the company?  As the accompanying spreadsheet* shows, the single largest windfall came from the excess salary the company paid as a result of wage and bonus increases compounded over 25 years — nearly $147,000.  In addition, the company paid more than $16,000 in retirement plan contributions, which, incidentally, would have grown even more as the contributions were invested.  Mark’s one-time little $2,000 fraud in 1989 had cost the company a whopping $163,000. (Click on the chart for a closer look.)

“Clearly, the fraud deterrence measures the company had in effect in 1989 were faulty,” said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “No one should be able to set their own salary in the payroll system. The company should have required the written approval of the employee’s superior.  And the payroll department should have confirmed the starting salary with the Human Resources Department.  This was a fraud that never should have happened.  It was easy to prevent.”

Anderson, a forensic accountant and Certified Fraud Examiner in Philadelphia, said that with Mark’s pension as leverage, MegaGiantInternational reached a settlement with their former employee regarding the overpayments, and his pension was adjusted to the lower numbers.

This Tale of Fraud is part of an ongoing series of articles that examine actual cases of fraud carried out in businesses, non-profits and government offices, how fraud investigations played a part in discovering the fraudulent activities, and the fraud deterrence measures that might have thwarted them.

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 Fraud Examiner and a Certified Valuation Analyst.

*NOTE:  On the spreadsheet, all salary increases, bonuses and profit-sharing contributions have been averaged.  In actuality, the increases fluctuated with the greatest increases occurring with promotions and good operating years.

Government payments to providers under the Medicare and Medicaid programs are based on an “honor billing system,” meaning it is up to providers to honestly and accurately bill the government for services or goods provided.  Not surprisingly, fraud investigations routinely uncover fraudulent activities that cost the government billions of dollars each year.

“As a forensic accountant, I have been asked to investigate Medicare and Medicaid billing fraud both by the government and by private companies that suspected some of their employees were involved in fraudulent activities,” 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.  “My fraud investigations have unearthed some of the most common Medicare and Medicaid fraud schemes as well as some that were quite creative.”

Medicare is a federal government health insurance program established in 1966 to provide health insurance to people 65 and older and to certain disabled people, said Anderson, who also is a Certified Fraud Examiner in Philadelphia.  The program is funded through payroll tax deductions and administered by the federal government.  Medicaid is a government program established in 1965 to provide health insurance to low-income individuals in all 50 states, Anderson said.  Medicaid is funded jointly by the state and federal governments and administered by the states.

The so-called “honor billing system” puts the onus on healthcare providers, including durable medical equipment suppliers and pharmacies, to truthfully bill the two agencies for services and goods, said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  As a result, Medicare and Medicaid billing fraud generally is detected only after the fact, based either on tips from whistleblowers or after-the-fact data analysis that detects unusual billing patterns, he said.

Among the fraudulent Medicare and Medicaid schemes Anderson’s fraud investigations have uncovered are:

• Upcoding Schemes: These frauds involve healthcare providers who  charge for a more expensive procedure than was actually performed, said Anderson, a forensic accounting expert in Philadelphia.  For example, he said, because Medicare pays more for a comprehensive annual physical exam than it does for a routine office visit, some providers will improperly bill a routine office visit as a comprehensive annual physical exam to receive the higher fee.  Or, a physical therapist may schedule a group session to provide physical therapy for multiple individuals at the same time, but bill Medicare/Medicaid for individual treatments at a much higher rate.
• Unbundling Schemes: This fraud occurs when a group of medical tests typically billed as a single procedure are instead billed individually, thereby increasing the total fees for the tests.  An excellent example of this, said Anderson, a Certified Fraud Examiner in Philadelphia, is the Chemistry Panel and Complete Blood Count test.  This panel includes tests for cholesterol, triglycerides, blood glucose, calcium, potassium, iron, and complete blood count, as well as a number of other tests.  By performing a Chemistry Panel and Complete Blood Count but billing for each test individually, the laboratory can make a much higher fee for its services.
• Non-existent Services Schemes: These fraud schemes occur when a healthcare provider bills for goods or services never provided, Anderson  In his work as a forensic accountant, Anderson uncovered a dentist who billed Medicaid for removing the same tooth from a patient four different times.  Another example, he said, is a gynecologist who billed for performing an internal pelvic exam on a man.  Anderson, a forensic accounting expert in Philadelphia, said Medicare and Medicaid recently have cracked down on home health care companies, for example, for providing eight hours of home health care but billing for 24 hours of care.
• Medical Equipment Schemes: These schemes have many variations but generally involve providers who bill for new medical equipment but deliver used equipment, or who bill for equipment that was never delivered at all.
• Prescription Drug Schemes: There also are more variations on this scheme, which include pharmacies that provide patients with generic drugs, but bill for more expensive name brands, or pharmacies that bill for a higher dosage or number of pills than was provided to the patient.

“The FBI estimated that in 2012, Medicare fraud alone cost the government as much as $250 billion for the year,” said Anderson, a forensic accountant and Certified Fraud Examiner in Philadelphia.  “Add to that the many billions of dollars lost to Medicaid fraud annually, and you can see how big a problem this is.  Hopefully, both federal and state governments will implement new procedures to reduce Medicare and Medicaid fraud in the future.”

This Tale of Fraud is another in a series of occasional posts that explores actual frauds perpetrated against businesses, non-profits or government offices and agencies and the fraud investigations that uncovered the illicit activities and, when possible, the fraud deterrence measures that could have prevented them.

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 Fraud Examiner and a Certified Valuation Analyst.

The senior partner at an auto dealership was a successful businessman who owned multiple businesses.  As a result, he relied heavily on his junior partner to act as the general manager of the dealership.  With the dealership running smoothly and turning a profit, the senior partner had no reason to suspect anything was amiss until a fraud investigation conducted by a forensic accountant found that his trusted junior partner had defrauded him of tens of thousands of dollars over a number of years.

“This was a classic case of fraud in that the fraud was made possible by the clear presence of the Fraud Triangle, the three key factors necessary for fraud to occur — pressure, opportunity and rationalization,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.  “The junior partner’s pressure came in the form of college tuition bills for his two sons and a wife who felt her husband was underpaid and under appreciated by the senior partner.  Opportunity came from the trust the senior partner placed in the junior partner to run the dealership and set up the necessary controls and reporting procedures.  And rationalization came when junior partner felt entitled to the illicit financial benefits because he worked so hard and his name — not the senior partner’s — was on the dealership.”

Anderson, a Certified Fraud Examiner in Philadelphia, said the junior partner actually carried out three frauds simultaneously.

The first occurred when the junior partner presented his family with expensive Christmas gifts – ATVs for each son and an RV for his wife.  He purchased the vehicles through the dealership at significant discounts not normally available to retail purchasers and then, even though they were in his possession, listed the vehicles in the dealership’s vehicle inventory, Anderson said.  The junior partner’s plan to repay the dealership evaporated when he realized after about a year that the senior partner never looked closely at the vehicle inventory, so he could just leave the vehicles listed there and never pay for them.

The second fraud occurred when the junior partner learned that some insurers cover only vehicle repairs made using cheaper after-market parts instead of genuine auto manufacturer-supplied parts.  The junior partner set up a wholesale auto parts business (essentially a small office with two delivery trucks) to buy after-market parts.  Anderson, a Certified Fraud Examiner in Philadelphia, said the fraudster then swapped those parts with the genuine auto manufacturer-supplied parts in the dealership’s inventory and sold the more expensive parts to other auto dealers and body shops, pocketing a larger profit than he could make selling the cheaper parts.  Meanwhile, the value of the auto dealership’s inventory carried on the books was higher than the actual inventory value because the books reflected the value of the more expensive parts instead of the value of the cheaper after-market parts the junior partner had fraudulently put into inventory.

The third fraud occurred when the junior partner persuaded the senior partner that used cars purchased for resale and serviced customer vehicles should be detailed instead of merely washed by the dealership, claiming he had an agreement with a local car wash to detail each vehicle for $35 (instead of its normal $75 rate).  The junior partner then purchased a nearby car wash and sent more than 100 vehicles a month to it for detailing.  The car wash billed the dealership $35 per vehicle, Anderson said, but instead of actually detailing the vehicles, the junior partner had each vehicle washed and then paid a car wash employee $5 per vehicle for cosmetic cleaning to make it appear the vehicles had been detailed.  The junior partner pocketed more than $25 on each vehicle.

“The fraud could have continued indefinitely except that a disgruntled former employee of the auto dealership tipped off the senior partner about one of the frauds,” said Anderson, a forensic accounting expert in Philadelphia who recommends that every organization enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

As a result of the tip, Anderson said the senior partner hired a forensic accountant to conduct a thorough fraud investigation, which not only confirmed the tip, but also uncovered the other two frauds.  The forensic accounting expert’s fraud investigation further found that the frauds could have been easily prevented by removing a key element in the Fraud Triangle – Opportunity.

“Had the senior partner engaged a forensic accountant with expertise in auto dealership operations to perform certain fraud deterrence procedures every month, the frauds would have been prevented entirely or uncovered in a much shorter period of time,” explained Anderson, a forensic accounting expert in Philadelphia who also is a Certified Fraud Examiner in Philadelphia.

The fraud deterrence measures that should have been enacted were:

• A detailed review of certain monthly reports, such as the vehicle aging report, which indicates how long vehicles have been in inventory as well as their classification in the inventory system.

• Surprise monthly audits/counts of selected parts in inventory, with different parts counted on a rotating basis each month.

• Closer scrutiny of outside services/vendors to ensure that the contracted service was actually provided.

“With adequate fraud deterrence measures in place, the junior partner may never have been able to get away with a single fraud scheme, let alone three of them,” said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “The opportunity simply would not have been there for him to do so.”

If your fraud deterrence measures have not been reviewed by a forensic accounting expert recently, it may be time to engage the services of a Certified Fraud Examiner in Philadelphia to analyze your company’s fraud controls and assure that they will adequately protect your company from fraudulent activity.

This Tale of Fraud article is part of an ongoing series of occasional posts that examine real cases of fraud against businesses, non-profits or government offices and the fraud investigations that revealed how the fraud was perpetrated.

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 Fraud Examiner and a Certified Valuation Analyst.