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Engage Expert Witnesses Early for Successful Litigation Support

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

Trial attorneys know that expert witness testimony from a forensic accounting expert can be critical in determining the outcome of legal proceedings.  Likewise, the timing of when an attorney engages the services of a forensic accountant for litigation support services and, ultimately, expert witness testimony also has a direct bearing on the success or failure of the case.

“The earlier a forensic accounting expert is called in to consult on a case, the greater the chances the expert will be able to contribute information crucial to winning the case,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley.  “Forensic accounting experts who are engaged too late in the process often cannot have the impact on the case that the attorney needs.”

Anderson recently was asked by an attorney to provide expert witness testimony in Philadelphia for ongoing litigation.  The attorney’s client, who was a minority shareholder in a medium-sized distribution business, was claiming that 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 trail, but that didn’t happen.  Now, an expert report was due within two weeks.  Discovery had closed several months before, but the attorney had the company’s federal income tax returns for the past five years and believed that would be enough for Anderson 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 return 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.  “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.  A $50,000 line item for ‘Miscellaneous Expenses’ appeared on one year’s return, but with no breakdown.”

Absent the complete 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 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
  • Analysis of the complaint and assistance with identifying arguments for the response (if for the defendant)
  • 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)
  • 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 identification of individuals to be deposed
  • Assistance with development of questions for the deponents, including for the expert witness’s own deposition
  • Preparation of a report identifying and calculating damages or business value
  • 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.

Fraud Tales: Fraud Investigation Finds Stolen Cash in Business

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

Cognizant of the rampant escalation of fraud in the business world, the owner of a mid-sized retail establishment took great care in establishing fraud deterrence measures to protect the company.  With more than 80 percent of the company’s sales paid in cash, multiple checks and balances were put into place to make sure each day’s receipts, cash register tapes, bank deposit slip and bank receipt all matched.  And still, the accounting manager was able to steal $400,000 from the company.  This second Tale of Fraud in an ongoing series recounts an actual fraud investigation that revealed exactly how the fraud was perpetrated.

“The fraud deterrence measures seemed foolproof to the business owner,” 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 owners need to realize that the people handling their money are in a unique position to identify loopholes in the system and, given the opportunity, to exploit them.”

Anderson said the fraud deterrence measures set up by the company required cashiers to manually record each sale on a numbered receipt from multi-copy receipt books and also to ring up the sale on the cash register.  At day’s end, the cashiers totaled the register drawers and matched them to the register tapes.  The accounting manager then recounted each drawer and rematched it to the tape.  She gave the cash, checks and credit card receipts, along with the corresponding numbered manual receipts, to the accounting clerk for entry into the computer system.  The accounting clerk prepared the deposit slip, and the controller took deposit slip and receipts to the bank.  The accounting clerk then verified that the amount on the printed bank deposit receipt matched the amount on the original deposit slip.

“By having multiple people involved in the process and having receipts and deposits checked multiple times, the owner couldn’t envision a scenario in which anyone would have been able to steal a penny,” 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.  “A forensic accounting expert would have offered a different opinion.”

The fraud investigation Anderson performed found that the genesis of the fraud was in the numbered receipt books, which used only four-digit receipt numbers.  Because the business had thousands of transactions each year, the same four-digit receipt numbers were used multiple times.  There was no delineated plan for providing specific receipt books to the cashiers or for tracking numbered receipts, meaning the same receipt book might be used by multiple cashiers during a year.

The fraud investigation also found that although the register tapes were matched to the drawer contents each day, there was no requirement that the tapes be retained or that the bank deposit total match the register tape total.

These weaknesses in the fraud deterrence measures were the catalyst for the accounting manager’s illicit activity, Anderson said.  First, she discarded the register tapes each day so that no one could go back and match them to the bank deposit.

Then, according to the fraud investigation, she destroyed some of the handwritten cash receipts and pocketed the amount of cash they represented. The remaining receipts were given to the accounting clerk to enter into the accounting system.  As a result, the remaining cash, checks and credit cards matched the remaining handwritten receipts, as well as the amount deposited into the bank, Anderson explained.

“There was no reason to suspect the accounting manager of being anything but loyal, reliable and diligent,” Anderson said.  “Except, of course, that she was in that very special position of being intimately involved in the accounting procedures and therefore able to exploit the weaknesses in them.  A comprehensive fraud deterrence program developed by a forensic accounting expert would have helped close the loopholes and prevent the loss of $400,000.”

If you suspect your anti-fraud controls may have weaknesses, consider contacting a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A Certified Fraud Examiner can examine your fraud deterrence measures and make recommendations for improving them, Anderson said.

This Tale of Fraud article is the second in a series of occasional posts that will analyze actual cases of fraud that occurred in businesses, non-profits or government offices.

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.

Outsourced CFOs Bring Big Benefits at Reasonable Cost

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

Many small- to medium-sized businesses rely on their controller or accounting manager to handle routine financial and accounting matters.  But what if a company’s financial needs exceed the basic functions their controller or accounting manager can provide?  What happens when the more specialized services of a Chief Financial Officer (CFO) are needed, but the company can’t afford a more costly CFO or doesn’t need one on a permanent basis?  The solution is easy:  Contract with an outsourced CFO.

“Good, experienced controllers and accounting managers are very are 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:

  • 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.

Fraud Deterrence on Foreign Soil

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

Your company has decided to open a factory overseas, or to begin selling their products in a foreign country.  Do you understand the laws that will affect how your company operates outside the boundaries of the United States?  Which payments to foreign government officials are allowed and which are considered fraudulent?  A forensic accounting expert can help you navigate this complex international maze and establish policies and procedures as part of a comprehensive fraud deterrence program that will protect your company from unwittingly participating in fraudulent financial activities abroad.

“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.”

Take the case of the 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 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 they made the payment to the provincial governor, were they 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 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, Anderson said.  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 its products there — or is thinking about doing so — it may 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.

Fraud Tales: Fraud Investigation Reveals Loopholes in Checkbook Controls

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

Harry Johnson was a savvy businessman who was well aware of the perils of not having the proper fraud deterrence measures in place.  He took great care to see that his successful small business was adequately protected by anti-fraud controls that he created himself.  Then how did Harry end up losing more than $200,000 from fraudulent activity?  This Tale of Fraud is the story of an actual fraud investigation that uncovered exactly what went wrong in Harry’s business.

“Harry was seemingly meticulous about safeguarding the checkbook used for his business,” 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.   “He diligently set up a series of anti-fraud controls that he truly believed would prevent fraud from occurring.”

Anderson said that although Harry, which is a fictitious name, allowed the controller to be listed as a signatory on the checking account, he always carefully watched the controller fill out each check and he always signed each check himself.  Additionally, Harry was the only person who could write in the checkbook, so he vigilantly recorded each check, Anderson said.

The controller was permitted to fill out the deposit slips, but only under Harry’s watchful eye.  And, only Harry could record the amount of the deposit, which he got from the printed bank deposit receipt.  Finally, Anderson said, although the controller performed the monthly bank reconciliation, Harry always matched the amount recorded by the controller in the checkbook to the monthly bank statement.

“To the untrained eye, Harry’s fraud deterrence measures might seem adequate,” 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.  “But a forensic accounting expert would have seen that the measures were filled with loopholes that the controller exploited, allowing him to steal well over $200,000 before Harry realized anything was wrong.”

How did the controller do it?

The fraud investigation Anderson conducted revealed that because the controller was a signatory on the checking account, he was able to prepare and cash counter checks that were never recorded in the checkbook.  In addition, while the controller prepared each deposit slip in front of Harry, he never totaled the deposit.  The fraud investigation found that once the controller got to the bank, he would enter a total that was less than the deposit, allowing him to take a certain amount out in cash that he then pocketed.  The net amount deposited was printed on the bank deposit receipt, Anderson said, and it was this amount that Harry recorded in the checkbook, never realizing that it was not the amount it should have been.

Finally, the fraud investigation discovered that Harry never kept a running balance in the checkbook, but instead, relied on the controller to perform the bank reconciliation and write the updated bank balance in the checkbook, Anderson explained.  The controller always made sure that the month-end amount recorded in the checkbook equaled the month-end balance shown on the bank statement.

“Protecting your company from devious-minded people who are intent on defrauding you is a complex process,” Anderson said.  “It’s not something to do yourself and hope you get it right.  Creating strong anti-fraud controls as part of a comprehensive fraud deterrence program that will adequately protect your business is something you should entrust to a forensic accounting expert.”

If you aren’t absolutely certain that your anti-fraud controls are effective enough to prevent fraud, it’s time to contact a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley to analyze the controls and make recommendations for strengthening them, Anderson said.

This Tale of Fraud article is one in a series of occasional posts that will examine actual cases of fraud that have occurred in businesses, non-profits or government offices.

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.

 

Forensic Accounting Experts Bring Peace of Mind in Trust and Estate Disputes

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

If you have children or grew up with brothers and sisters of your own, you probably know all about sibling rivalry and family squabbling.  The conflicts tend to be fairly mundane.  Who got the biggest piece of cake?  Whose turn is it to take out the garbage?  Who borrowed a favorite sweater without permission?  And then the ultimate arbitrator of such important disputes — usually a parent or grandparent — steps in to settle the matter.

But what happens when everyone has grown up and the conflict between siblings or other family members turns to more serious matters involving disagreements among beneficiaries of family trusts or estates?  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.

“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.”

The better solution, Anderson said, is for families to 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.

“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.

Secure Passwords Key to Fraud Deterrence

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

We hear about it all too often — another data breach at another major bank or retailer.  It’s gotten so bad that Americans say they are more worried about identity theft than terrorism.  There’s not much you can do to thwart hackers trying to steal data from your bank or favorite store.  But you can help safeguard your identity by taking this simple fraud deterrence measure:  secure your passwords.

“We all should know by now that having secure passwords is one of the most effective ways to protect your information and your identity,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware  Valley.  “Yet the most common passwords people use are still ‘password,’ ‘123456’ and, courtesy of the Jackson Five, ‘abc123.’  These people are incredibly vulnerable to identity theft.”

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

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

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

What can you do to make sure your passwords are secure?  Anderson, who recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley, suggests the following fraud deterrence measures to help protect your identity.

  • Don’t use easily identifiable passwords such as those above, your birthday, your anniversary, your spouse’s name, etc. And don’t use the same password for everything.
  • Make sure that your passwords are at least 8 characters long (unless the system requires fewer).
  • Include a mixture of capital and lowercase letters, numbers, and special symbols ($, %, &, etc., if permitted).
  • Try to have some level of familiarity with the basis for each password so that it’s not too difficult to remember. For example, you could take the city of your birth (say, Chicago) and the year you started your business (say, 2007) to come up with the following password:

 

Oga20Cih07C

 

This looks complicated, but it’s actually not.  It’s Chicago spelled backwards in a group of three letters with the first letter capitalized, then the first two digits of the year, then repeat the pattern. After using this password a few times, it is easily memorized.

 

  • For systems that require four-digit pins, select a four-letter word that you will remember and convert it to numbers using the telephone keypad. For example, you might use your father-in-law’s first name (Alex) to come up with 2539, or if you hail from Utah, you might want to use 8824.  As long as you don’t use birthdays, anniversaries, street numbers or the last four digits of your phone number, it would be hard for someone to guess these converted numbers.
  • Consider using a password manager. Your antivirus software may already contain a password manager, or there are a number of online password managers.  You create a single strong password to log into the password manager, and it stores all of your other passwords.  As a result, you need to memorize only one strong password.
  • Keep the written record of your password in a secure location. Don’t tape your password to your computer or your desk.  And never share your passwords with other people.

 

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

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

If you require 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.

Understanding Business Valuation, Part V

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

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.

A control adjustment 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.

Fraud Investigation Uncovers Casper, The Unfriendly Ghost Employee

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

Casper Richardson was the perfect employee.  He was never sick, opted out of company medical insurance, often worked overtime, received glowing reviews from his supervisor, and always cashed his paycheck on payday.  Casper’s one fault?  He didn’t actually exist.  Casper was a ghost employee that a subsequent fraud investigation revealed had cost the company a tidy bundle — more than $200,000 over a five-year period.

“Ghost employees can be fictitious employees created by a fraudster or real individuals who are paid but don’t work for the employer,” 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.  “Either way, they are illusions — nonexistent employees whose paychecks are collected by a fraud perpetrator masquerading as a loyal employee.”

And because the perpetrator is in a position to be able to engineer the fraud and to carefully cover it up, this type of fraud can go on for years and be difficult to uncover, Anderson said.  In the case of Casper, the Unfriendly Ghost Employee, the fraud was discovered only when Casper’s supervisor — the fraud perpetrator — was involved in an auto accident and missed work on payday, thereby unable to collect Casper’s illicit paycheck and maintain the cover-up.

Anderson, a Certified Fraud Examiner, said ghost employee fraud occurs when the fraud perpetrator places fictitious employees on the payroll, collects the paychecks and then either cashes them or hands them over to an accomplice to cash.  Real individuals who are ghost employees usually are employees who were terminated, but not removed from payroll, Anderson explained.  The fraud perpetrator intercepts subsequent paychecks and, once again, cashes them or gives them to an accomplice to cash.

Anderson said that fraud investigations historically have shown that the fraud perpetrators in these types of cases are supervisory or management employees with access to and authority over the payroll process, or lower-level payroll or human resources employees who discovered and exploited a weakness in the internal payroll control.

Fraud investigations also have uncovered cases in which several people worked together to perpetrate the fraud, Anderson said.  As an example, he noted situations in which supervisors conspired with terminated employees who continued to collect paychecks that they cashed and then split with the supervisors.

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.  Following are some fraud deterrence measures organizations can implement now to lessen the chances of having ghost employees on the payroll:

  • Separate the hiring and human resources functions from the payroll function;
  • Require two levels of review and approval for time cards and pay sheets;
  • Maintain a list of terminated employees and periodically check the list against payroll data, and
  • Require someone other than the employee’s supervisor to distribute paychecks.

“Putting these steps into practice, as well as adopting other fraud deterrence procedures, can help businesses safeguard against losing significant amounts of money by paying non-existent characters like Casper the Unfriendly Ghost Employee,” Anderson said.

If you suspect that you may have a ghost employee on the payroll or that any type of fraudulent activity is 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.

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.

Understanding Business Valuation, Part IV

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

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, a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley, 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 in a series of articles on business valuation, 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 – 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 – 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 – 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,” Anderson said.  “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, Anderson 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,” Anderson 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 his next installment of “Understanding 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.

 

Pay for Fraud Deterrence Now — or Fraud Losses Later

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

Remember the old auto oil filter company commercial with the tag line “Pay me now or pay me later?”  The advertising message being sent was that the small upfront cost to replace your car’s oil filter now could prevent more costly repairs in the future.  The same can be said about fraud deterrence programs — the lower cost of implementing anti-fraud measures now could save you big losses in the future.

So, 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 and they boil down to management not understanding how easily fraud occurs or how easily and cost effectively it can be prevented,” 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.

Anderson said the first problem is that management often cannot fathom that fraud could ever occur in their organization, usually because they staunchly believe their employees are trustworthy and loyal and also because they believe that they would inherently somehow “know” if fraud was occurring.  Secondly, he said, management mistakenly believes 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.”

Anderson 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 see our doctor for an annual physical to catch any problems early on.  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.

Understanding Business Valuation, Part III

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

Determining the worth of your business can be a complex matter.  Before the actual business valuation can truly get underway, there are a multitude of steps that must be taken to set the groundwork.

In previous postings, 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, 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.

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

“Small business owners, however, 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.”

As a result, Anderson said, 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 – These 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/Nonrecurring Adjustments – Non-operating or nonrecurring income or expense 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.  The non-operating 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 – 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.  The adjustments 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 “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.

Fraud Deterrence Can Ferret Out Phony Vendors

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

One of the most frequent schemes deceptive employees use to steal money in the workplace is the creation of phony vendors who are paid for services never rendered or goods never delivered.  There are, however, fraud deterrence steps organizations can take to help ferret out these fictional vendors.

“It really is a popular tactic among fraudsters,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.  “It’s not easy to root out phony vendors, but there are things you can do to help identify them.  Ultimately, you might need to seek professional help to make sure all your vendors really are legitimate.”

Anderson said that to discover whether you are paying phony vendors, it helps to understand how an employee goes about creating one in the first place.

The first thing a fraudster must do is establish a vendor name, either by creating a new name that has never been entered into the accounting system or by using an existing vendor already in the system but for whom there has been no activity for a year or more.  Anderson said savvy fraudsters will invent service or supply vendors because it is more difficult to determine whether the services were actually performed and because supplies are sometimes expensed and not tracked in a company (think paper clips, for example).

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

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

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

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

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

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

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

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

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

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

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

About David Anderson & Associates

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