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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.

Understanding Business Valuation, Part II

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

Understanding how to achieve a fair and accurate business valuation is something every business owner — at some point — needs to know.

“You don’t want to rely on estimates, gut instinct or rumored calculation methods to determine business value,” 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.  “When you need to know the true worth of your business, you need to understand the process.  And you need the expertise of a highly qualified business valuation expert.”

In a recent posting, Anderson covered the first step of business valuation — determining the standard of value.

“The second step in ascertaining a company’s worth is to decide on the premise of value,” according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley.

The premise of value is the type of transactional circumstances underlying the business or property being valued, Anderson said, adding that there are four premises of value: Going concern value; book value; liquidation value, and replacement value.

Going concern value — the most frequently used premise of value — assumes the business will continue to operate and produce revenues and (one hopes) future profits, Anderson said.

Book value is the difference between a company’s total assets (adjusted for depreciation, depletion and amortization) and total liabilities as listed on the balance sheet.  Assets such as real estate, collectibles and artwork are recorded at historical cost and therefore may be undervalued on the balance sheet.  Intangible assets such as patents, copyrights and trademarks also may be undervalued.

Interestingly, many buy-sell and shareholder agreements use book value to establish share value when a shareholder wishes to sell shares back to the company or when shares are purchased after a shareholder is terminated or dies.  In these cases, disputes often arise when the book value of the shares is significantly less than the going concern value.

Liquidation value is the net amount realized if the business is terminated and the assets sold individually.  Liquidation value typically results in the lowest of the premises of value, Anderson said.

Replacement value generally is used for specific assets and refers to the current cost of property equivalent to the property being valued.  Replacement value is often used in insurance contracts (on real estate or tangible personal property) and in construction or manufacturing agreements.

“Determining these two crucial steps — the standard of value and the premise of value — will allow a business valuation expert to select the appropriate valuation methodology to decide your company’s worth,” Anderson said.

Over the next several weeks, Anderson will post additional articles on the specific methods business valuation experts use to establish value, the effect non-operating assets have on business valuation and discounts for lack of control and lack of marketability.

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.

Keeping an Eye on Fraud Deterrence

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

Getting away with fraud is no easy feat.  Perpetrators must go to great lengths to hide their illicit activities.  And yet they manage to pull it off all too often.  So is there a fraud deterrence measure you can adopt to thwart them without spending a small fortune?  There most definitely is.  Simply let them know you are watching.

“In this day and age, people are used to being watched,” 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.  “Cameras are everywhere — at red lights, private residences and inside stores and out in the parking lot too.  And everyone’s got a camera on their cell phone. It’s no wonder criminal activity is down in areas where people are — or think they are — under surveillance.  The same is true regarding fraud.”

Anderson doesn’t advocate actual video surveillance of employees, but rather that organizations convey clearly to employees that they are watching for fraudulent activities at all times.  By implementing several relatively inexpensive steps, Anderson said organizations can let employees know that fraud deterrence is a critical organizational goal.

The first step is to develop and publish a code of conduct and an anti-fraud policy that lets employees know:

  • Fraud is unacceptable and will not be tolerated;
  • Every employee is responsible for being alert to the possibility of fraud;
  • It is the duty of every employee to not turn a blind eye to fraud; and
  • Management will be actively instituting one or more anti-fraud measures, including surprise audits, regular management review, mandatory job rotation, mandatory vacations, fraud training for employees and managers, and (possibly) the institution of a fraud hotline.

The next key step is to actually carry out the anti-fraud measures.

“Your fraud deterrence program isn’t going to work if you make a point about being on the lookout for fraud but then do nothing to indicate you are actually watching,” Anderson said.  “Besides, you don’t want to wait until you get to the point where you have to hire a Certified Fraud Examiner to conduct a fraud investigation.  You want to prevent fraud from happening.  If employees think you are watching, they might not be inclined to steal in the first place.”

Carrying out anti-fraud measures does not need to be expensive.  Anderson suggests a few well-timed surprise audits – of petty cash, bank accounts and inventory – sprinkled throughout the year.

“I particularly like a surprise count of petty cash at 4:00 p.m. on a Friday or the day before a holiday because there is a greater chance of petty cash being taken for use over a weekend or holiday,” 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.

Anderson notes that inventory need not be counted in total, but certain items that are high value, have a high turnover or are prone to fraud could be subject to a surprise count once a month.  Annual fraud training for employees and managers also is not financially burdensome – nor is a fraud hotline, he said.

“All of these measures let your employees know that your organization is serious about fraud deterrence and that employees are, in effect, under surveillance for illicit activities, ” Anderson said.  “Enacting these measures and then carrying them out will greatly reduce the potential for fraud.”

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

About David Anderson & Associates

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

Understanding Business Valuation, Part I

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

Do you know the value of your business?  There are myriad reasons why you might need to know — from mergers and acquisitions to estate issues or marital dissolution.  When the time comes, understanding how a fair and accurate business valuation is determined is of paramount importance.

“The first step in valuing a business is to determine the standard of value,” 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.  “This is the type of value that is being requested for the business.  The three most common standards of value are fair market value, fair value and strategic/investment value.”

The IRS defines fair market value as “The price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Fair market value is the most widely recognized and accepted standard of value, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley.  Fair market value is used to establish value for all Federal tax matters, including estate tax, gift tax and income tax, he said.  This standard also is used for many purchase, sale and merger transactions; for buy-sell agreements; for regulatory valuations; and for most litigation matters, including partner/shareholder disputes, divorces and economic damage cases.  Fair market value takes into consideration discounts for lack of control and lack of marketability.

Fair value generally is defined as fair market value without considering discounts, Anderson said.  Fair value principally is used to value the shares held by a company owner with a minority interest when that person believes he is being forced to receive less than adequate compensation for his shares.  Fair value also may apply to divorce cases in some states.

Strategic/investment value is the value to a particular investor based on individual requirements and expectations, according to Anderson.  This standard most often is used for a purchase, sale or merger in which the buyer expects to realize certain synergies with the seller’s business.  Strategic/investment value typically is higher than fair market value because of these synergies.

“The standard of value is one of the key components used to determine the valuation methodology to be employed and, ultimately, the business valuation expert’s decision on the value of your business,”  Anderson said.

Over the next several weeks, Anderson will post additional articles on the specific methods business valuation experts use to determine value, the effect non-operating assets have on business valuation and discounts for lack of control and lack of marketability.  Up next in Understanding Business Valuation, Part II:  Determining the premise of value, the type of transactional circumstances that underlies the business or property being valued.

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.

Prosecution: The Ultimate Step in Fraud Deterrence

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

So you’ve been the victim of fraud.  You knew something was amiss.  You hired a Certified Fraud Examiner.  A thorough fraud investigation uncovered the fraud and identified the perpetrator.  You fired the fraudster — or punished them internally — and implemented stronger anti-fraud controls as part of your overall fraud deterrence program.  So it’s over, right?

Not quite.

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

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

In its 2014 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) —  the world largest anti-fraud organization, dedicated to fighting fraud through its more than 70,000 members in more than 150 countries worldwide — found that only 61 percent of fraud cases were referred to law enforcement.  The remaining 39 percent were not.

Of the cases referred for prosecution, 75 percent resulted in a guilty plea or a conviction.  Only one percent resulted in an acquittal.  In most of the other cases, law enforcement declined to prosecute.

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

  • Nearly 35 percent said fear of bad publicity kept them from referring the case to law enforcement;
  • More than 30 percent thought internal punishment was sufficient;
  • More than 21 percent reached a private settlement with the fraudster, and
  • Almost 19 percent thought that referring the case to law enforcement and helping with prosecution would be too costly.

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

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

Anderson recalled a case in which a company controller who committed fraud was allowed to remain in his job by agreeing to repay the stolen money through regular payroll deductions.  After some time passed, Anderson was retained by the company to conduct another fraud investigation, which found that the controller was again defrauding the company in a variety of ways, including having instructed the payroll department to stop the payroll deductions designed to repay the previous fraud.  The company terminated the fraudster, but again declined to prosecute.

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

There also is a key benefit to your fraud deterrence efforts that comes from referring fraud cases to law enforcement, Anderson said.  “Seeking prosecution of a fraudster is one of the strongest fraud deterrence message you can send,” he said.  “It tells every other employee that fraud will not be tolerated and, in fact, will be prosecuted to the fullest extent of the law.”

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

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

About David Anderson & Associates

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

Understanding Employees Key to Fraud Deterrence

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

Do you know your employees?  Do you understand how they function on the job or the scope of their interpersonal relationships at work?  Do you know what personal challenges or difficulties they face at home?  If not, perhaps it’s time to learn.  Understanding your employees is a key component to an effective fraud deterrence program.

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

In its 2014 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) identified some of the more frequently occurring behavioral signs and personal situations that should raise red flags at companies, non-profits and government offices.

The report, a biennial global survey on the costs, schemes, perpetrators and victims of fraud, found that a key red flag is employees who live beyond their means, Anderson said.  Look for a significant change in lifestyle – a lower level employee who suddenly starts driving an expensive car, wearing designer clothes or taking expensive vacations.  In more than 43 percent of frauds, coworkers and others noticed that the fraudster had adopted a more extravagant lifestyle, the survey noted.

Another off-the-job red flag is employees who are experiencing financial difficulties, according to Anderson.  Perhaps a family member or close relative is suffering through an expensive illness.  Or, maybe the family’s primary breadwinner is unemployed.  Note also an employee who complains about mounting debts or foreclosure proceedings on their house (or actually lost their home).  In 33 percent of frauds, the fraud perpetrator was struggling with personal financial difficulties.

On the job, look for employees, particularly purchasing or operations employees, who are unusually close to a vendor or customer, Anderson said.  Perhaps they regularly socialize with that person or receive tickets to baseball games, the theater or other events.  Look for a salesperson who spends an inordinate amount of time with a customer’s employee.  Fraud investigations found this type of activity in almost 22 percent of fraud cases.

Another on-the-job red flag is employees with control issues, Anderson added.  Perhaps the employee insists on being the only one to perform certain duties or gets overly defensive when a coworker tries to get involved in his or her job.  In one case he investigated, Anderson said the fraudster was the only employee in the company who could process payroll.  The employee actually had to be taken from the hospital in an ambulance in order to run payroll on one occasion, Anderson said.  The ACFE report found that nearly 22 percent of frauds involved an employee with these types of control issues.

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

“This is not to say that every employee who displays one of these signs is intent on defrauding the company,” said Anderson, a Certified Fraud Examiner and an ACFE member.   “They may be suffering through a difficult personal situation, but managing it nonetheless.  Or they may have hit it off really well with their customer or vendor and developed a mutually beneficial, but perfectly above-board, relationship.  But it would benefit you to know whether that is the case or not.  You could end up helping your company, your employee or both.”

In upcoming posts, Anderson will continue to share results from the ACFE’s 2014 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 70,000 members in more than 150 countries worldwide.

A comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley is highly recommended for every type and size of organization.

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

About David Anderson & Associates

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

Fraud Investigations Pinpoint Characteristics of Fraudsters

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

The perpetrators of fraud come in all shapes and sizes, demographically speaking.  But fraud investigations throughout the years have been able to pinpoint the more typical characteristics of a fraudster, and some of the results are surprising.

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

The Association of Certified Fraud Examiners (ACFE) collected extensive data about the people who commit fraud during the association’s biennial international survey to study the costs, schemes, perpetrators and victims of fraud.  Below are highlights of the latest findings as outlined in the ACFE’s 2014 Report to the Nations.

Although most people believe fraudsters are career criminals, Anderson said, surprisingly more than 86 percent of fraud perpetrators never had been charged or convicted of a fraud; another seven percent had been charged but not convicted.  Almost 82 percent of fraudsters never had been punished or terminated by a previous employer for fraud-related conduct, and an additional nine percent had been terminated but never punished.

Another surprise involved the tenure of the employee committing the fraud, Anderson said.  More than 45 percent of fraud perpetrators had been with their company between one and five years – neither a very short time nor a very long time.  Less than six percent had tenure of under a year, while 25% had tenure of more than 10 years.

Not surprisingly, Anderson said, was the finding that the higher the position the employee held, the greater the loss.  Frauds carried out by a regular employees caused a median loss of $75,000, while those carried out by a managers caused a median loss of $130,000 and those carried out by owners/executives caused a median loss of $500,000.

Fraud investigations have found 52 percent of all fraud perpetrators were between the ages of 31 and 45 and that men were twice as likely to be the perpetrator as women.  Also, the older or the more educated the perpetrator, the higher the loss tended to be, usually because these people were higher up in the organization.

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

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

Anderson will continue to share findings from ACFE’s 2014 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 70,000 members in more than 150 countries worldwide.

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

About David Anderson & Associates

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

The Best Anti-Fraud Controls in Fraud Deterrence Programs

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

The single most common anti-fraud control companies use as a fraud deterrence vehicle is the formal financial audit.  Unfortunately, it’s not a very effective one.

In its 2014 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) reported that out of 18 identified anti-fraud controls, the formal financial audit scored 16th in reducing potential fraud losses and 17th in reducing the duration of fraud.

“If you’re relying on a formal financial audit as the backbone of your fraud deterrence program, you are not adequately protecting your company from fraudulent activity,” 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.  “A formal financial audit is an important tool in a comprehensive fraud deterrence program.  It just isn’t the best anti-fraud control available.”

The ACFE’s 2014 Report to the Nations, which is derived from a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud, reported that the five most effective controls in terms of reducing potential losses from fraud were:

  • Proactive data monitoring and analysis (reduced fraud loss by almost 60 percent)
  • Employee support programs (reduced fraud loss by 55 percent)
  • Management review (reduced fraud loss by almost 52 percent)
  • Having a published corporate code of conduct (reduced fraud loss by 50 percent)
  • Having and using an internal audit department (reduced fraud loss by 44 percent)

In terms of reducing the duration of fraud, the ACFE said the six most effective controls, all of which reduced the average duration by 50 percent, were:

  • Hotlines
  • Surprise audits
  • Fraud training for employees
  • Proactive data monitoring and analysis
  • Having a published anti-fraud policy
  • Having a dedicated fraud department, function or team

“Clearly, these are the controls that businesses, non profits and government offices need to implement to safeguard their organizations,” said Anderson, a Certified Fraud Examiner and an ACFE member.   “Relying on just one or two anti-fraud controls isn’t necessarily going to protect you.  You need a multi-faceted approach.”

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

“It’s simply the most effective way to combat fraud in the workplace,” he said.  “You don’t want to wait until you need to call in an expert to conduct a fraud investigation.  You need to be proactive and call in the experts to prevent the fraud from occurring in the first place.”

Over the next weeks, Anderson will continue to post findings from ACFE’s 2014 Report to the Nations.  The Association of Certified Fraud Examiners is the world largest anti-fraud organization, dedicated to fighting fraud through its more than 70,000 members in more than 150 countries worldwide.

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

About David Anderson & Associates

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