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Why You Can’t Afford Not to Invest in Fraud Deterrence

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

Think a fraud deterrence program is too pricey?  Consider this.  In its biennial global survey, the Association of Certified Fraud Examiners (ACFE) found that the typical organization loses five percent of its revenues to fraudulent activities each year.

That conclusion was a key finding in the ACFE’s 2014 Report to the Nations, the results of an international survey conducted every two years to study the costs, schemes, perpetrators and victims of fraud.

“Think about what that means,” says 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.  “If you have $1 million in sales each year, you are likely losing $50,000 per year to fraud.  At $10 million in sales per year, that adds up to $500,000 lost to fraud each year.  And so on and so on.”

The ACFE study also found that the median loss to fraud is $145,000 per incident and that 22 percent of reported incidences involved losses of more than $1 million.

Anderson says organizations sometimes tell him that installing anti-fraud controls and following a comprehensive fraud deterrence program is too expensive or simply not in the budget.

“But given the ACFE’s findings, it is far more likely that failing to install anti-fraud controls is what is too expensive.  Businesses, government offices and other organizations really can’t afford not to invest in fraud deterrence,” said Anderson, a Certified Fraud Examiner and an ACFE member.

Anderson encourages every organization to enact strong anti-fraud controls.  A comprehensive fraud deterrence program established by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help protect your organization from losses caused by fraud.  If you have even the slightest suspicion that illicit activity is occurring at your organization, Anderson urges you to contact a Certified Fraud Examiner to conduct a wide-ranging fraud investigation to stem the losses and determine the extent of them.

In the next several weeks, Anderson will share additional highlights from the ACFE’s 2014 study on global fraud.  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.

Understanding “The Fraud Triangle” Can Aid in Fraud Deterrence

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

Fraud deterrence is undoubtedly a complex issue.  But there is one seemingly simple approach that can help you keep fraud out of your business or organization:  Understanding “The Fraud Triangle” and using it to your advantage.

“‘The Fraud Triangle’ is what forensic accountants talk about when they refer to the three elements that are necessary for fraud to occur — pressure, opportunity and rationalization,”  says David Anderson, a Certified Fraud Examiner and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.  “If those three elements are not in place, then fraud cannot occur.  So it goes to reason that if you successfully eliminate one of the elements, fraud will not be a problem for you.  It’s really a rather straightforward, proactive approach to fraud deterrence.”

Pressure, the first element, is the motivation or incentive to commit fraud, Anderson said.  Pressure often comes from one’s personal life, such as the expensive illness of a loved one, a spouse’s unemployment, a gambling or drug problem, the practice of living beyond one’s means, or other situations that carry a heavy financial burden.  In these cases, Anderson said, an employee may feel extreme pressure to find more money and that can open the door to fraud.

The second element, opportunity, indicates the ability of the employee to carry out the fraud through the misappropriation of cash or other company assets, Anderson explained.  Opportunity arises when a company lacks critical anti-fraud controls, such as separation of duties, dual signature requirements for checks over a certain amount, management review of bank accounts and financial statements, and other necessary controls.  Opportunity also can occur when excessive trust is placed in employees who have the ability to override or circumvent anti-fraud controls.

The third element, rationalization, refers to an employee’s justification for committing fraud, Anderson said.  It can start as an employee’s simple rationalization that the theft is just a temporary loan that will be paid back before anyone ever finds out about it.  But that type of thinking can quickly mushroom into grander rationalizations, such as “I’m underpaid and just getting my due.” or “My boss is stealing, so why can’t I?” or “They’re making a lot of money and won’t even miss what I have taken.”

“If you’ve got all three elements, you’ve got a potential fraud brewing,” Anderson said.  “Remove one of the elements and the potential for fraud evaporates.”

Anderson recommends that you get to know your employees better so that you are more aware of any high-pressure financial situations they may be dealing with in their private lives.  Prevent opportunity by enacting comprehensive anti-fraud controls and establishing a strong fraud deterrence program, he said.  And send a clear message as a part of that fraud deterrence program that there is absolutely no acceptable rationalization for committing fraud, he added.

If have reason to believe that fraudulent activity has infiltrated your business — or if you believe “The Fraud Triangle” exists with any of your employees — Anderson recommends you act immediately by hiring a Certified Fraud Examiner from a firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A comprehensive fraud investigation will determine the extent of your losses, if any, and an experienced Certified Fraud Examiner will identify weak spots in your internal anti-fraud controls and set up a strong 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, 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.

Financial Statements Can Be Invaluable in Fraud Deterrence

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

Financial statements issued by companies, government entities or organizations can be invaluable tools in fraud deterrence.  But too often, the people in charge don’t bother to read these statements on a regular basis, and those who do often don’t understand what they are reading.

Understanding your financial statements, and knowing what to look for, are important components both in fraud identification and fraud deterrence.

“The only time officials in most companies, government entities or organizations actually look at the financial statements is after year-end,” said David Anderson, a Certified Fraud Examiner and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, including fraud investigation and fraud deterrence programs.  “They are doing themselves a major disservice.  Financial statements often have red flags that can alert you to potential fraudulent activity.”

A full forensic accounting analysis of your financial statements can identify the warning signs of fraud, Anderson said.  There are many things to consider in analyzing the statement, he said.

Say business is booming.  Do your financial statements show regular increases in sales or do they show relatively flat sales?  If it’s the latter, you’ll want to know why.  In one recent fraud case, a dishonest employee was diverting sales and cash receipts.  Had the business owner checked the company’s financial statements regularly, the fraud could have been detected sooner, Anderson noted.

Say business isn’t booming and your sales, understandably, are down.  If your financial statement is showing an increase in inventory purchases, something may be wrong.  Could someone be fraudulently diverting inventory?

If your gross margins — the difference between sales and cost of sales or cost of goods sold — are decreasing, find out why.  If certain operating expenses — such as office supplies/expense, travel and entertainment expense, etc. — are rising faster than expected, look into it.  If the cash balance on your financial statements doesn’t approximately equal the balances on the corresponding bank statements (allowing for some outstanding checks), look for missing funds.

The reason behind any of these “red flags” may be completely legitimate, Anderson said, but they also may warrant a fraud investigation to ferret out illicit activity.  At the very least, a consistent examination of your financial statements may identify business inefficiencies that can be resolved.

Lastly, regular financial statement analysis lets employees know that you care about the company, government entity or organization, and that you are following the flow of money to assure operating efficiency and to identify potential fraud.  It’s one of the strongest fraud deterrence messages you can send, Anderson advises.

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.

A Disaster Recovery Plan Can Help your Business Survive a Disaster

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

Disasters are in the news every day.  Tornadoes.  Hurricanes.  Sinkholes.  Floods.  Fires.  As a matter of practice, you’ve probably insured your home, your business, your health and your very life in the event disaster strikes.  But what do you actually do when the immediate threat has passed?  Do you have a disaster recovery plan in place?  Surprisingly, few businesses do.  And they are, frankly, flirting with disaster.

Insurance industry statistics show that 70-80 percent of businesses affected by a disaster never reopen or fail within two years of reopening.

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

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

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

— Are both your electronic and paper business records protected?  Is vital information backed up in case a computer hard drive crashes?

— If one or more of your offices or production facilities are severely damaged or destroyed, where will you relocate?

— What steps need to be taken to resume operations and how fast can you be up and running again?

— Do your employees know what to do and where to go?

— Do you have adequate insurance to rebuild your business?

— How do you assure your customers will keep paying you?

— Will your vendors continue to extend credit to you?

— How will you replace key employees injured or killed by the disaster?

— Are you prepared with step-by-step procedures to react to different types and severities of disasters?

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

If you are in need of a comprehensive contingency and disaster recovery plan or require any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

 

Fraud Deterrence Starts with You

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

As a reasonable and intelligent business owner who employs reasonable and intelligent employees, you might think fraud deterrence programs are unnecessary.  It’s a given that everyone knows they’re not supposed to steal from their employer, right?

And they also understand that as the boss, you get certain perks to which they are not entitled.  It’s your company, not theirs; your right, not theirs.  That’s another given, isn’t it?

Think again.

“Your actions determine the kind of message you are sending to your employees about fraud,” says 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.  “If you don’t have a strong fraud deterrence program in place and if you engage in questionable activities yourself, then you’re sending the wrong message.”

Anderson points to two recent fraud cases in which employees blamed management for creating an atmosphere of fraud tolerance.  In one case, a  defendant claimed the company never told her that fraudulent activities were unacceptable, indicating — to her — the company’s tacit approval of her illicit actions.  In another case, the defendant claimed that because the company president was committing fraud by running personal expenses through the business and claiming them as business deductions, it was okay for him to defraud the company too.

“Whether you are a business owner, a corporate executive or an elected or appointed official, your employees look to you for cues regarding what is and what is not acceptable behavior regarding fraud,” Anderson said.  “What kind of messages are you sending?”

Anderson suggests management make fraud deterrence a key objective by sending employees a strong message that fraud is unacceptable in the workplace and by living that message too.

Establish a clear fraud prevention policy and publicize it to employees through employee handbooks, manuals, training, memos, etc.  Let your employees know that fraud investigation is an ever-present aspect of your business and that steps are always underway to ferret out the perpetrators of fraudulent activity.

If you do suspect that your business has fallen victim to fraud, Anderson recommends that you contact a Certified Fraud Examiner to conduct a comprehensive fraud investigation and determine the extent of your losses.  A Certified Fraud Examiner from a firm that provides forensic accounting services in Philadelphia and the Delaware Valley also can help you establish a fraud deterrence program to help protect your company in the future.  And always remember that the message you send by the example you set can be a powerful deterrent.

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.

Business Valuation Reveals What Your Business is Really Worth

Posted by & filed under Blog Articles, Business Valuation, Forensic Accounting.

Something has come up and you need to know what your business is worth.  Do you need the advice of a business valuation expert to figure this out or can you do it on your own?

The business down the street sold for $10 million, the former owner claims.  Your business is about half the size; so is it worth $5 million?  Or you’ve heard you can approximate your business’s worth by multiplying its income by six.  Will that suffice?

In a word, no.

“Neither of those business valuation methods are remotely reliable,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley.  “A small software company named WhatsApp would have valued itself at between $50-$60 million using the six times income method.  But earlier this year, they sold themselves to Facebook for $19 billion — more than 300 times higher.”

If you really want to know the true worth of your business, says Anderson, you need a highly qualified business valuation expert.

There are many reasons a company may need to know the accurate value of its business: partner/shareholder disputes; gifting a portion of the business; sales, mergers and acquisitions; divorce; estate and trust matters; insolvency, and a host of other issues.

Depending on your situation, you may need one of two types of business valuations.  A calculation of value is an informal business valuation that provides a reliable approximation of your business’s worth.  A full-blown formal business valuation is important for estate planning, gifting and litigation.

A Certified Valuation Analyst will determine your business’s true income, examining salaries, expenses, profits, losses and more.  Are you paying yourself or your family members more or less than what outside managers would cost?  Do you have company cars or special deferred compensation programs for family members or any other expenses a third party would not incur?  Do you have one-time expenses related a lawsuit or losses from a natural disaster?

In calculating your business’s worth, a professional business valuation expert also considers industry, geographic and economic factors, as well as recent sales of businesses similar to yours.

Don’t rely on gut instinct, street rumors or amateur rules of thumb when you need an accurate business valuation.  Put your trust in a Certified Valuation Analyst to find out what your business is really worth.

If you require the services of a certified business valuation expert, please contact the Philadelphia forensic accounting firm of David Anderson & Associates today 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 Reveal Trusted Employees Often at Fault

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

It’s in the headlines nearly every day — stories about fraud investigations that reveal the theft of hundreds of thousands and even millions of dollars from local businesses, government agencies and charitable organizations. And who’s to blame? Too often the culprit is a long-time trusted employee.

“The person responsible for defrauding the company frequently is the last person the business owner ever would have suspected,” says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that conducts fraud investigations and offers fraud deterrence programs and fraud deterrence training. “Our fraud investigations often point to the most loyal, trustworthy and reliable employee, someone the boss can’t even imagine running the business without.”

Even worse, it is precisely this high level of trust that the employee has earned that allows him or her to perpetrate the fraud for many years without raising suspicion.

“Business owners are always shocked that fraud has occurred and stunned by the dollar amount stolen,” said Anderson, a Certified Fraud Examiner. “Most of them are busy focusing on their core jobs and necessarily delegate important financial duties to these most trusted employees. As long as things run smoothly and the owners and employees get paid, there is no reason to suspect theft.”

So what fraud deterrence steps can you take? One easy thing is to have your bank statements (originals or copies) mailed to your home instead of to your business. Then, take 15 minutes each month to examine the statements and cancelled checks to see if anything unusual is happening, Anderson said. Look for unknown vendors receiving regular payments, strange check numbers, lower cash receipts or bank balances than expected, or any red flags that indicate you need the expertise of a Certified Fraud Examiner, a highly specialized forensic accountant who can conduct a thorough fraud investigation to determine your company’s exposure.

Fraud investigations conducted by David Anderson & Associates can ascertain your company’s susceptibility to internal or external fraud, quantify the extent of economic damages if fraud has occurred, uncover missing assets, and provide economic damages expert witness testimony and litigation support in resulting prosecutions.

David Anderson & Associates also can help companies seeking to take a proactive approach to preventing fraud by assisting with risk assessment, fraud deterrence programs and fraud deterrence training.

If you need the services of a Certified Fraud Examiner, please contact the Philadelphia forensic accounting firm of David Anderson & Associates today by calling David Anderson at 267-207-3597 or emailing him.

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the surrounding communities. 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 Impact of Different Conventions for Projecting Future Damages, Part I

Posted by & filed under Forensic Accounting, Litigation Support.

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

The Mean

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

The Median

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

Exponential Smoothing

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

adnderson-chart1

 

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

Regression Analysis

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

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

 

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

Posted by & filed under Forensic Accounting, Litigation Support.

The valuation of damages is designed to put the harmed party back into the same economic position that would have existed if the harm had not occurred. The most difficult part of that equation is to project the economic conditions one would have expected without the harm. An analysis of historical results is often used to assist in making that forecast. In my last blog post, I discussed the pros and cons of four of the most commonly used methods to analyze a series of events, namely the mean, the median, exponential smoothing and regression analysis. This post will present two examples and show how each method impacts the damages calculation under each.

Example: Projecting Damages From Theft of Customer Lists – Upward Trend

Hypothetical ABC Co. is a distributor of household cleaning products to small retail stores. Although sales and profits fell during the beginning of the financial crisis in 2007, since then both have steadily increased. At the beginning of 2011, the national sales manager left ABC and took with him all of the contact information for ABC’s customers. He then went to work at a competitor and ABC experienced a drop in sales and profits. ABC has sued to recover damages from 2011 for lost profits caused by this theft of customer lists. Net profits from 2007 through 2011 were:

chart2

 

Let’s apply each of the four methods to project what 2011 profits would have been but for the theft of customer lists:

  • Mean – the average of 2007 to 2010 profits is $20,000 (the sum of the four year’s profits divided by four).
  • Median – there are two midpoints – ($5,000) and $35,000 – so the median would be the point halfway between the two or $15,000.
  • Exponential smoothing – applying weights to each of the four years (1 for 2007, 2 for 2008, and so on) and then dividing the total by 10 – the sum of the weights – yields a projection of $44,500.
  • Regression analysis – there is a clear upward trend that would imply that 2011 profits should be higher than previous year’s profits. Regression analysis yields a projection of $142,500.

In this example, regression analysis not only yields the highest projected value, but it supports the fact that profits had been steadily increasing over each of the past several years.

Example: Projecting Damages From Theft of Customer Lists – Fluctuating Levels of Profits

Using the same facts as in the first example, suppose that profits were fluctuating up and down over the past few years:

chart3

Applying each of the four methods to calculate damages for 2011 provides the following results:

  • Mean – the average of 2007 to 2010 profits is $3,750.
  • Median – the median would be the point halfway between ($10,000) and $50,000 or 20,000.
  • Exponential smoothing – yields a projection of $5,500.
  • Regression analysis – yields a projection of $12,500.

In this example, the median yields the highest value. Because there is no clear trend of growth or decline and a wide range of swings in value, the mean may be the most supportable of the values.

The above calculations are made in a vacuum and clearly there is not enough information in the fact patterns to suggest the best option in each case. The illustrations do highlight some of the mechanics behind the damages calculation, and the impact of using different conventions.

 

Creating an Effective FCPA/UKBA Compliance Program

Posted by & filed under Forensic Accounting, Fraud Deterrence.

Last month I discussed the potential risks that a company faces under the U.S. Foreign Corrupt Practices Act of 1977 (FCPA) and the U.K. Bribery Act of 2010 (UKBA) when conducting business in foreign countries. This month, I’ll present the key components of an effective FCPA/UKBA compliance program.

There are seven key components to an effective FCPA/UKBA compliance program. They are the following:

1) Establish standards and procedures to prevent and detect criminal conduct and ensure compliance with government regulations and industry standards.

2) Create a culture of compliance led by the company’s senior management. This means that senior management must:

– Be knowledgeable about the content and operation of the compliance program;
– Exercise reasonable oversight of the implementation and ongoing review of the effectiveness of the compliance program;
– Assign specific senior level manager(s) overall and day-to-day operational responsibility for the program; and
– Provide the necessary authority and resources to enable successful implementation and ongoing review of the program.

3) Use reasonable efforts to exclude known violators from activities that could lead to program violations. This also requires that the company exercise due diligence in the screening of current and prospective employees for past illegal or improper conduct.

4) Provide reasonable ongoing communication and training to senior management, employees and third-party agents regarding the standards and procedures of the compliance program.

5) Monitor, audit and evaluate the effectiveness of the compliance program on a regular basis. Included within this component are:

– The establishment of a monitoring/auditing program to verify that the compliance program is being followed, which will necessitate the use of internal audit staff or external forensic auditors;
– Evaluation of the effectiveness of the compliance program at regular intervals, including analysis of monitoring/auditing results as well as use of feedback from senior management, employees, third-party agents and others; and
– The use of hotlines to enable employees, third-party agents and others to anonymously or confidentially report or seek guidance about potential criminal conduct without fear of retaliation.

6) Establish of appropriate performance incentives and disciplinary measures that are promoted and enforced consistently within the company to support the compliance program.

7) Establish appropriate response to detected criminal conduct, and subsequent reassessment of the compliance program to reduce the risk of the same conduct occurring again. This requires that the company take the appropriate steps to report detected criminal conduct and cooperate with law enforcement. In addition, the company must take reasonable steps to modify, if necessary, its compliance program to prevent similar conduct in the future.

Of course, no program can prevent rogue employees or agents from violating the FCPA or UKBA, but a well-designed and implemented compliance program — with effective communication and training as well as regular monitoring and evaluation — can minimize the risk of a company and/or its employees violating the FCPA or UKBA. In addition, the existence of such a program can mitigate punishment of the company in event of violation of either statute.

Valuation Issues to Consider During Healthcare Acquisition Negotiations

Posted by & filed under Business Valuation, Forensic Accounting.

In response to the Affordable Care Act, more hospitals and large physician groups are buying physician practices to control referral sources, service quality and operating costs. This increase in practice acquisitions is expected to continue for the foreseeable future. Because of this, it is more important than ever for both acquirers and acquirees to consider key valuation issues when negotiating an acquisition.

Among these key issues are:

1. The potential impact of the ACA on the future revenues of the acquired practice

For example, if the acquired practice has a level of patient readmissions that could cause the acquirer to receive a reduction in Medicare payment rates, the acquirer would want to reduce the valuation of the acquired practice to account for this impact on its future revenues.
2. The impact on future revenues and costs of the acquired practice due to the departure of practice physicians

Often one or more physicians will depart when the practice is sold. Sometimes these physicians retire or relocate, other times they plan to set up their own local practice in competition with the acquired practice. In either case, this will have an impact on future revenues and costs. Accordingly, the acquirer will want to adjust the valuation of the acquired practice for such departures.

3. Analyzing future competition and local conditions at each acquired practice location

Acquirers need to consider the potential impact of future competition and local economic conditions at each location to be acquired. This includes asking such questions as:

  • Is a competing hospital or large physician group planning to encroach on the area of a practice location?
  • Is the local area population growing or shrinking?
  • Are any large local employers closing?
  • Are any large local employers entering the area?
  • Are the population demographics (average age, ethnic mix, average earnings, etc.) changing?

The answers to these questions may cause the acquirer to adjust the valuation of the acquired practice.

4. Physician compensation and benefits

Acquirers and acquirees need to consider the impact of planned changes in physician compensation and benefits. Often, hospitals and larger physician practices will require more productivity-based measures for compensating physicians coming from smaller practices which have fewer such measures. However, benefits may be less generous than at the smaller practices. To account for such differences, acquirees may want to negotiate either minimum guaranteed compensation for the first few years after acquisition or an upward adjustment to the valuation of the acquired practice.

5. Other important considerations

Other factors that may impact the valuation include:

  • Whether the acquisition will affect the acquirees’ referral sources;
  • Whether there are agreements with key sub-contractors (such as outside physicians, labs, medical equipment providers, etc.) and whether such contracts must be renegotiated;
  • The malpractice insurance claims history of the acquiree; and
  • Whether receivables, medical supplies and/or specialized equipment are also being acquired.

Because of increased practice acquisition activity in response to the ACA, it is important for both acquirers and acquirees to consider the key factors identified above, and how they impact on the valuation of an acquired practice.

Protecting Your Auto Dealership From Fraud

Posted by & filed under Forensic Accounting, Fraud Deterrence.

Owning and operating an auto dealership can be a rewarding experience. Despite the long hours and myriad of issues facing the dealer, a well-run dealership can be a source of satisfaction and financial reward. However, the complexity of auto dealership operations can give employees and others the opportunity to commit fraud, thereby diverting significant profits from the dealership. This article will address several of the most common dealership frauds and provide solutions for preventing them.

Certain departments are more likely to see fraud. These include: new car sales, used car sales, service and parts. Here are some fraud risks in each of these departments.

New Car Sales

Problem: Sales management or staff issuing “dealership rebates” not authorized by the manufacturer

Solution: Require all salespeople and sales managers to sign a statement acknowledging that “dealership rebates” are not permitted. Have your controller or accounting manager review every financed sale to make sure that no “dealership rebates” are present. Because this scheme is also accomplished with a customer receivable or promissory note to reflect equity in the bank deal, any promissory notes or receivables must be approved by the general manager or dealer.

Problem: F & I or sales employees preparing fraudulent credit applications for customers

Solution: Inform all employees, in writing, that having customers sign blank credit applications is prohibited. Require that all deals where the customer seeks financing include a one-page document (with very large type) that states, “Customers are not permitted to sign blank credit applications.” The document should require that the customer sign an acknowledgement of this.

Used Car Sales
Problem: Used car management wholesaling cars below book value or purchasing cars at auction for excessive prices in return for kickbacks

Solution: The accounting department should be required to track the source and price paid for all used cars brought into inventory. The accounting department should also regularly check the price paid for used cars purchased at auction against the book value. In addition, general managers or dealers should regularly review all used car sales with a gross profit of less than $1,000 in order to determine the cause.

Service Department
Problem: Sales staff releasing serviced vehicles without customer payment

Solution: Make sure that only authorized service personnel have access to customer vehicle keys. Post signs prohibiting anyone other than authorized service personnel from releasing a customer’s vehicle. Inform all employees that they will be held personally financially liable for any unpaid repair bills if they allow a customer to take their vehicle from the service department without paying the bill in full.

Problem: Service staff charging the manufacturer for warranty repairs not performed

Solution: The service manager should make sure that all service staff members (service writers and mechanics) understand the implications of warranty repair fraud. Advanced authorization from either the service manager or assistant service manager should be required for all warranty repairs. Evaluation of service management job performance and bonuses should include controlling warranty repair charges to the manufacturers.

Parts Department

Problem: Parts department management or staff substituting aftermarket parts for manufacturer-authorized parts

Solution: Make sure that all parts and service personnel are adequately trained regarding the requirements to use manufacturer-authorized parts. Consider installing a fraud hotline that allows employees to anonymously report allegations of fraud (such lines are relatively inexpensive to install and use). Also, have the accounting department conduct unannounced spot bin counts to determine if all of the inventory in the parts department is on the pad.

Problem: Parts department management writing off parts as obsolete and then selling the parts off the books

Solution: The general manager or dealer must review and approve all such write-offs. The accounting department should prepare a comparison of the obsolete parts identified by the manufacturers and those being written off. All discrepancies should be investigated. Also, on a monthly basis the accounting department should reconcile the pad to the general ledger balance. Variances here also need to be investigated.

The Annual Check-up
Just as people have an annual physical exam or check-up to make sure they’re well, every dealership should have an annual check-up to minimize the likelihood that its health is at risk due to fraud. One of the best ways to prevent fraud in your dealership is to let employees know that you are regularly checking up on them. So by taking this relatively inexpensive measure on an annual basis, you are killing two birds with one stone. While the annual check-up alone will not prevent all fraud, it’s a very good start to helping ensure that your dealership’s profitability is not being reduced due to fraud.

Are Your Clients at Risk Under the Foreign Corrupt Practices Act or the U.K. Bribery Act?

Posted by & filed under Forensic Accounting, Fraud.

If any of your clients conduct or plan to conduct business in any foreign country, then you should read this blog.

The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) makes it a crime for a business or any of its officers, directors, employees, agents or shareholders to bribe a foreign official, foreign political party or candidate for political office, for the purpose of influencing a foreign official in order to obtain or retain business.

The U.K. Bribery Act of 2010 (UKBA), which is due to take effect on July 1 and has been described as “the FCPA on steroids,” takes this further by giving the U.K. jurisdiction over any commercial organization that conducts operations in the U.K., regardless of where the bribe is paid.

This means, for example, that if an agent of a U.S. company with operations in multiple countries, including at least one U.K. country, pays a bribe to a foreign official in any of those countries (U.K. or not), the U.S. company could be convicted under the UKBA. The UKBA also prohibits facilitation payments and certain entertainment and promotional expenditures permitted under the FCPA.

Recently, the Securities & Exchange Commission, U.S. Justice Department and FBI have aggressively investigated and prosecuted companies for FCPA violations. In 2010, the top eight FCPA settlements (with either the SEC or DOJ) totaled more than $1.5 billion. As of December 2010, the U.S. Justice Department had about 150 ongoing investigations and prosecutions.

Both the SEC and DOJ have also been focusing on prosecuting individuals, including company management, in addition to the financial settlements. In one recent case, the SEC brought claims against both the CEO and the CFO of a large nutritional/personal care products company for failing to adequately supervise the miscreant employees of a foreign subsidiary. The U.K. Justice Ministry, instead of providing specific written guidance regarding the key provisions of the UKBA and the applicability of the UKBA to non-U.K. companies, has decided to let the U.K. courts decide these issues.

All of this means that a company currently conducting or planning to conduct business in any foreign country could face a significant financial risk and a risk of prosecution of its management under either the FCPA or UKBA.

So, how does a company minimize this risk? The answer is to put in place an effective and robust FCPA/UKBA compliance program and to actively audit and/or monitor compliance, especially in high-risk locations. Having such a program will minimize the risk of violating the FCPA and UKBA and is the only acceptable mitigating factor to reducing the size of financial settlements and penalties if a company is convicted of violating either statute. Forensic accountants can assist you in this role.

In the next edition of this blog, I’ll address the key components of an effective FCPA/UKBA compliance program. Stay tuned.

– See more at: http://thelegalintelligencer.typepad.com/tli/2011/05/are-your-clients-at-risk-under-the-foreign-corrupt-practices-act-or-the-uk-bribery-act.html#sthash.zTEiO6Ek.dpuf