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.

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 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.

Fraud deterrence programs never take a vacation, but your employees most definitely should.

Requiring employees to take regular vacations is a key anti-fraud control in an organization’s comprehensive fraud deterrence program.  In its 2014 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) notes that a mandatory vacation policy reduces an organization’s median dollar loss to fraud by 33.3 percent and cuts the median length of time a fraud occurs by 40 percent.

“Fraudsters work very hard to conceal their fraud,” 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 requires a great deal of time and attention on a consistent basis to maintain the cover-up.  Very often, an employee’s illicit activities are uncovered only when he or she is on vacation or out sick.”

In fact, it is the very act of maintaining the cover-up that makes these employees seem like the most loyal, dedicated, hard-working employees on the payroll.

“They never miss a day of work,” said Anderson, a Certified Fraud Examiner and an ACFE member.   “They never take vacation.  They’re often the first ones at the office in the morning and the last ones to leave at night.  They work evenings, weekends and holidays.  They even come to work when they are sick.  From all outward appearances, they are an owner or manager’s dream employee.  What they really are doing is working hard to hide the fraud.”

Two recent fraud cases illustrate how a mandatory vacation policy can separate dream employees from fraudsters.

In one case, an employee created a phony service vendor with a phony address.  The employee then produced phony invoices for non-existent services that the company paid.  At work, the employee intercepted the check before it was mailed and then deposited it in a bank account set up by the employee.  The fraudulent activity was discovered when the employee took a vacation day on the day a check was mailed to the phony vendor.  When the envelope was returned as undeliverable, a manager tried to contact the vendor and discovered that not only the address, but also the phone number was phony.  A fraud investigation ensued, and the employee was caught.

Another case involved a manager who was engaged in a skimming scheme — intercepting and diverting cash payments before they were entered into the company’s accounting system.  The manager went on vacation, forgetting that he had left incriminating evidence in his desk drawer.  The manager filling in for him found the incriminating evidence and turned it over to senior management.  In this case, Anderson was engaged to perform a comprehensive fraud investigation and found that hundreds of thousands of dollars had been diverted by the fraudster.

“Forensic accountants love vacations,” said Anderson, who recommends every organization enact and maintain a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. “All sorts of fraudulent activities can surface during an employee’s absence.”

Anderson said most anti-fraud experts recommend employees be required to take at least one full week off from work and that their work activities be covered by someone else while they are gone.  This simple step prevents an employee from covering their tracks, he said.

So do your employees — and yourself — a favor and enact a mandatory vacation policy.  They’ll return to work more relaxed, and you can relax a bit as well because you will have instituted the most pleasant of anti-fraud controls.

Over the next weeks, Anderson will continue to share results from ACFE’s 2014 Report to the Nations, which is drawn from a global survey conducted biennially to study the costs, schemes, perpetrators and victims of 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.

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

In its 2014 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) found that in more than 32 percent of identified fraud cases, the opportunity that allowed fraud to occur existed solely because the organization lacked the proper internal controls.  In another 20% of fraud cases, the opportunity for fraud existed because of a lack of management review.

“None of these frauds would have occurred if management had taken adequate preventive steps to eliminate the opportunity,” said 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. “No matter how much pressure an employee is under to steal or how much they can rationalize their illicit actions, they cannot successfully carry out the fraud if the opportunity to do so doesn’t exist.”

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

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

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

— Overriding of existing internal controls, which was responsible for 19% of fraud cases.  Fraud investigations indicate that these situations occur when a more senior person, usually in management, persuades an employee to ignore or circumvent internal controls.  For example, a manager may ask an employee to print a check for a dollar amount that requires two levels of approval without proving the approvals were obtained.  Or an auto dealership employee may allow a customer to leave without paying for car repairs made by the dealership.

— Poor tone at the top, a key factor in more than eight percent of reported frauds.  Fraud investigations show that employees take their cues from their supervisors.  If management engages in questionable behavior, such as overriding existing internal controls or running personal expenses through the company, it sends a message to the employee that such behavior is tolerated.

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

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

Anderson will continue to share findings from ACFE’s 2014 Report to the Nations during the coming weeks.  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.

Fraud investigations into asset misappropriation — one of the three main types of fraud — reveal an assortment of deceitful means by which dishonest employees can steal from an organization.

“There is no shortage of schemes by which a fraudster can misappropriate funds from an employer, whether it is a company, a non-profit or a government office,” 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.  “And each of these schemes is often more common to certain types of organizations simply because of the way those organizations operate.”

In its 2014 Report to the Nations, the Association of Certified Fraud Examiners identified seven asset misappropriation schemes.  The other two types of fraud — corruption and financial statement fraud — are schemes in and of themselves and do not have subsets.  Bolster your fraud deterrence efforts by understanding the different types of schemes and the ones to which your organization is most susceptible.

Billing schemes, in which fraud perpetrators create phony vendors that are paid for goods never delivered or services never rendered, are common in most organizations, but especially in health care, education, transportation/warehousing and non-profits, Anderson said.

Service, insurance and education organizations in particular need to be on the lookout for skimming schemes.  In these schemes, the fraudster steals incoming payments from customers or other entities (an insurance claim payment or vending machine operator payments, for example) before they are recorded and then hides the diversions by entering credits against the customer’s or payee’s balance.

Cash-on-hand schemes, in which the perpetrator steals from the cash register, petty cash or company safe, occur most frequently in retail, banking and financial services companies.  Theft from a cash drawer often occurs when the employee voids a transaction or rings up a lesser amount and pockets the difference.

Check tampering is typically associated with non-profits and with construction, healthcare and transportation/warehousing companies and occurs when the perpetrator forges or alters a company check (by changing the payee name or the check amount, for example).

Expense reimbursement fraud most frequently plagues non-profits and education, health care and construction companies.  In these schemes, employees submit reimbursement requests for a non-existent expenses or inflate the amount of an expense.  Examples include personal expenses masked as business expenses, inflated mileage or gratuities, and charges for business class airline tickets when the employee flew coach.

Non-cash schemes occur when fraudster steals inventory, supplies, company equipment or the confidential information of a customer or the company.  These schemes most frequently affect manufacturing, retail, transportation/warehousing and oil and gas companies.

Payroll fraud, in which a dishonest employee inflates the number of hours worked or creates a “ghost” employee on the payroll, most often occurs in non-profits and construction companies.

Anderson said these schemes — with the exception of non-cash schemes — tend to be more prevalent in smaller companies because they tend to lack the strong fraud control and fraud deterrence programs usually found in larger companies.

“Fraud perpetrators are cleverly devious and are dedicated to hiding their activities,” said Anderson, a Certified Fraud Examiner and an ACFE member.  “They often get away with it because their bosses and coworkers are honest people, so they aren’t expecting — and therefore aren’t looking for — fraudulent activity.”

Anderson encourages all organizations to enact strict fraud controls and to adopt a comprehensive fraud deterrence program developed by a firm that provides  forensic accounting services in Philadelphia and the Delaware Valley.  At the first suspicion of illicit activity, organizations should engage a Certified Fraud Examiner to initiate a fraud investigation, he said.

Over the next weeks, Anderson will share more findings from ACFE’s 2014 Report to the Nations, the results of a global survey conducted biennially to study the costs, schemes, perpetrators and victims of fraud.  The Association of Certified Fraud Examiners is the world 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.