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Ways to Fight Fraud in Your Cash-Intensive Business

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

While most sales transactions today involve an electronic or paper check payment, there still are numerous businesses that largely deal with cash payments, including cannabis operations, casinos, retailers in low-income areas, food trucks, and small food operations (such as water ice or pretzel carts). For such businesses, the risks of fraud due to diversion of cash are much higher than those of businesses that deal primarily with electronic (including credit card) or paper check payments.

Fraud from Moment of Sale to Internal Depository

Cash can be diverted between the moment of sale and the business’s internal depository (typically a safe or locked cabinet) in a variety of ways. These include:

  • The employee receiving the cash payment from the customer can just pocket the money, and not leave the business with any documentation evidencing the customer’s payment; or
  • The employee receiving the cash payment can prepare a manual receipt for the customer (either not numbered or numbered but not controlled), place the cash receipt in a register drawer, and later remove both the cash and any copy of the cash receipt before the register drawer is removed and counted; or
  • The employee who removes and counts the register drawer can remove both the cash and any copy of the cash receipt before counting and recording the cash in the register drawer and placing it in the internal depository.

Safeguards to protect against the above types of diversion include:

  • Use of video surveillance;
  • Use of point-of-sale systems to record all sales;
  • Use of numbered and controlled manual cash receipt books (with duplicates);
  • Removal and counting of cash register drawers under management supervision;
  • Regular management review of sales transactions.

Fraud Between Internal Depository and Actual Deposit of Cash into a Bank

Cash also can be diverted between the time it is placed in the internal depository and the time it is deposited in the bank. These diversions can be accomplished by:

  • An employee who can prepare and record bank deposits, and who also performs bank reconciliations, can remove cash from the internal depository, record a bank deposit for the amount removed, and “adjust” the bank reconciliation to hide the fact that no bank deposit was made.
  • Alternatively, an employee who can initiate and record credit memos (and who also has access to the internal depository) can remove cash from the internal depository and process a credit memo against customer sales to “account” for the shortfall in cash.
  • Also, for a business that does not or cannot use bank accounts (such as cannabis operations), an employee with access to the internal depository simply can remove cash from the internal depository.

Safeguards to protect against the above types of diversion include:

  • Use of video surveillance;
  • Separation of duties so that no employee who prepares bank deposits makes bank deposits and that no employee who performs bank reconciliations or initiates credit memos can record deposits or access cash in the internal depository;
  • Regular and timely reconciliation of bank accounts; and
  • Performance of regular (even daily) cash counts of the contents of the internal depository under management supervision.

Fraud Involved with Cash Disbursements

Cash also can be diverted as part of the disbursement process when it is used to pay employees, vendors, and others. These circumstances occur in businesses that do not or cannot use bank accounts (again, cannabis operations). These diversions can be accomplished by:

  • An employee in charge of processing cash disbursements creates a non-existent vendor, creates phony invoices, and “pays” himself/herself the amount on the invoices.
  • An employee in charge of processing cash disbursements for inventory or supplies arranges to return certain delivered inventory or supplies to the vendor but “pays” the original vendor invoice to himself/herself. He/she then pays the vendor the revised (lower) vendor invoice amount, keeping the difference between the two vendor invoices.
  • An employee in charge of processing payroll creates a non-existent employee, and “pays” himself/herself the payroll amount.
  • An employee in charge of processing expense reimbursements creates either non-existent expense documentation (such as getting fake receipts from http://salesreceiptstore.com/) or makes copies of previously submitted expense documentation, and “pays” himself/herself.

Safeguards to protect against the above types of diversion include:

  • Use of video surveillance.
  • Separation of duties so no employee who processes cash disbursements can create a vendor or employee or return inventory or supplies. Additionally, such employee cannot hand out payroll payments to employees.
  • Management approval of all vendor invoices, expense reimbursements, and employee payroll.
  • Performance of regular (even daily) cash counts of the contents of the internal depository under management supervision.

The potential cash diversion risks and safeguards discussed above are not all-encompassing but are meant to provide examples. The actual cash diversion risks and safeguards to prevent them are dependent upon the specific circumstances present in the business.

Additionally, very small businesses (as well as smaller non-profit organizations such as sports league snack stands and smaller houses of worship) may not be able to afford video surveillance and may not have enough staff to facilitate the separation of duties discussed above. In such cases, more management oversight would be necessary to offset these shortcomings.

If you want to learn more about how to prevent fraud in your cash operations, a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help. For details, contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

A Dose of Vigilance Can Help Prevent Common Payroll Fraud Schemes

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

Payroll fraud, says forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, is one of the most common frauds perpetrated upon businesses and other organizations. This crime can take numerous forms, including:

  • Ghost Employees: In this scheme, the fraudster creates a non-existent employee in the payroll system. The fraudster then enters time for the non-existent employee, resulting in production of a paycheck. The fraudster intercepts the paycheck and either deposits it in an account under his/her control or has a confederate either cash the check or deposit it in an account under the confederate’s control.
  • Terminated Employees: In this scheme, the fraudster works with a terminated employee. The fraudster keeps the terminated employee on the books and enters time for the terminated employee, resulting in production of a paycheck. As with a ghost employee, the fraudster intercepts the paycheck and forwards it to the terminated employee.  The terminated employee either cashes the check or deposits it in an account under the terminated employee’s control (and shares the proceeds with the fraudster).
  • Fraudulent Hours: In this scheme, the fraudster enters a higher number of hours worked either for him/herself or for another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster.  This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Pay Rate: In this scheme, the fraudster adjusts either his/her pay rate or that of another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster. This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Bonus Pay: In this scheme, the fraudster either adds him/herself to the list of employees receiving a bonus; or adjusts his/her bonus amount; adds a confederate to the list of employees receiving a bonus; or adjusts the confederate’s bonus amount. If entered for a confederate, that person shares the increased proceeds with the fraudster. This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Expense Reimbursement: In this scheme (which applies to companies/organizations that reimburse employee business expenses through payroll), the fraudster enters a higher expense reimbursement amount either for him/herself or for another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster.
  • Fraudulent Vacation and/or Sick Leave Hours: In this scheme, the fraudster, who has control over tracking and/or reporting vacation and sick leave hours, takes vacation and/or sick leave, but either doesn’t record the hours taken against the available hours or artificially inflates the number of vacation and/or sick leave hours to which he/she is entitled.  A variant on this scheme has the fraudster doing the same for other employees in return for cash payoffs from the benefiting employee.
  • Fraudulent Diversion of Employee Pay: In this scheme, the fraudster, who has control over/access to payroll records, adds a new bank account (over which the fraudster has control) for an employee, artificially inflates the employee’s pay (via hours or pay rate changes), and diverts the excess pay to the new bank account.  The fraudster counts on the employee not tracking total annual pay (most employees only track their weekly/biweekly pay) and not noticing that the employee’s form W-2 wages are higher than the amount the employee received.

So, how can companies and organizations avoid being victimized by these payroll frauds?  They can take some or all the steps identified below:

  • Separate the hiring and human resources functions from the payroll function.
  • If this is not possible, ensure there is adequate separation of duties so different employees are responsible for different steps in the payroll process. For example, the employee who sets up other employees in the payroll system (including pay rates) should be different from the employee who enters employee time.
  • Require two levels of review and approval for timecards and pay sheets.
  • Maintain a list of terminated employees and periodically check the list against payroll data.
  • Require someone other than the employee’s supervisor to distribute paychecks.
  • Require either multiple signoffs for pay changes (especially for manager and executive salaries) and/or for approvals of vacation and sick pay.
  • Have either a higher-level manager or a third party, such as a forensic accountant, periodically review payroll, including pay rates, hours/time, and total payroll funding amounts.
  • Have either a higher-level manager or a third party, such as a forensic accountant, periodically review accrued and used vacation and sick hours.

Does your company need to enact stronger safeguards against payroll fraud? If so, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. You can do just that by contacting the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

Forensic Accountants Help Fight Fraudulent Conveyance Litigation

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, fraud deterrence, litigation support and expert witness testimony services in Philadelphia and the Delaware Valley.

Facing losses from such occurrences as foreclosures, divorces and other legal proceedings, shady business owners sometimes resort to the fraudulent conveyance or transfer of property or other assets to lessen or eliminate their losses by hiding valuable assets.

When that happens, it is the role of the forensic accountant to uncover the improperly transferred assets and determine their value.

“Black’s Law Dictionary defines fraudulent conveyance or fraudulent transfer as ‘the illegal transfer of property by a debtor to avoid creditors or claims’,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley. “It is a blatant action intended to undermine often legitimate claims filed by creditors, ex-spouses and other parties.

Anderson said the resulting fraudulent conveyance litigation typically involves civil suits bought by creditors or bankruptcy trustees seeking to recover improperly transferred assets or business. Examples of these transfers include:

  • Payments to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends, or business partners of the debtor;
  • Transfer of title of assets from the debtor to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends, or business partners of the debtor;
  • Sales of assets at bargain prices from the debtor to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends, or business partners of the debtor;
  • Transfer of business (sales) to other entities in which the debtor or relatives, friends or business partners of the debtor have an ownership interest; and
  • Gifts made by the debtor during a period of financial stress, including donations to charity.

In cases of fraudulent conveyance litigation, attorneys rely on forensic accountants to document the alleged fraudulent transfer; identify and locate improperly transferred assets and calculate the lost value of improperly transferred assets or business, said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley who has performed forensic work in multiple fraudulent conveyance matters, recalled one such case that later became the basis for his case study, “The Sore Losers.”

He said the case involved business owners who wanted to avoid a creditor’s foreclosure action by draining funds from the company. Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, said the business owners improperly paid themselves special bonuses and distributions, drastically increased rents charged to the business on real estate owned separately by the business owners, and ran personal expenses through the company. Anderson was able to identify each of the transactions and calculate the total amount of the payments, thereby facilitating the creditor’s recovery of the payments.

Anderson, a forensic accounting expert in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, recalled another case in which a husband who planned to divorce his wife sought to reduce the value of his business to decrease the amount of his future divorce settlement.

The husband sold certain assets to his girlfriend at a bargain price and had a friend set up a competing business, to which the husband directed his own customers. After the divorce was completed, the plan was to have the friend sell a majority interest in the new business to the husband at a bargain price, according to Anderson, a Philadelphia forensic accountant.

The fraudulent transactions were discovered after Anderson was engaged by the wife’s counsel to value the husband’s business. “During my investigation, I noted a significant decline in the business as well as the sale of certain assets during the two years preceding the divorce,” he said. “The investigation revealed the transfer schemes, and I was able to value the husband’s business as if these improper transfers had never occurred, thereby increasing the divorce settlement paid to the wife.”

If you need litigation support services or expert witness testimony in Philadelphia or require the services of a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.

Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst, and a Certified Fraud Examiner in Philadelphia. Anderson also has provided expert witness testimony in the Greater Philadelphia area and served as a forensic accounting consultant on both civil and criminal cases.

Part Two: Stay Alert to Stave Off Cyberattacks and Hackers

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

In this second of a two-part series, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, concludes his look at examples of security failures he has observed in his work.

As he noted last week, many businesses implement a wide range of policies and procedures to protect their property, assets, and data. However, even the best of policies and procedures are ineffective if employees don’t adhere to them. Here are several more such “tales:”

The unsecure data center: Anderson was engaged to evaluate the IT security controls at a medium-sized company based in North Carolina. Their “secure” data center was an unlocked coat closet just off the lobby. Besides having no air flow, which could have caused the servers to overheat, visitors could have easily entered the closet, and even walked off with the equipment.

Common user IDs and passwords: At the same company as above, each member of the accounting department accessed the company’s accounting system by entering “Accounting” as the user ID and “Accounting” as the password. Although the company had experienced departmental turnover, including one individual who had embezzled funds, the company had never changed the common user ID and password.

Not changing locks and system access: At a medium-sized Philadelphia-area company, Anderson’s investigation of the IT and facility security controls noted that the firm issued employees an office key when they started their jobs, but never asked for the key back when the employee left. Additionally, the company never deleted the user ID and password for these employees.

Although Anderson said he was able to persuade the company to remove system access for terminated employees, management did not want to incur the cost of changing locks and issuing new keys. This problem was resolved several months later after a former employee, who had retained his key, entered the premises one weekend, and stole computers and inventory.

Non-secret passwords: This is perhaps the most common “insecurity” Anderson said he has encountered. At many companies, he has seen passwords taped to the monitor, or tacked to a corkboard next to the computer, or taped to the desk underneath the user’s keyboard. In several of the companies, the company itself was the cause of the “insecurity” because many employees accessed multiple systems which each required a new password every 60 days, and passwords could not be common across systems.

Executives who violate access rules: This is another “insecurity” Anderson said he has seen in multiple companies. A busy executive provides his/her user ID and password to his/her administrative assistant/executive secretary to facilitate access to his/her e-mail and personal files. Assuming the administrative assistant/executive secretary is a trusted employee, many companies do not consider this situation to be a problem, even though, as Anderson points out, it usually violates company IT security control procedures.

This situation becomes a problem when that trusted employee is out and must temporarily be replaced. For example, Anderson said he has seen such employees out on vacation, parental leave, family medical leave, etc. This means one or more new employees – or even temporary employees – are granted access to the executive’s e-mail and personal files. Now, because the executive does not want to change user IDs and passwords, no such change is made. This means other employees or temporary employees could continue to access the executive’s e-mails and personal files.

In each of the above cases, the employee’s failure to adhere to the established policies and procedures resulted in security lapses. To avoid the “insecurity” failures Anderson detailed in both part one and part two, he makes the following recommendations:

  • Engage an outside expert to review your company’s security/control policies and procedures to identify potential failure points and provide solutions.
    • For example, changing multiple passwords across multiple systems every 60 days is likely excessive. The expert can suggest alternatives, such as using the same password across multiple systems; increasing the number of days between password changes to 120 or 180 or even annually; or providing a password management tool.
  • Ensure all employees are provided with, and acknowledge receipt of, company security/control policies and procedures.
  • Conduct training on a regular basis, at least once a year, to remind employees of the policies and procedures, and why they need to be followed.
  • Encourage employees to follow the guideline “if you see something, say something” with regards to unauthorized visitors and employees who violate company policies and procedures.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help you steer clear of such security issues, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

Part One: Stay Alert to Stave Off Cyberattacks and Hackers

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

Many businesses implement a wide range of policies and procedures to protect their property, assets, and data. However, according to forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, even the best of policies and procedures are ineffective if employees don’t adhere to them. The following is Part One of a two-part series featuring examples of security failures Anderson has observed in his work:

When Security Badges Aren’t Effective:

Many businesses require employees to wear a security badge and “swipe” it to gain access to facilities. In one case, a just-fired employee returned to the company that had fired him and waited by the security access door. Other employees who had seen him around (and didn’t know he had been fired), held the door open for him (not noticing he didn’t have a security badge). He then entered the building, proceeded to pull out a hammer, and vandalized several desktop computers until security officers stopped him.

When Security Badges Still Aren’t Effective:

In another case, Anderson said he was visiting the IT department of a large Philadelphia business to conduct an evaluation of its IT controls. He was standing outside the secure data center when an employee with a large cart full of equipment swiped his security badge to enter the data center. The employee was struggling to hold the door open for his cart and, seeing Anderson, asked him if he would hold the door (neither Anderson nor the employee had seen each other before, and Anderson was wearing a visitor badge). Anderson helped and continued to hold the door open until the employee entered the data center and was out of view. Anderson, now in the center himself, went over to one of the terminals, and, if he had been malicious or interested in stealing data, he said he easily could have entered the necessary commands to do so.

When Terminals or Desktop Computers Aren’t ‘Secure:’

When conducting an IT security evaluation, Anderson wandered into the accounting department of another large Philadelphia business. He observed an employee tell another he was going to lunch, and then watched him get on the elevator and leave. Anderson walked over to the now-empty cubicle and noticed the just-departed employee had not logged out of the company’s accounting system. Anderson said he sat down at the vacant desk and proceeded to access the accounts payable and general ledger applications. No one challenged him, he said, or even appeared to notice he was there. Again, had he wanted to, Anderson said he could have caused major damage to the company’s accounting system.

When Confidential Records Aren’t Secure:

When Anderson was a junior auditor (before the days of electronic medical records), his first assignment was on the audit of a large hospital. One of his assignments was to make sure selected patient records had been properly entered into the hospital’s accounting system (to facilitate billing). He said he was unable to locate one patient’s file, and after investigation, learned it was because the patient was still in the hospital (and the records were at the nurse’s station on one of the patient floors). He said he went up to that floor and requested the patient’s chart (He said he was not wearing a badge and didn’t identify himself but was dressed in a business suit). The nurse handed the requested documents to Anderson, saying, “Here’s the chart, doctor.”

Taking Secured Data Files Home to an Unsecured Computer:

At one medium-sized company, Anderson was called in to investigate when their system became infected with a rather nasty virus. It turned out the Controller had taken certain budget files home (on a thumb drive) to work on over a holiday weekend. Unbeknownst to him, his high school son had been using the same family computer and had unknowingly downloaded a virus. When the Controller used the computer, the virus was transferred to his thumb drive and then to the company’s system. What made this worse was that the Controller was responsible for updating the virus protection for the company’s system but had failed to download three years of updates.

Becoming Victimized by E-Mail Spoofs:

Hackers had obtained confidential names, addresses, social security numbers, and other salary information of the employees of a small subsidiary of a larger Philadelphia company. Anderson said his investigation determined the company’s systems had not been penetrated, but instead, the Accounting Manager of the subsidiary had been victimized by an e-mail spoof. She had received an e-mail, purportedly from the parent company’s Controller, informing her there was a problem with the subsidiary’s W-2 forms, and requesting she prepare and send to him an Excel spreadsheet of the subsidiary’s W-2 information, allegedly so the home office “can correct the problem.” The local Controller failed to notice the requesting e-mail came from an e-mail address that was similar to but not the same as the corporate Controller’s actual e-mail address. She prepared the requested spreadsheet and attached the spreadsheet as she replied to the original “spoofed” e-mail.

—–     —–     —–     —–     —–

In each of the above cases, employee failure to adhere to the established policies and procedures resulted in security lapses. In his next column, Anderson will present more examples of such failures, and offer some tips for avoiding them.

If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help you steer clear of such security issues, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

Forensic Accountants Can Find Those Hidden Assets

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

In divorce proceedings and certain types of commercial litigation, counsel may suspect the opposing side has hidden some assets. A forensic accountant can be of great assistance in formulating discovery information requests and conducting the analysis that will aid in the identification and location of potentially hidden assets.

To identify hidden personal and/or business assets, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, says counsel must address his or her discovery requests not just to the known (items identified on the tax return, items of which his or her client is aware, etc.) but also to the potentially unknown.

Once receiving this information, the forensic accountant will perform analyses and asset searches that may identify or point to the potential existence of such items as:

  • Income or other payments received that have not been deposited to known accounts.
  • Funds deposited for which there is no documentation as to the source of the funds.
  • Funds withdrawn for which there is no documentation as to where the funds went.
  • Direct wire transfers made to or from unknown accounts.
  • Unusual activity involving the safe deposit box (this could be indicative of cash or other assets being placed in or removed from the box).
  • The existence of previously unknown offshore bank accounts, or investment accounts or other assets.
  • The substitution of lower value assets for higher value assets (for example, substituting an inexpensive work of art for an expensive work of art).+
  • The proceeds of expense reimbursements, loans or advances or other non-payroll payments from the spouse’s company.
  • The existence of off-balance sheet accounts.
  • The existence of intangible assets with a value more than the book value.
  • The existence of fixed assets with a value more than the book value.
  • Transactions with related parties (this may be indicative of non-arm’s length transactions that could have been used to reduce the value of the company).
  • Unusual company transactions with third parties (this could be indicative of attempts to reduce the value of the company by transferring funds or assets to third parties).
  • Hidden insurance policies for which the defendant is the beneficiary.
  • Trusts for which the defendant is a beneficiary.

Because each divorce or commercial litigation matter has its own set of circumstances, it is critical the review of the discovery request occurs between counsel and the forensic accountant as early as possible in the discovery process. The forensic accountant can help identify specific documents that should be included in the discovery request. This will allow the forensic accountant to conduct thorough analysis and asset searches to identify, or point to, the existence of such assets.

Do you need help finding hidden assets or unseen fraud? If so, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. You can do this by contacting the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

Even With No Profits, Can a Business Have Value?

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

 Unearthing value in an unprofitable business might seem to make as much sense as wringing water out of a rock, but – by putting forensic accounting principles to work – a knowledgeable business valuation expert can do just that.

“Business valuators look to three primary methods for valuing a business: The Income Method, the Market Method, and the Asset Method. Most of these valuators primarily rely on the Income Method because a ‘hypothetical’ buyer is looking for value from the profits and cash flows of a business,” said David Anderson, a Certified Valuation Analyst and 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. “It then makes sense that if a business isn’t making a profit, it would not be of any value to a potential buyer. That, however, is not necessarily true.”

How can this be? There are several scenarios under which an unprofitable business can have value.

  • The first is a startup business. Typically, the costs of starting up a business and ramping up its sales can be incurred over several years. During that time, the business usually operates at a loss.  However, because of the future earnings potential, investors are willing to give a business value based on this potential.
    • Case in point: Just Eat Takeaway, a European-based online food ordering and delivery company that purchased Grubhub in 2021, lost $5.7 million in 2022 on revenues of $5.6 million, and also had losses in each of the last four years. This hasn’t stopped investors from putting hundreds of millions of dollars into the company. Today, it is publicly traded with a market cap of approximately $3 billion.
  • Similar to startup businesses are those that are in bankruptcy. Such companies typically have been unable to produce sufficient profits to cover operating costs and debt service (the cost of repaying debt with interest). Through the bankruptcy process, these companies are able to shed their debt which makes them attractive to potential investors who focus on the potential future profitability of the debt-free company.
    • Case in point: Core Scientific, which engages in digital currency mining, had lost money in three of the last four years, and filed for bankruptcy in December 2022. Today, although it has not yet emerged from bankruptcy, it is still publicly traded with a market cap of over $130 million.
  • A third type of unprofitable business that can have value is one that has assets with a value that exceeds the liabilities and debts of the business. In this case, notes David Anderson & Associates, a business valuation expert in Philadelphia that also serves as a Philadelphia forensic accounting firm, a potential purchaser is less concerned with the profitability of the business it is acquiring, and is very interested in the assets of the business, and the value they will add to the purchaser’s business.
    • Case in point: AES, Inc., a large utility headquartered just outside of Washington, D.C., has had operating losses in each of the last two years. Its assets exceed its liabilities by approximately $4.5 billion, yet AES, Inc. has a market cap of over $14 billion.

Unprofitable businesses can have value to the “hypothetical” and real buyer, concludes David Anderson, a business valuation expert in Philadelphia. In each of these scenarios, the purchaser sees the potential for value in the future operations of the business.

If you require the services of a Certified Valuation Analyst, or 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.

Why Aren’t You as Good as the Fraud Investigators on TV?

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

On TV, especially in police procedurals, fraud investigators are able to access banking records, credit card information and tax returns within minutes of identifying the perpetrator. In addition, they are able to easily identify fraudulent activity by briefly viewing these records.

Unfortunately, this is seldom the case in the real world. Nevertheless, some of my fraud investigation clients seem surprised that I can’t easily and quickly obtain banking records, credit card information, tax returns, and other personal financial information. Others don’t understand why I can’t just look at a transaction and immediately determine if it is fraudulent or not. This blog discusses why this is the case. My focus will be on civil litigation and criminal defense.

In civil litigation, the forensic accountant must depend on the counsel with whom he or she is working to subpoena business and personal records. The other side can dispute the need to provide these records and can insist that the Court decide which records must be provided (and under what circumstances). Additionally, the other side can delay up to the Court’s time limit and can provide records in a haphazard, incomplete, or burdensome way which can require significant time and resources to analyze them. Banks and credit card companies can also insist on payments for copies of statements, cancelled checks and deposit slips. Companies can demand payments for copying costs. All-in-all, it can be quite burdensome to obtain these records.

Once the forensic accountant has obtained and analyzed the records, the forensic accountant must depend on the client to identify which transactions are improper and unauthorized (we are not permitted to say fraudulent – that is a legal finding which is up to the Court or a jury). It is not necessarily the case that every check written to the employee or employee’s family members and/or every personal charge on company credit cards by the employee is improper and unauthorized.

For example, in a recent case, I found a check for a significant amount which the perpetrator had written to herself, and which appeared to have been improperly recorded as a distribution to the owner. However, upon reviewing the check with the client, I learned that the client had authorized the payment as a short-term personal loan from the owner to the employee. The employee had directly repaid the owner.

In another case, I found payments made by the company directly to the perpetrator’s divorce attorney (the employee was a non-owner). Upon reviewing this with the owner, I learned that the owner had approved these payments due to the employee’s long and loyal service to the company (which, of course, turned out to be not so loyal). In this case, the owner was also at risk for recording legal costs which were not valid costs of the business.

In a third case (involving improper and unauthorized credit card charges), the owner had allowed the perpetrator to pay for one personal family dinner per month using the company’s credit card, and to have the expense recorded as a company business expense (again, an additional business risk for the owner).

Having to review specific transactions can sometimes be overwhelming for a client, but the forensic accountant needs this additional level of verification to prevent the risk that the forensic accountant has identified one or more valid transactions as improper and unauthorized.

For criminal defense litigation, I interviewed Philadelphia federal criminal defense and white-collar crime attorney NiaLena Caravasos (https://nialena.com/). Ms. Caravasos advised me that for criminal litigation, the government is generally required to share with the defense all of the relevant documentation and other information it has received.

However, there may be additional information which the defense needs but which the government has not obtained. For example, the defense may desire to see the defendant’s Outlook work calendar, even though the government did not obtain this information. As a result, the criminal defense attorney will seek to obtain it from the defendant’s employer. In this case, the process is similar to that of civil litigation. The criminal defense attorney requests the Court to issue a subpoena for the desired information. This then affords the third party the opportunity to dispute the subpoena with potentially the same results as described above for civil litigation.

Again, once the forensic accountant has obtained and analyzed the records, the forensic accountant must depend on the client to review each transaction and indicate a potential defense for some or all of the transactions. In such cases, the forensic accountant might need to perform additional work in order to support the client’s defense (for example, locating an e-mail authorizing the client to make a personal charge on the company’s credit card, or additional analysis of the company’s credit card transactions to show that it was a regular practice of the owner to allow employees to make personal charges on the company’s credit card account).

So, the next time you see a forensic accountant on television easily identify fraud and catch the perpetrator by the end of the hour, remember that this is so only through the magic of television. In the real world, forensic investigations take a lot of time and effort on both the part of the forensic accountant and the client.

If you would like to speak with such a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

How Tone at the Top Impacts Your Company’s Fraud Risk

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

In my previous discussions about the Fraud Triangle – the three factors that must be present for fraud to occur – one of those factors was Rationalization: The mental process a potential fraudster goes through to justify committing the fraud. Without being able to rationalize to oneself why it is OK to commit the fraud, a potential fraudster with Opportunity and Pressure – the other two key factors in the Fraud Triangle – is unlikely to proceed.

Tone at the Top – management’s attitude towards honesty and ethical behavior – can have a significant impact upon an employee’s likelihood to commit fraud. Employees typically take their cues from management. If management has clearly stated that fraud is unacceptable in the company’s written policies, in employee training, and in how management acts, then employees will be less likely to commit fraud.

However, regardless of what management says, if management shows a disdain for fighting fraud or plays “fast and loose” with rules and regulations, employees are more likely to rationalize it is OK for them to commit fraud.

Here are a few examples:

  • In a large real estate development company, the owner had his CFO rent, at the company’s expense, a luxury apartment for the owner’s girlfriend to use, and had the company acquire an expensive car for the girlfriend to drive. The girlfriend was neither an employee nor contractor of the company. When the CFO saw an opportunity to exploit a weakness in the company’s payroll software, he used the weakness to embezzle over $3 million from the company. When caught and questioned, he stated that since the owner of the company was cheating the government, he figured it would be okay to cheat the company.
  • Similarly, the owner of furniture store chain regularly bragged to his controller that he was having the company pay for an expensive home theater room and expensive bathroom hardware for his vacation home. He directed the controller to hide the expenses so that “the IRS won’t find out.” The controller began to have personal financial problems and started taking money from the company through various fraudulent schemes. When confronted by the owner, she threatened to turn him in to the IRS if he reported her. The owner allowed her to keep working for another year, and to keep taking funds through other schemes, and finally contacted his lawyer about how to manage this. If he had contacted us (or a good lawyer), we would have advised him he could have filed amended tax returns with the IRS and paid the additional taxes plus some interest and penalties, instead of allowing the controller to continue to commit fraud.
  • The owners of a consulting business regularly charged personal expenses, including vacations and personal purchases to their company credit card. They told the controller to record the personal expenses as business expenses. The controller ordered an additional company credit card in her name, charged her own personal purchases to the company credit card, and recorded the charges as the company’s business expenses. When we investigated and confronted her, she, too, stated that since the owners were “cheating” she figured it would be okay for her to cheat the company.
  • A construction company owner had his bookkeeper “adjust” employees’ work records to show fewer hours than they actually worked. He also regularly instructed his bookkeeper to not pay certain vendors until the vendors threatened to sue the company. He would then negotiate reductions in the vendors’ bills. The bookkeeper’s husband became ill and was laid off from his job. Because of the financial pressure, the bookkeeper began writing checks to herself to help her cover her expenses. She recorded the checks as having been paid to various vendors. When we investigated and confronted her, she told us that because she needed the money, and saw how the owner regularly defrauded others, she felt it was okay to defraud him since she was only taking monies to which he was not entitled.

The above examples illustrate how the Tone at the Top of each of these companies contributed to the fraudsters rationalization that it was okay for them to improperly take funds from the company. In essence, each fostered a culture of improper behavior, and each suffered because employees reflected the behavior of management.

If you would like to speak with such a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

An In-Depth Look at Accounts Receivable Fraud

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

Among the less-frequent but more-expensive frauds are those targeting Accounts Receivable.  In this column, I’ll discuss some of the Accounts Receivable-related frauds I have encountered.

Fraudsters can manipulate Accounts Receivable to conceal their diversion of payments made by customers.  A common element of these diversions is that the fraudster has set up separate bank accounts under his/her control, and that the bank account names are similar to that of the business being defrauded.

For example, if the business being defrauded is ABC Services Company, the fraudster may set up a business entitled “ABC Company”.  The fraudster can then deposit checks made payable to ABC Services Company by its customers.  Additionally, the fraudster can provide new wire instructions to ABC Services Company customers with the ABC Company name.

Because the names are so similar, most customers won’t notice the small difference in company name.  Additionally, banks allow leeway in processing checks made out to a similar name and may not notice the difference either. (For example, some customers may just make their checks out to “ABC.”)

If the perpetration of the fraud is based on diverting customer checks, the fraudster either needs to provide customers with a new mailing address (such as a P. O. Box under the fraudster’s control) or have the ability to open mail and remove the customer’s checks before entry into the company’s accounting system.  If the perpetration of the fraud is based on diverting customer wires, the fraudster needs the ability to “hide” receipt of the wires into the alternate bank account.

So, how can the fraudster manipulate the fact that payments have not been received by the company?  Here are a few of the ways:

  • If the fraudster has control of credit, collections, and bad-debt write-offs, the fraudster can just allow the unpaid customer invoices to sit on the system and get older and older. Eventually, the fraudster writes off the unpaid invoices to bad debts.
  • Depending on the type of accounting system in place, the fraudster can cancel the customer invoice. Of course, if the accounting system is tracking inventory, the cancellation would cause the system to show a higher amount of inventory than exists.  However, if the accounting system does not track inventory or if the company is providing services instead of products, this won’t be a problem for the fraudster.
  • If the fraudster has the ability to post credits against a customer’s account, the fraudster can post a credit (for such things as sales discounts, sales adjustments, sales returns and allowances, etc.) against the invoice paid by the diverted check or wire to eliminate the invoice balance.

Because the above schemes are more complex than other fraud schemes (such as theft of cash or inventory), it is usually a higher-level accounting person (such as a Chief Financial Officer, Controller or Accounting Manager) who perpetrates this type of fraud.

So, how can a company defend itself against Accounts Receivable fraud.  Here are a few recommendations:

  • Management should require and review a regular monthly report of open invoices by age. Once an invoice reaches a certain age (for example 45 days past the billing date), a more senior employee outside the accounting department should be asking the customer why the invoice is unpaid and when it will be paid.
  • Management signoff should be required (and documented) for any credits posted to customer accounts, whether for sales discounts, sales adjustments, sales returns and allowances, etc.
  • Management should implement an invoice numbering system that allows for tracking of invoice numbers. It should require and review a regular monthly report of invoice numbers to include customer name and billing date.  An explanation should be required for any gaps in invoice numbers.
  • Management (or a more senior employee outside of the accounting department) should periodically verify with each customer’s accounts payable department the check mailing addresses and wire instructions to make sure they have not been changed.

In cases where management lacks the time to perform the above tasks, or the company is too small to separate duties sufficiently, corporate leaders should consider engaging a reliable and impartial outside forensic accounting expert to perform these services.

If you would like to speak with such a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

Forensic Accountants Can Play Key Role in Resolving Family Inheritance Disputes

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

Family arguments over such minor issues as toys, chores, or family rules are quite common among siblings, cousins, and other relations.

However, these youngsters often grow up and get engaged in more meaningful, and significant, disagreements over trusts, estates, and other inheritance issues.

This is where the services of a forensic accountant can come into play.

“Unfortunately, there rarely is a family member who can step in as the ultimate arbiter to settle the conflict,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm.  “Instead, the unhappy beneficiaries often turn to the courts to resolve the dispute, ending up in litigation that can be very contentious and very expensive.”

Anderson said, in many cases such as these, families turn to a forensic accounting expert to analyze the management and administration of the trust or estate and to account for the assets and transactions.

“Perhaps one or more beneficiaries, who often are siblings or other relatives, believe the fiduciary (trustee or executor) is mishandling the trust or estate’s finances, is improperly taking funds from the trust or estate, or has improperly or unevenly distributed assets or income of the trust or estate.

“A forensic accounting expert has no stake in the matter and is not a family member.  He or she is concerned only with the facts of the matter at hand,” said Anderson, who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “As a result, both the beneficiaries and the fiduciary can be confident that the forensic accountant’s report will be independent, fair and unbiased.  Engaging a forensic accounting expert to settle the conflict is less contentious and less expensive.”

Anderson said a forensic accountant’s report typically identifies the specific documents that govern the administration of the trust or estate and cites specific passages from those documents regarding management of assets, distribution of funds, payment of fees to and expenses of the fiduciary, and related matters.  The report identifies the period examined, provides a schedule of assets of the trust or estate at both the beginning and end of the period, and lays out (in either detail or summary form) the transactions of the trust or estate.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, said the report outlines the forensic accountant’s findings regarding the fiduciary’s management of the trust or estate relative to the trust documents, and whether any transactions conflict with the governing documents.  The forensic accountant will review the report with the beneficiaries and the fiduciary and answer any questions regarding the findings.

While the cost of engaging a forensic accounting expert to analyze the handling of a trust or estate is usually significantly less than the cost of actual or threatened litigation, it is the lessening or neutralizing of the emotional aspects of the dispute that can be even more appealing to families.

“A forensic accountant’s involvement reduces the contentiousness,” Anderson said.  “Family members tend to acknowledge that the dispute is in the hands of a professional whose independent analysis will bring peace of mind to everyone involved.  The forensic accountant is, in effect, the ultimate arbitrator we grew up with.  It’s the next best thing to Mom and Dad.”

Anderson recommends that beneficiaries and fiduciaries engage the services of a forensic accounting expert at the first sign of a dispute — before the matter escalates and family relationships are destroyed.

“Don’t let suspicions of mismanagement fester until things have gotten so bad that there is no hope of repairing the relationship,” said Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “Family is important.  Bring in a third party as soon as a conflict arises.”

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

About David Anderson & Associates

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

Part Five: Taking a Closer Look at Business Valuation

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

David Anderson is 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 last of a five-part series in which Anderson reviews the basics of business valuation.

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 considered.”

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 to assess more accurately 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 considered because they are owned by the business and therefore affect its overall value.

Control adjustments 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 percent of the total or they give the buyer more than 50 percent 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 the business valuation expert must consider determining 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 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.

Part Four: Taking a Closer Look at Business Valuation

Posted by & filed under Blog Articles, Business Valuation, Company News, Forensic Accounting, Fraud, Fraud Deterrence, Marital Dissolution.

David Anderson is 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 fourth of a five-part series in which Anderson reviews the basics of business valuation.

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, 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 of the series, 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 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 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 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,” said Anderson, whose company – David Anderson & Associates – is a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley.

“For example,” Anderson said, “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, he 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 sales 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,” he 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 an 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 the next and final installment of “Taking a Closer Look at 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.