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Independent Expert Witness Puts Education, Experience on Your Side

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

Expert witnesses who are called to testify in litigation are not – contrary to what some people believe – supposed to be advocates for the side that hired them but should serve as independent experts applying their education and experience to the matter.

It should, instead, be the client’s attorney who serves as the advocate for his or her client, 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.

Forensic accountants, business valuators, and CPAs engaged as expert witnesses are subject to professional standards that require them to maintain their independence (there are some exceptions, such as those related to preparation of tax returns). Additionally, expert witnesses also may be required by certain government regulations to maintain their independence.

In discussing independence, Anderson, a Certified Fraud Examiner who recommends every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley, said the professions identify two sub-categories of independence:

  • Independence in fact, and
  • Independence in appearance.

Independence in fact refers to the expert’s mental attitude regarding the matter. It most often reveals itself in the expert’s reports and/or testimony. It should not matter which side has engaged the expert. The expert’s conclusions should be the same (subject to certain assumptions).

However, the expert’s independence could be called into question if:

  • The expert has made certain assumptions (at either the request of the client or the attorney) that clearly are unreasonable, and which benefit the side that engaged him or her. For example, if the expert has assumed a mature business would have been able to grow its revenues at a 20 percent rate solely from its existing products for each of the next 10 years or has assumed employees would accept a 50 percent wage decrease for the next ten years.
  • The expert asserts, without providing any corroborating evidence, certain questionable actions of the side that engaged him or her were reasonable. For example, testifying that certain funds improperly taken by an employee without authorization were advances on his or her inheritance because the employee expected to eventually inherit the business.

Independence in appearance, said Certified Fraud Examiner Anderson, refers to how an uninterested third party might view the expert’s independence considering certain facts. For example:

  • Does the expert have a financial stake in the side that engaged him or her?
  • Does the expert have a familial relationship with anyone on the side that engaged him or her?
  • Is the expert currently performing work for the attorney on another matter or does the expert have an ongoing working relationship with client that engaged him or her?
  • Is the expert owed money by the side that engaged him or her? If so, is it possible that the expert’s report or testimony could be affected by the potential of non-payment in the event the client does not like his or her conclusions or testimony? This is one of the reasons Anderson said he requires upfront retainers and payment in full prior to releasing a draft report or testifying.
  • Does the expert have, or has the expert had, a past adverse relationship with one or more of the parties or attorneys on the opposing side?
  • Has the expert agreed to make certain changes to his or her report or proposed testimony due to pressure or specific direction from either the attorney or the client? This also touches on the concept of making unreasonable assumptions. A recent prominent Federal Tax Court case – Exelon Corp v. Commissioner – was lost, in part, to the expert doing just that.
  • Is most of the expert’s work performed for either plaintiffs or defendants – the so-called “hired gun” – and not a balance of both?

Independence is a critical aspect of being an expert witness. The decider of fact – whether a judge, jury, or arbitrator – often will consider the expert’s independence in deciding on the credibility of the expert. As a result, expert witnesses must be independent in both fact and appearance.

If you engage in, or are anticipating, a legal proceeding, either as a plaintiff or defendant, make sure you have an expert witness who truly is independent. David Anderson is a Certified Fraud Examiner with experience providing forensic accounting services in Philadelphia and the Delaware Valley.

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

About David Anderson & Associates

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

What is a Financial Neutral and Why Might You Need One

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, fraud deterrence, litigation support, and expert witness testimony services in Philadelphia and the Delaware Valley.

You may have heard the term “Financial Neutral” used regarding litigation or alternate dispute resolution. This blog discusses Financial Neutrals and the services they provide.

A Financial Neutral is an independent financial expert who works with both parties in either litigation or an alternate dispute resolution. A Financial Neutral can either be appointed by the court or by an arbitrator, or can be jointly engaged by the parties involved in either mediation or collaborative dispute resolution.

I have been engaged as a Financial Neutral in mediation and collaborative dispute resolution to perform such services as:

  • Business valuation;
  • Analysis of a couple’s assets and debts for equitable distribution in a divorce;
  • Analysis of each spouse’s income for support purposes in a divorce.

Additionally, I have been court-appointed to investigate suspected fraud and to calculate economic damages due to such fraud.

Other potential Financial Neutral appointments include the following services:

  • Analysis of contract and other business disputes, including calculation of financial damages;
  • Analysis of trustee’s or executor’s accounting, and investigation of any improprieties identified;
  • Analysis of investment returns – both past and projected;
  • Appraisal of real estate, artwork, vehicles, and other assets (this usually involves an expert with specific training and experience in appraising assets).

Because a Financial Neutral is independent, the parties not only save the cost of having to engage competing financial experts, but also have confidence in the transparency of the Financial Neutral’s work. Additionally, particularly in mediation and collaborative dispute resolution, the Financial Neutral can explain his/her analysis in detail to the parties involved.

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

About David Anderson & Associates

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

Think Cash Transaction Fraud is Easy? Forensic Accountants Make It Difficult

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, fraud deterrence, litigation support, and expert witness testimony services in Philadelphia and the Delaware Valley.

There are several reasons why the owner or principal of a business – typically a retail business – that receives payment in cash for a significant amount of sales might try to hide some or all such cash by pocketing it and not entering the sales into their books and records. These primary motivations are:

  • To pay less in taxes; and/or
  • To show reduced cash flow, profits, and business value to divorcing spouses or to shareholders who are not employed in the business (often called non-operating shareholders).

As a firm that offers forensic accounting services in Philadelphia, David Anderson & Associates is often called in to analyze the books, records, and operations of such businesses to determine whether – and, if so, how much – cash sales are not being reported. As part of my fraud investigation, and as a Certified Fraud Examiner, our Philadelphia forensic accounting firm employs many of the same fraud deterrence techniques as the IRS and other taxing authorities to identify non-reported cash sales.

Here is a sampling of some of the techniques that forensic accountants use:

  • Analysis of tax returns and financial statements over a multi-year period: One form of analysis is to compare key operating data over a multi-year period and look for unusual trends. For example, in the case of a retail gardening business, I noted the business had been averaging about $600,000 to $800,000 sales per year with a slight upward trend until the year immediately before the owner commenced divorce proceedings. In that year, sales dropped to about $450,000. The next year, sales recovered to around $600,000, and the following year sales jumped to over $700,000. This was a potential indicator of unreported cash sales.
  • Analysis of tax returns and financial statements in comparison to industry statistics: Forensic accountants have access to industry statistics that can be compared to the financial information reported on a company’s tax returns and financial statements. For example, a pizza restaurant with between $3 million and $5 million in sales will typically have a gross profit in the range of 65 percent to 72 percent of sales. If the pizza restaurant I am investigating has been averaging a gross profit in the range of only 45 percent to 50 percent, this can be a strong indicator of unreported cash sales.
  • Comparison of inventory records with sales records: In the case of a retail beauty products business, I analyzed the inventory records of certain high-value beauty products – including expensive perfumes – and compared those records to the recorded sales of those high-value beauty products. I was only able to trace about 50 percent of the inventory reduction to recorded sales. The owner was unable to explain the other 50 percent inventory reduction. Her initial claim was that her staff must have stolen the other 50 percent, but she then was unable to explain how the staff members obtained access to the locked cage where the products were stored after I determined she was the only one with a key to the locked cage.
  • Analysis of employee time records versus recorded sales: In analyzing the sales of a catering business, I noted multiple instances in which employees were paid for working certain catered events for which no sales were recorded. I then contacted each of the customers for these events and learned that each had paid cash. In this case, I could obtain the actual amount paid from each customer.

As a Certified Fraud Examiner offering forensic accounting services in Philadelphia, some of the other fraud deterrence techniques I have used include observation – in which I have someone observe the number of customers and/or product deliveries that occur during a specific length of time and then compare that information with the number of sales recorded in the company’s accounting system – and interviews with present and former employees, although I have noted that interviews with present employees can be very sensitive because such employees may not want to cooperate for fear of losing their jobs.

Of course, while such techniques can be a strong indicator of unreported cash sales, forensic accountants still must perform other procedures and analyses to validate the amount of such unreported cash sales.  But in the end, if the owner is hiding cash sales, a forensic accountant who also is a Certified Fraud Examiner and is conducting a fraud investigation is very likely to find them.

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

About David Anderson & Associates

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

Forensic Accounting Tips to Help Avoid Costly Revenue Recognition 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.

As noted in my recent six-part series on the state of fraud in 2022 based on the Association of Certified Fraud Examiners’ (ACFE) “Occupational Fraud 2022 – A Report to the Nations,” most fraud losses come from financial statement fraud. One of the most significant causes of such fraud is the overstatement of revenues or revenue recognition fraud.

Recently, the AICPA (Association of International Certified Professional Accountants, formerly American Institute of Certified Professional Accountants) published an article discussing types of revenue recognition fraud and red flags which would identify potential revenue recognition fraud. This blog will discuss key takeaways from that article.

The article identified several types of revenue recognition fraud. These included:

  • Improper timing: This type of revenue recognition fraud usually occurs when a company prematurely records revenues to create the appearance that it is hitting revenue targets (announced either internally or publicly) and therefore making its financial statements appear stronger than they really are. Recent SEC actions against Under Armor and Belden (as well as Sunbeam in the 1990s) were based on the use of improper timing.
  • Delayed revenue recognition: This less-common fraud scheme is the opposite of improper timing. This type of revenue recognition fraud occurs when a company, already having met certain revenue targets, improperly shifts revenue to the future to ensure revenue targets are met in upcoming time periods. One key result of such revenue shifting is to increase executive bonuses based upon meeting certain revenue targets. This type of revenue recognition fraud was the basis for certain recent SEC actions against American Rental Associates.
  • Fictitious revenue: This type of revenue recognition fraud results from a company inflating its revenues and earnings by recognizing revenue related to fake contracts, fake customers, or other non-existent sales. This type of fraud may be harder to commit because it requires overriding key internal controls. Two well-known SEC cases involving fictitious revenue were Satyam Computer Services Limited (2011) and Anicom Holdings (2002).
  • Channel stuffing: This revenue recognition fraud scheme involves companies sending excessive amounts of products to their distributors, wholesalers, or customers over and above demand. This usually occurs near the end of a reporting period for which the companies realize they will miss their targets. To induce the recipients to accept the excess inventory, companies will offer kickbacks, excessive discounts, or other incentives. Well-known SEC cases involving channel stuffing were Bristol-Myers Squibb (2004) and Symbol Technologies (2004).

The article also identified certain red flags which can indicate the potential for revenue recognition fraud. These include:

  • An aggressive sales culture and poor tone at the top.
  • Hitting revenue targets due to sales booked in the last few days (or even the last day) of a sales reporting period.
  • Journal entries, especially manual ones, that can’t be explained or have no support. Such entries include topside adjustments at the end of the sales reporting period.
  • Anomalies or large balances within accounts receivable aging and unusual fluctuations in bad debt reserves.
  • Re-aging of invoices (such as due to a change in payment terms) or canceling and reissuing invoices.
  • Unusual fluctuations or patterns of returns from period to period.
  • Holding the books open beyond the accounting period.
  • Loss of major customers.
  • Pressure from executive management to hit sales targets without any mention or reminder of acting ethically or following company policies or procedures.
  • Distributors or wholesalers with higher-than-normal inventory levels at the end of a reporting period.

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

Cut Down on Petty Cash Fraud with Effective Oversight

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, fraud deterrence, litigation support and expert witness testimony services in Philadelphia and the Delaware Valley.

While a company’s petty cash account is designed to provide reimbursement quickly and easily for such small expenditures as office supplies, mileage, and snacks for meetings, these minor amounts can add up to major problems unless your organization has effective fraud deterrence measures in place.

It might be surprising to learn fraud investigations have uncovered cases of petty cash fraud that resulted in major losses, according to forensic accountant David Anderson. It is, however, not the amount of money available in petty cash at any moment, but the cumulative amount in the account over weeks, months, or years.

“Nearly every business keeps an amount of cash on hand to pay unexpected cash expenses, reimburse employees for small expenditures, or provide cash advances to employees who will be traveling,” said David Anderson, a forensic accountant and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.

“I have seen petty cash funds as low as $50 and as high as $10,000,” he said. “While this might not seem significant, consider that companies with multiple locations usually have petty cash at each location. In addition, the petty cash fund can be replenished as often as several times a week. This means a company with a single petty cash fund of $1,000 that is replenished twice a week could have petty cash expenditures of as much as $100,000 per year.”

Anderson, a forensic accountant who also is a Certified Fraud Examiner in Philadelphia, notes that management usually looks at only the petty cash available at a given time (for example, $1,000) and not the amount of cash passing through the petty cash fund over time. As a result, he said, the amount of cash at risk is considered insignificant and the petty cash fund is usually maintained by a single “trusted” employee who is responsible for disbursing the funds, obtaining receipts for expenditures, and requesting that the petty cash fund be replenished when needed.

“There seldom is any oversight or control over the employee’s management of the petty cash fund, and therein lies the potential for fraud,” said Anderson, a forensic accounting expert in Philadelphia who recommends every company enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

The petty cash fund can be the starting point for an employee to commit fraud, Anderson said. It often starts off small as the employee simply “borrows” a few dollars for the weekend or until the next pay date. Initially, the employee may even leave an “IOU” note in the petty cash box or a check made payable to the company, and the employee usually returns the “borrowed” money as soon as possible, he explained.

But as time goes on and the employee realizes no one is watching, the dollar amounts “borrowed” get larger and the time it takes to return the money gets longer until the employee eventually stops returning the money at all, according to Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations. When the amount of “borrowed” money approaches the petty cash fund limit, he said, the employee will manufacture reimbursable expenses so that the petty cash fund can be replenished.

I recall one fraud investigation in which I discovered that the perpetrator had submitted multiple photocopies of the same receipt in the petty cash replenishment requests,” said Anderson, a Certified Fraud Examiner in Philadelphia. “In another case, I found handwritten “receipts” from service vendors for cash payments. Handwriting analysis showed that the signatures of the individuals who signed each receipt call came from the same person – the perpetrator.”

So, how do you combat petty cash fraud? There are several fraud deterrence measures that companies can implement to lessen the chance that petty cash fraud will occur in their business, explained Anderson, a forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

First, he said, management should conduct irregular “surprise” checks of the petty cash fund at least once a month during the year. These mini audits should occur at various times and different intervals. The day before pay day, late on a Friday and the day before a holiday are all times when the trusted employee might not expect anyone to be looking, Anderson said. In addition, these checks should be conducted two weeks apart, four weeks apart, or maybe two checks close together. It is important that checks be conducted randomly to prevent the trusted employee from anticipating when they will occur, he said.

Next, someone at a higher level than the trusted employee should randomly and irregularly scrutinize petty cash replenishment requests, including comparing the latest request with several earlier requests, said Anderson, a forensic accounting expert in Philadelphia.

These two measures will go a long way toward ensuring that petty cash fraud is not occurring at your company, and that the petty cash employee knows that you are watching even this seemingly insignificant fund.

If you require the services of a Certified Fraud Examiner 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, 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.

Tips to Help Prevent Fraud in Cash-Intensive Businesses

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.

Latest ACFE Study Reveals the State of Fraud in 2022 – Part Six

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.

This blog, the last in a series of six, concludes my discussion of the Association of Certified Fraud Examiners (ACFE) “Occupational Fraud 2022 – A Report to the Nations”.  This final blog focuses on how perpetrators concealed their frauds:

  • The top five concealment methods used by fraudsters were:
    • Creating fraudulent physical documents (39 percent of all frauds)
    • Altering physical documents (32 percent of all frauds)
    • Creating fraudulent electronic documents or files (28 percent of all frauds)
    • Altering electronic documents or files (25 percent of all frauds)
    • Destroying or withholding physical documents (23 percent of all frauds)
      • (NOTE: These five methods total more than 100 percent because some fraudsters used more than one method of concealing their fraudulent activities.)
  • 57 percent of all cases involved the creation of fraudulent evidence and 38 percent of all cases involved concealment of BOTH physical and electronic evidence.
  • In 12 percent of frauds, the fraudster made no attempt to conceal the fraud.
  • 48 percent of executive-level perpetrators destroyed evidence.
  • 61 percent of managers created fraudulent evidence.

The above concealment data point to the importance of such anti-fraud controls as:

  • Job rotation/mandatory vacation (to prevent ongoing concealment by the perpetrator)
  • Surprise audits (to potentially catch activity before it can be concealed)
  • Proactive data monitoring/analysis (to potentially catch activity before it can be concealed and to identify trends or data that seems to be “out of sync” due to the concealment)
  • Formal fraud risk assessments by outside parties (to identify areas which could be subject to concealment)

I hope you enjoyed reading this six-blog series about the current state of fraud.  If I can be of assistance in helping your business/organization in fighting fraud, please let me know.

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.

If you require the services of a Certified Valuation Analyst 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.

Latest ACFE Study Reveals the State of Fraud in 2022 – Part Five

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.

This blog continues my discussion of the Association of Certified Fraud Examiners (ACFE) “Occupational Fraud 2022 – A Report to the Nations.” This week I focus on how companies and organizations react after a fraud has been discovered and what their experiences are in attempting to recover fraud losses:

  • 61 percent (down from 66 percent in 2020) of victim companies and organizations terminated the perpetrator while another 11 percent permitted the perpetrator to resign.
  • However, 19 percent (up from 14 percent in 2020) of companies and organizations allowed the perpetrator to remain with the organization either with probation or suspension (12 percent) or no punishment at all (7 percent).
  • Only 40 percent (down from 45 percent in 2020) of all owners and executives were terminated by the victim company or organization.
  • 58 percent of victim companies and organizations referred the matter to law enforcement. This percentage has steadily declined from 69 percent of companies and organizations which did so in 2008.
  • 29 percent of victim companies and organizations filed civil suits against the perpetrator. This increased over the 20-to-25 percent average during the past ten years.
  • 44 percent (down from 56 percent in 2020) of perpetrators referred to law enforcement pled guilty or no contest while another 22 percent of perpetrators were convicted at trial.
  • In 17 percent (up from 12 percent in 2020) of cases referred to law enforcement, the authorities declined to prosecute (due to either the size of the loss not being large enough or because the company or organization could not produce sufficient documentation and other evidence for the authorities to be confident that they could obtain a conviction).
  • 10 percent (up from 2 percent in 2020) of cases referred to law enforcement resulted in the perpetrator being acquitted.
  • 27 percent (down from 41 percent in 2020) of companies and organizations that filed civil suits received a judgment in their favor while another 39 percent of such suits were settled before a verdict was reached.
  • Perpetrators obtained a favorable judgment in 29 percent (up from 21 percent in 2020) of civil cases (because the company or organization could not produce sufficient documentation or other evidence to sufficiently prove the perpetrator’s guilt).
  • The overall trend over the last two years is that more perpetrators are fighting either the criminal or civil fraud charges in court, and are, unfortunately, winning more often.
  • Victim companies and organizations that decided not to refer cases to law enforcement cited the following reasons for their decision:
    • A belief that internal discipline was sufficient (50 percent of non-referred cases)
    • Fear of bad publicity (30 percent of non-referred cases)
    • The company or organization reached a private settlement with the perpetrator (28 percent of non-referred cases)
    • The belief that pursuing a conviction would be too costly (20 percent of non-referred cases)
    • The lack of sufficient evidence to persuade law enforcement to pursue the matter (10 percent of non-referred cases)
  • The median loss for companies and organizations which chose not to pursue the perpetrators was $50,000 for those which chose to not refer to law enforcement and $70,000 for those who chose to not pursue a civil action.
  • The median loss for companies and organizations which chose to refer the perpetrators to law enforcement was $200,000 and was $300,000 for those which chose to pursue a civil action.

My next blog article, the final entry in this six-part series, will focus on how perpetrators conceal their frauds.

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.

If you require the services of a Certified Valuation Analyst 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.

Latest ACFE Study Reveals the State of Fraud in 2022 – Part Four

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.

This blog continues my discussion of the Association of Certified Fraud Examiners (ACFE) “Occupational Fraud 2022 – A Report to the Nations.” This week I focus on corruption:

  • Transparency International, the global coalition against corruption (transparency.org), defines corruption as:

“The abuse of entrusted power for private gain. It can be classified as grand, petty, and political, depending on the amounts of money lost and the sector where it occurs.”

  • The 2022 Report shows that 50 percent of all frauds involve a form of corruption (up from 43 percent in the 2020 Report and from 33 percent in the 2012 Report) with the median loss from corruption being $150,000 (down from $200,000 in 2020), and the fraud lasting an average of 12 months (down from 18 months in 2020).
  • The 2022 Report identifies four main types of corruption:
    • Conflicts of interest, including purchasing schemes and sales schemes
    • Bribery, include invoice kickbacks and bid rigging
    • Illegal gratuities
    • Economic extortion
  • Corruption is the most pervasive form of fraud worldwide.
  • Sixty-five percent of corruption cases were perpetrated by someone in an executive or upper management position.
  • The Purchasing Department is the department most at risk for corruption; 82 percent of cases involved Purchasing Department fraud.
  • The industries with the highest proportion of corruption cases are:
    • The Energy Sector (64 percent)
    • Manufacturing (59 percent)
    • Transportation and Warehousing (59 percent)
    • Information Services (58 percent)
    • Government and Public Sector (57 percent)
  • Corruption is the most commonly committed fraud committed by employees of any size companies/organizations (those with fewer than 100 employees and those with 100-plus employees). Fifty-four percent of organizations with 100-plus employees reported corruption fraud in the 2022 Report.
  • Conflict of interest cases principally involve:
    • Purchases from favored parties regardless of whether the party provides the best quality and/or lowest prices.
    • Sales to favored parties at bargain prices; often these sales are lower than those offered to other parties, or at a price usually reserved for larger customers.
    • Favored parties are often friends, relatives, or parties in which the purchaser has a financial interest.
  • Bribery cases principally involve:
    • Kickbacks to the purchaser for purchasing either more goods or services than would be normally purchased or at higher prices than would normally be paid.
    • Bid rigging whereby the purchaser provides inside information to a favored vendor in return for payments/kickbacks.
    • Bid rigging can also be achieved by collaborating with the favored vendor to write the request for proposal (RFP) in such a way that only the favored vendor can meet the RFP’s requirements.

My next blog article will discuss how companies/organizations react after a fraud has been discovered and what their experiences are in attempting to recover fraud losses.

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.

If you require the services of a Certified Valuation Analyst 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.

Latest ACFE Study Reveals the State of Fraud in 2022 – Part Three

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.

This blog continues my discussion of the Association of Certified Fraud Examiners (ACFE) “Occupational Fraud 2022 – A Report to the Nations.” This week, I discuss the various controls that companies and organizations put in place to prevent fraud, and how effective these controls are:

  • The 2022 Report identified 18 specific anti-fraud controls and noted all 18 were associated with lower fraud losses and quicker detection of the frauds.
  • The most common anti-fraud controls employed by companies and organizations were:
    • Having an external audit of the companies’ and organizations’ financial statements (present in 82 percent of the companies and organizations)
    • Putting in place a code of conduct (present in 82 percent of the companies and organizations)
    • Having an active internal audit department (present in 77 percent of the companies and organizations)
    • Having management certification of the companies’ and organizations’ financial statements (present in 74 percent of the companies and organizations)
    • Having an external audit of the internal controls over the companies’ and organizations’ financial reporting (present in 71 percent of the companies and organizations)
    • Having a confidential tip reporting hotline (present in 70 percent of the companies and organizations)
    • Regular management review of financial reporting (present in 69 percent of the companies and organizations)
    • Having an independent audit committee (present in 67 percent of the companies and organizations)
    • Providing fraud training for employees (present in 61 percent of companies and organizations)
  • The effectiveness of these most common controls (for the seven most effective controls) was:
    • Job rotation and mandatory vacations reduced the median loss by 54 percent and the duration of the fraud by 50 percent
    • Having a confidential tip reporting hotline reduced the median loss by 50 percent and the duration of the fraud by 33 percent
    • Having surprise audits reduced the median loss by 50 percent and the duration of the fraud by 50 percent
    • Performing proactive data monitoring and analysis reduced the median loss by 47 percent and the duration of the fraud by 56 percent
    • Having an anti-fraud policy in place reduced the median loss by 45 percent and the duration of the fraud by 33 percent
    • Providing fraud training for employees reduced the median loss by 45 percent and the duration of the fraud by 33 percent
    • Conducting formal fraud risk assessments performed by outside parties reduced the median loss by 45 percent and the duration of the fraud by 44 percent.
  • It is interesting to note that of the seven most effective anti-fraud controls, only two (a tip hotline and fraud training for employees) were among the most frequently used controls. This points to somewhat of a disconnect from what company executives believe are the most effective controls and those that are effective.
  • Over the past 12 years, four anti-fraud controls have seen significant increases in use:
    • Use of tip hotlines – an increase of 19 percent
    • Implementing an anti-fraud policy – an increase of 17 percent.
    • Providing fraud training for employees – an increase of 17 percent
    • Providing fraud training for managers and executives – an increase of 15 percent
  • Other anti-fraud controls used less frequently by companies and organizations included:
    • Creating employee support programs (especially for those suffering from addictions/dependencies or experiencing depression)
    • Creating a dedicated fraud department, function, or team
    • Providing rewards for whistleblowers

My next blog article will discuss corruption and its impact on companies and organizations.

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.

If you require the services of a Certified Valuation Analyst 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.

Latest ACFE Study Reveals the State of Fraud in 2022 – Part Two

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.

This blog continues my discussion of the Association of Certified Fraud Examiners (ACFE) “Occupational Fraud 2022 – A Report to the Nations.” This week, I discuss how frauds are detected and the characteristics of the people who commit fraud:

  • Most people believe having a financial audit will detect fraud. However, the 2022 Report, as with the 2020 Report found that only 4 percent of all frauds were detected by external auditors.  The percentage of frauds detected by accident remained at 5 percent – higher than the audit rate.
  • The most frequent method by which frauds were detected came from tips – the 2022 Report found that 42 percent of all frauds were detected from tips. Employees were the source of 55 percent of all tips, followed by customers (18 percent), anonymous tips (16 percent) and vendors (10 percent).  The employee percentage was up from the 50 percent rate in the 2020 report.  This possibly means that more employees are willing to report fraud than in the past.
  • Internal auditors detected 16 percent of all frauds.
  • Management review detected 12 percent of all frauds.
  • The 2022 Report found that, although owners and executives committed only 23 percent of all frauds, the median loss from such frauds was $337,000 (down from $600,000 in 2020). Managers committed 39 percent of all frauds with a median loss of $125,000 (down from $150,000 in 2020), and lower-level employees committed 37 percent of all frauds with a median loss of $50,000 (down from $60,000 in 2020).
  • Tenure with the organization correlated with the amount of fraud loss. The median fraud loss from employees with 5 years or less tenure remained at $100,000.  This grew to $137,000 (down from $190,000 in 2020) for employees with 6 to 10 years tenure, and to $250,000 (up from $200,000 in 2020) for employees with more than 10 years tenure.
  • Men were responsible for 73 percent of all frauds with a median loss of $125,000 (down from $150,000 in 2020). Women were responsible for 27 percent of all frauds with a median loss of $100,000 (up from $85,000 in 2020).  The lower loss level is most likely due to the lower number of women in senior positions.  However, the spread appears to be narrowing as more women move into senior positions.
  • The perpetrator’s age followed a bell curve with 68 percent of all frauds committed by persons between the ages of 30 and 50. The median loss correlated directly with the perpetrator’s age in that the older the person, the higher the median loss.  This is most likely because the older the person, the higher up they are likely to be in the business or organization.
  • 87 percent of all perpetrators had no criminal background.
  • 85 percent of perpetrators displayed at least one behavioral red flag. These included:
    • Living beyond their means
    • Having known financial difficulties
    • Having an unusually close relationship with a customer or vendor
    • Having control issues, including an unwillingness to share duties
    • Known for bullying or intimidation
    • Experiencing divorce or other known family problems
    • Having a “Wheeler-Dealer” attitude
    • Displaying frequent irritability, suspiciousness, or defensiveness
    • Having known addiction problems (drugs, gambling, alcohol, etc.)
    • Frequent complaining about inadequate pay

Given the financial difficulties (loss of wages, furloughs, medical costs, loss of other income, inflation, etc.) that many people continue to face due to the COVID-19 virus, it is likely that the incidence of red flags will continue to increase over the next two years.

My next blog article will discuss the various anti-fraud controls that businesses/organizations employee, and the effectiveness of each of the controls.

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.

If you require the services of a Certified Valuation Analyst 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.

Latest ACFE Study Reveals the State of Fraud in 2022 – Part One

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.

Every two years, the Association of Certified Fraud Examiners (ACFE) commissions a survey of fraud in the United States and abroad. The ACFE just released its 2022 study entitled “Occupational Fraud 2022 – A Report to the Nations.”

Over the next several weeks, I will discuss some of the key findings from the 2022 report. Up first, here are some general observations regarding fraud:

  • The ACFE study estimates that the typical business/organization (including non-profit organizations) is losing about 5 percent of revenue each year to fraud.
  • The median loss from fraud is $117,000. This is down 6 percent from the $125,000 median loss identified in the 2020 Report and down 10 percent from the $130,000 median loss identified in the 2018 Report.
  • Twenty-five percent of all frauds result in a loss of over $600,000.
  • The median duration of reported frauds is 12 months, down 14 percent from the median duration of frauds identified in the 2020 Report and down 25 percent from the 2018 Report duration of 16 months.
  • Overall, the 10-year trend shows that frauds are being caught faster and therefore resulting in a smaller overall median loss.
  • Smaller businesses (those with fewer than 100 employees) experienced the highest median loss at $150,000.
  • Asset misappropriation schemes (frauds involving the theft of cash, inventory, supplies, equipment, or other company assets) remained the most common scheme, remaining at 86 percent of all fraud schemes (versus 89 percent in the 2018 Report). Median asset misappropriation losses remained at $100,000 (versus $114,000 in the 2018 Report).
  • Financial statement fraud remains the least common scheme at 9 percent (versus 10 percent in the 2020 Report), but results in the highest losses – $593,000 – down 38 percent from the $954,000 per fraud in the 2020 Report.
  • Internal control weaknesses, including inadequate separation of duties, were responsible for nearly 49 percent of all frauds reported in the 2022 Report (up a whopping 48 percent from the 33 percent shown in the 2020 Report).
  • Eight percent of frauds discussed in the 2022 Report involved cryptocurrency with 48 percent of those frauds involving bribes and/or kickbacks paid in cryptocurrency and 43 percent of those frauds involving misappropriated assets being converted to cryptocurrency.
  • Fifty-two percent of the frauds in the 2022 Report were affected in some way by COVID-19 related factors which resulted in changes in staffing, processes and/or controls.
  • The 2022 Report identified 18 different anti-fraud controls that companies had implemented (These will be discussed in greater detail in a later blog article). It found that every control implemented resulted in a reduction in both the duration and amount of fraud.

The next blog article in this series will discuss how frauds are detected and the characteristics of the people who commit fraud.

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.

If you require the services of a Certified Valuation Analyst 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.

Can a Business with No Profits Have Value?

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

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.

Uncovering 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 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 take 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 upon this potential. Case in point:  Bright Health Group, which owns and operates medical clinics as well as provides health care insurance, lost over $500 million in 2021. But 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 over $2 billion.

Similar to startup businesses are those 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 can shed their debt. That makes them attractive to potential investors who are focusing on the potential future profitability of the debt-free company. For example, last year, Luckin Coffee, a Chinese rival to Starbucks, filed for Chapter 15 bankruptcy in the U.S. Today, although it has not yet emerged from bankruptcy, it is still publicly traded with a market cap of over $3 billion.

A third type of unprofitable business that can have value is one that has assets whose value 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 because it is focusing primarily on the assets of the business, and the value of incorporating those assets into the purchaser’s business. Case in point – Sun Pharma, the largest pharmaceutical company in India, has pursued a strategy of buying unprofitable drug makers and merging their operations into its own. In fact, says David Anderson, a Certified Valuation Analyst offering forensic accounting services in Philadelphia, Sun Pharma has made 10 such acquisitions totaling several billion dollars over the past 15 years.

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.