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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.

David Anderson Featured on Philadelphia ACFE Website

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 programs and forensic accounting services in Philadelphia and the Delaware Valley.

David Anderson, CPA, CFE, CVA has been featured for March 2022 in the “Member Spotlight” on the website of the Philadelphia Area Chapter of the Association of Certified Fraud Examiners (ACFE).

Click here to go to the ACFE home page. Scroll to the bottom and hit the “Read More” button to see Anderson’s interesting and informative question and answer exchange.

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

Formed in 1991, the Philadelphia Area Chapter of the Association of Certified Fraud Examiners is one of more than 190 worldwide chapters sponsored by the internationally renowned Association of Certified Fraud Examiners (ACFE). The primary mission of the ACFE is to reduce the incidence of fraud and white-collar crime and assist the membership in its detection and deterrence.

Currently, the Chapter has more than 300 members representing a broad range of professions, including accountants, auditors, investigators, federal and state law enforcement personnel, loss prevention specialists, attorneys, prosecutors, managers, executives, academicians, and anti-fraud consultants.

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

About David Anderson & Associates

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

Always Remit Taxes You Collect in a Timely Manner

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 programs and forensic accounting services in Philadelphia and the Delaware Valley.

Almost every organization is responsible for collecting and remitting taxes. These taxes, which occur on the Federal, state, county, or local levels, can include payroll taxes – such as income tax, Social Security tax, Medicare tax, and unemployment tax – as well as sales taxes, excise taxes, fuel taxes, and others.

“These taxes belong to the governmental taxing authorities,” said Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates, “and should not be used by the business at any time for any reason.”

He explained these tax types often are referred to as “trust fund taxes,” evoking the concept that the organization is holding the tax monies “in trust” for the government because they have been withheld from taxpayers by the business.

Some organizations that are experiencing cash flow or financial difficulties have used these funds for financing operations, Anderson said, instead of remitting the funds in a timely manner to the governmental taxing authorities.

Their logic, he said, usually is that if they can’t continue to operate, then they will have to lay off employees – which would cost the taxing authorities both payroll taxes and unemployment payments – and they will lose sales – which, similarly, would cost the authorities sales taxes, excise taxes and fuel taxes.

However, taxing authorities believe the taxes become their property the minute the organization withholds them from employees or collects them from customers, said Anderson.

The failure to remit these collected taxes when they should be, he said, can result in penalties and interest being charged to the organization.  In addition, such failure can trigger trust fund penalties of up to 100 percent of the unpaid taxes, a practice commonly known as the “100 percent penalties.”

Under these penalties, Anderson said, not only is the organization responsible for the unpaid taxes, but also any person – termed by the law as “responsible persons” – who can effectively control the finances or determine which bills should or should not be paid and when.

Under the law, he said, the term responsible person is very broad and can include employees and shareholders/partners, as well as others outside of the formal organization – including, potentially, sureties and lenders.  Additionally, taxing authorities don’t have to wait to see if they will be paid by the organization; they can, Anderson said, go after the responsible person at any time.

As if the 100 percent penalties aren’t enough, the fraud deterrence professional said, taxing authorities also can pursue criminal fraud complaints if they view that the owners – or officers, in the case of non-profit organizations – have used the unpaid taxes to benefit themselves.  This includes compensation, fringe benefits, expenses paid on their behalf, distributions or dividends, loan repayments, and retirement plan contributions.

A failure to remit taxes collected on behalf of governmental taxing authorities in a proper and timely fashion, Anderson said, can have significant and dire consequences.  One way to avoid this issue in the case of payroll taxes is to employ a professional payroll service to withhold and pay such taxes.

In addition, many of these same companies offer similar services for sales, excise, and fuel taxes.  Organizations in financial need should consult their professional advisors and other financial companies – such as lenders, factors, floor plan providers, etc. – to find other ways to finance the operations of their organizations without resorting to the improper use of collected and withheld trust fund taxes.

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

About David Anderson & Associates

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

Vigilance Can Stave Off These 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.

Tips to Help You Navigate the Cryptic World of Cryptocurrencies

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 2017 blog on cryptocurrency, I discussed the risks involved with Bitcoin and other cryptocurrencies.  At that time, only a few U.S. companies were accepting cryptocurrency as payment, and there were significant fraud and investment risks in cryptocurrency transactions.  In my 2019 update on the fraud risks of cryptocurrencies, I reiterated these risks along with the increased risks of hacking attacks against digital wallets, private keys, and exchanges.

In the past two plus years, cryptocurrencies have become more popular than ever.  In fact, as of today, cryptocurrency transactions are considered legal in most countries in the world (notable exceptions are Turkey, which banned cryptocurrency transactions in April 2021, and China which banned cryptocurrency transactions in September 2021).  Two countries – El Salvador (June 2021) and Cuba (August 2021) – recognize cryptocurrencies as legal tender, and this is expected to grow in 2022.

Additionally, the financial community is getting on board with cryptocurrencies.  In early 2021, Morgan Stanley announced that they were going to be offering to their wealthier customers funds which invested in cryptocurrencies.  BNY Mellon announced that it would provide custodial services for cryptocurrencies.

Additionally, Ally Bank, Chime Bank, Simple Banks, and USAA allow customers to purchase Bitcoin through their debit cards.  Goldman Sachs has opened a cryptocurrency trading desk.  In April 2021, Venmo added support for customers buying and selling cryptocurrencies.  In October 2021, Mastercard announced it will be building a platform to allow any bank or merchant to offer cryptocurrency services.  Additionally, cryptocurrencies can be used for retirement investments including IRAs, Roth IRAs, and certain 401-Ks.

Currently, the American Red Cross, UNICEF and the UN World Food Program accept donations in cryptocurrency.

Notwithstanding the above, risks still abound with cryptocurrencies.  These include:

  • Cryptocurrencies are still subject to extreme price swings, making them risky investments. For example, in 2021, Bitcoin’s price ranged between a low of $28,722 and a high of $68,789.  Additionally, significant swings can occur instantly due to certain world events.  For example, when China announced its ban on cryptocurrencies in September 2021, Bitcoin immediately fell in value by 9% (it has recovered and more since then).
  • Digital wallets, private keys and exchanges are still subject to hacking attacks.
  • Commissions and fees for investing in and cashing out from cryptocurrencies are still significant. Additionally, there may be withdrawal limits for cashing out.
  • Gains and losses from cryptocurrency transactions must be reported on your Federal and other income tax returns.

Additionally, the recently passed Infrastructure Investment and Jobs Act added certain reporting requirements.  Beginning in 2023, cryptocurrency exchanges and other transaction facilitators will have to track and report on their customer’s cryptocurrency transactions (similar to what your mutual funds and brokers/investment advisers currently do for securities transactions).

Also, starting in 2024, anyone receiving more than $10,000 in cryptocurrency for a product or service will have to report identifying details about the customer (including social security number) just as they currently are required to do for cash transactions over $10,000.  A check box has also been added to Federal income tax returns requiring the taxpayer to declare whether they’ve transacted or had a financial interest in a virtual currency.

Finally, the yet-to-be passed Build Back Better bill may be closing the ‘”wash sale” loophole for cryptocurrencies which currently allows a taxpayer to take a write-off of a loss even if they buy another cryptocurrency within 30 days before or after a sale.

I will continue to monitor cryptocurrencies and keep you updated.

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.