Blog

“Tricks of the Trade:” Fight Fraud with Names, Addresses, Phone Numbers

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

This blog is the second in a series of four posts that will examine the so-called “Tricks of the Trade” that forensic accountants use when conducting fraud investigations.

A forensic accountant can use names, addresses and phone numbers when investigating potential minority shareholder suppression cases and when conducting a fraud investigation.

In minority shareholder suppression cases, a forensic accountant will look for employees, subcontractors and vendors having the same last name as that of the majority shareholders, explained David Anderson, a Philadelphia 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.

“We also obtain information regarding the married names of female relatives of the majority shareholders and search for those names” said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia. “In several of my cases, I have identified significant payments being made to the majority shareholder’s daughter, her husband or her children, who performed little or no work for the company, as part of an effort to divert profits from the minority shareholder.”

When he is conducting fraud investigations, forensic accounting expert Anderson says he performs the same analyses.

“In one instance, the general manager of a division was found to be making referral payments to a seemingly unrelated third party,” said David Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley. “However, during my investigation, I found that this person actually was his wife – using her maiden name to appear to be unrelated to the general manager.

Anderson, a Certified Fraud Examiner in Philadelphia, said he made this discovery by Googling the general manager. One of the items he said he came up was the wedding announcement which contained the wife’s maiden name.

One final name analysis which Anderson said can be performed by a forensic accountant undertaking fraud deterrence in a fraud investigation is a search for vendor companies that use abbreviations in their titles (for example, ARH Enterprises or H & B Associates). Because of ego, many fraudsters and others use their own initials or those of their spouse and themselves in the names of companies they set up, said David Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. He said any companies he finds during such an investigation warrant additional analysis.

Addresses can also help identify potential fraud, forensic accounting expert, Anderson noted. When an employee sets up a phony vendor, Anderson said the employee often uses his or her home address as the address for the vendor. By running matches between the employee files and the vendor files, he said he has found numerous phony vendors.

“I also run the employee’s addresses against the company’s address or that of the corresponding subsidiary, division or group headquarters or facility address, said Anderson, a Philadelphia 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. “In these instances, I am looking for employees who are using one of the company’s addresses as their stated home address.

Certified Fraud Examiner Anderson said follow-up investigations of those employees have revealed that they usually are doing so for one of several reasons, including:

  • hiding from the government because they are undocumented aliens or parole violators;
  • hiding from ex-spouses or debtors; or
  • trying to avoid paying state or local taxes . . . such as a Philadelphia resident working in Montgomery County who is trying to avoid having the Philadelphia wage tax withheld.

A final address analysis that can be completed when a forensic accountant is conducting a fraud investigation or a program of fraud deterrence is running employee addresses and looking for employees who have the same address as another employee. While some such persons may be relatives of the employee and could be living in the same household, forensic accounting expert David Anderson said he also has found ghost employees by performing this analysis.

Just as with addresses, telephone numbers also can be used to identify potential fraud in the same way, said Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley. During his investigations, he said he has identified phony vendors and ghost employees by matching employee phone numbers against those of vendors and other employees.

If you have questions about any finance or fraud issues, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com if you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley.

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.

“Tricks of the Trade:” Benford’s Law Can Help Root Out Fraud

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

This blog is the first in a series of four posts that will examine the so-called “Tricks of the Trade” that forensic accountants use when conducting fraud investigations. 

The business of forensic accounting is — most of the time — a very precise, highly detailed process. It might be surprising, then, to learn one of the tricks of the trade forensic accountants use in fraud investigation stems from the very inexact science of probabilities, specifically, Benford’s Law.

“Frank Benford was a physicist in the 1930s who essentially proved an earlier hypothesis by astronomer Simon Newcomb in the 1880s that numbers starting with 1 occurred more frequently than other numbers,” explained David Anderson, a Philadelphia 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.

“Newcomb had noticed that when he looked up logarithm tables in a book he shared with colleagues,” Anderson continued, “the earlier pages (which contained numbers that started with 1) were much more worn than the other pages. Benford tested and expanded that work and the phenomenon was named after him.”

Benford’s Law, also known as the First Digit Law, states that the lower the first digit, the higher the probability that it will occur more often than higher numbers, Anderson said. Studies have confirmed the concept by showing the number 1 occurs as a first digit more than 30% of the time, the number 2 occurs as a first digit about 18% of the time, and so on, according to Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia. The number 9 occurs as a first digit the least – less than 5% of the time, Anderson added.

Benford’s Law is one of the tricks of the trade forensic accountants use in analyzing financial transactions during fraud investigations, Anderson said. If the results of the financial analysis show a mismatch with Benford’s Law, it is a red flag to forensic accountants that fraud may be present.

In one case, Anderson said, senior management engaged him to determine if any of their divisions were circumventing spending authorization limits.

“The company had a policy that required higher levels of approval for expenditures in excess of $100,000,” according to Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley. “I analyzed all transactions between $10,000 and $100,000 for each division and found three divisions had a higher incidence of transactions between $90,000 and $99,999 than would be expected. Two divisions exceeded 10%, while the third division exceeded 8%.”

Anderson’s findings for the three divisions were out of sync with Benford’s Law and a further analysis of the transactions between $90,000 and $99,000 revealed the three divisions were “splitting” vendor invoices that exceeded $100,000 to avoid having to obtain higher level approval, explained Anderson, a Certified Fraud Examiner in Philadelphia.

In another case, Anderson said, management had a policy that employees did not have to submit copies of receipts for meal expenditures under $25. When a senior sales representative submitted six months of travel reimbursement requests at once, the corporate controller noted that more than 50% of his meal charges in more than 17 different cities were for the same amount – $24.73 – regardless of whether they were for breakfast, lunch or dinner.

As a result, senior management engaged Anderson to analyze travel reimbursement requests for all employees. Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, found that more than 70% of all employee reimbursement requests for meals were for between $24.00 and $24.99. But under Benford’s Law, more than 70% of all employee meals with a stated cost of under $25.00 should have been less than $20.00, he said.

“The resulting conclusion was that employees were likely abusing the company’s policy,” explained Anderson, a forensic accounting expert in Philadelphia. “Management changed its policy to reimburse employees at the equivalent federal per diem rates. The only exceptions to this were for business meals at which customers or prospects were entertained. In these cases, the employee was required to provide a receipt.”

Two years later, management analyzed its travel meal reimbursements, and found that it was spending less than it had prior to the policy change, Anderson said. In this case, the fraudulent behavior was stopped, and the company realized material expense savings, he said.

If you have questions about any finance or fraud issues, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com if you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley.

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.

New Supreme Court Ruling Affects Internet, Other Remote Sellers

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

Prior to the U.S. Supreme Court ruling last month in South Dakota v. Wayfair, most Internet and mail order sellers were not required to charge and remit state sales taxes.  However, the justices’ ruling in this matter has significantly changed this.  If you are an Internet or remote seller or if you have clients who are, then this blog is of critical importance to you.

States had been permitted, before this ruling, to require out-of-state sellers to charge and collect sales tax only if they had “nexus”.  Nexus is generally defined as having some form of physical presence in a state.  This could include having actual physical stores or other facilities, having commissioned resellers or sellers’ representatives, or actually delivering product into a state using the company’s own vehicles.  Some states have even defined nexus as resulting from in-state advertising or trade show attendance.

With the South Dakota v. Wayfair ruling, the Supreme Court has allowed states to require out-of-state sellers to charge and collect sales tax if they also have “economic nexus”.  Economic nexus arises from having a certain minimum level of sales revenue and/or sales transactions in a state, regards of whether a seller has physical presence or not.  This means virtually every out-of-state seller could be required to charge and remit sales tax in every state into which products are sold.

Fortunately, in the case of South Dakota, the state recognized that forcing every seller to charge and remit sales tax could be extremely burdensome on smaller businesses.  Hence, South Dakota established two possible minimums that must be met before an out-of-state seller is required to charge and remit sales tax: Either $100,000 in taxable South Dakota sales or 200 separate taxable South Dakota sales transactions in either the current or previous calendar year.  This would allow smaller businesses who did not meet these minimums to avoid the burden of charging and remitting South Dakota sales tax.

Several other states have passed similar laws:

  • Alabama, which applies to companies with more than $250,000 in taxable Alabama sales in the previous calendar year;
  • Connecticut, which applies to companies with at least 100 taxable Connecticut sales transactions within the previous 12 months;
  • Kentucky, which applies to companies with more than $100,000 in gross Kentucky sales. These companies do not need to charge and remit Kentucky sales tax, but must notify each Kentucky customer that the customer needs to pay Kentucky use tax on the purchase;
  • Louisiana, which applies to companies with either more than $100,000 in taxable Louisiana sales or more than 200 separate taxable Louisiana sales transactions in either the current or previous calendar year;
  • Tennessee, which applies to companies with more than $500,000 in Tennessee sales within the previous 12 months;
  • Vermont, which applies to companies either more than $100,000 in Vermont sales or more than 200 Vermont sales transactions within the previous 12 months.

Of course, because specific state sales tax requirements can be more complex than those summarized above, you shouldn’t just rely on this information without speaking to a qualified tax advisor.  Also, some of these state laws were on hold pending the Supreme Court ruling while others have not yet announced when their law will become applicable. Additionally, at least 15 more states are either in the process of passing similar legislation or are considering such.

Retail e-commerce sales in 2017 totaled more than $450 billion.  This means that states expect to collect millions more in annual sales taxes based upon the Supreme Court ruling.

If your business or your client’s business could be affected by this Supreme Court ruling, then you or your client should consult with a qualified tax advisor.  Such a tax advisor should have expertise in “SALT” – State and Local Taxes, including those states in which you or your client does business.

If you have questions about any finance or fraud issues, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com if you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley.

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.

Don’t Let Fraud Take the Fun Out of Your Summer Vacation

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.

Another summer of fun and vacation is underway. Those employees with vacation homes at the shore or in the mountains have started their regular weekend visits.  Work likely has slowed down or fallen behind as employees take vacations, and employers scramble to cover their vacant positions.

While summer is generally fun for all of us, it is especially fun for fraudsters, according to Certified Fraud Examiner David Anderson of the Philadelphia forensic accounting services firm of David Anderson & Associates. That fun, he said, comes in two distinct areas: Workplace Fraud and Vacation Fraud. 

Workplace Fraud

As employers shift schedules to account for employees on vacation, Anderson said they can unwittingly open their operation up to increased risk of fraud.  This potential fraud arises from several sources:

  • Employees who do not normally perform sensitive financial jobs may be drafted to fill in for the vacationing incumbents;
  • These “fill-in” employees may not be familiar with fraud deterrence measures in place, and may fail to perform or enforce them;
  • These same employees may be provided with passwords and other access rights to computers and/or software to which they normally do not have access;
  • When incumbents return from vacation, they may not change their passwords and/or technical staff may not remove the access rights of the employees filling in for the incumbents;
  • Reconciling bank accounts and other fraud deterrence measures may be delayed due to backlogs created by vacations;
  • Management may relax fraud investigation and oversight as well as forensic accounting measures due to either employee vacations, their own vacations, or both.

To avoid these risks, Anderson said management must take steps to ensure:

  • “Fill-in” employees are properly trained not only in the incumbent’s job but also in the applicable fraud deterrence measures;
  • Technical staff sets up separate passwords and access rights for the “fill-in” employees, and promptly removes these access rights as soon as the incumbents return to work;
  • Bank reconciliations and other fraud deterrence measures should continue to be applied and performed on either an uninterrupted or a delayed basis; and
  • Management must exercise an increased level of oversight, or at least the same measure of oversight, as it does the rest of the year.

 Vacation Fraud

Fraudsters know people on vacation have relaxed vigilance regarding their debit and credit cards and other personal financial information.  Anderson said an increasing number of fraudsters are using skimmers and other measures to obtain this information.

In particular, the use of skimmers has increased.  Skimmers are electronic data collection devices that are placed over ATM card slots, credit card slots, and on credit card swipers.  They have become smaller in size and less noticeable to the point that it can be difficult to ascertain whether a skimmer has been placed on the device you are using.  In fact, the U.S. Secret Service just issued an alert about the increased use of skimmers on gas station pumps.

While Anderson said people generally are aware if something appears different in the ATMs and other devices they regularly use at home, relaxed vigilance on vacation and unfamiliarity with ATMs and other devices at vacation locations put individuals at greater risk of having their card and other personal financial information stolen. To emphasize this point, Anderson shared a personal experience:

Two years ago, Anderson was on vacation in Asheville, North Carolina.  On the Sunday his family was leaving, he went to the ATM at a local bank and withdrew funds.  Unbeknownst to him, fraudsters had placed a skimmer on the ATM machine. Anderson only learned of the theft of his debit card and PIN information on Monday night when he went online to check his bank account and noticed a strange charge made in Washington state approximately 12 hours after he had withdrawn funds from the ATM.

Anderson subsequently learned the fraudsters had used his debit card and PIN information to purchase an iPhone in Washington state.  When he contacted Ashville bank officials the next day, they checked the ATM and found there was no skimmer on it.  However, they later notified him they had had several complaints during the week about people who had used their ATM and had fraudulent charges appear on their debit cards.

Bank officials told Anderson they had instituted a new procedure to check the ATM at the end of their business day and first thing the next morning to see if there was a skimmer on it.  However, they admitted they would have no way of knowing that fraudsters had placed and then removed a skimmer outside of normal banking hours unless they reviewed hours of tapes from each ATM every day.

Now, when he is on vacation, Anderson said he only uses an ATM that is in a bank’s lobby and only during normal business hours.  He also said he only uses his debit card as a credit card to avoid entering his PIN number.  In addition, he said he maintains a higher level of vigilance whenever he uses his debit or credit card out of town . . . and he strongly recommends others adopt this same practice.  With regards to gas pump purchases, Anderson also said that he either pays cash or goes into the station to have his debit or credit card processed there instead of at the pump.

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.

David Anderson Article Featured on Collaborative Law Website

A recent article from David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley, was posted last week as the feature article on the Collaborative Law Professionals of Southeastern Pennsylvania website.

The article by Anderson – entitled “Key Issues Regarding Marital vs. Non-Marital Assets in a Divorce” and which originally appeared on the David Anderson & Associates blog this past March 26 – details a professional discussion Anderson had earlier this year with Kathy Bloom, an attorney-mediator who serves as Managing Partner of the family law firm of Bloom Peters, LLC, with offices in Horsham, PA and Mount Laurel, NJ.

“I’m thrilled the Collaborative Law Professionals organization decided to share the information Kathy and I presented in the article with its members and visitors to its website,” said Anderson, a marital dissolution accountant in Philadelphia. “The more people who are considering or involved in divorce learn about the legal and financial assistance options that are available to them, the less costly, difficult, and stressful the process can be for everyone involved.”

In the “Key Issues” article, Bloom and Anderson describe how, in general, decisions are made as to what are marital assets and what are non-marital assets. The discussion also zeros in on specific laws in the tri-state Pennsylvania-New Jersey-Delaware area that can help guide local dissolution and divorce proceedings and smooth the path toward completion.

Among the key points made in the piece, Bloom explains the delineation between marital and non-marital assets is not based upon the name in which the assets are held, but rather when the assets were acquired. In addition, she notes non-marital assets that are “comingled” with marital assets can, more often than not, become marital assets.

However, explaining that “there are even exceptions to . . . exceptions,” Bloom and Anderson, in the article, strongly recommend working with a team of legal and financial professionals.

Here’s a link to the just-published version of the article.

The Collaborative Law Professionals of Southeastern Pennsylvania (visit the website) is not a law firm but is a multi-disciplinary network of professionals trained to provide an alternative to the traditional court process. The organization helps individuals work collaboratively, outside of court, to find balanced, respectful, lasting solutions and agreements. The Collaborative Law Professionals offer the skill and knowledge of a diverse group of independent professionals, including lawyers, financial specialists, child specialists, and communication coaches, who ensure client needs, and the needs of each family member are individually and collectively considered.

Bloom Peters LLC (visit the website) is a full-service law firm focusing on family law and business law. The practice works with clients as a team, to assess their legal needs, find solutions to their legal problems, and then implement those solutions. Bloom Peters provides superior legal services to clients and to rapidly respond to client needs, while striving to uphold the highest standards of integrity, expertise, and professionalism. The firm prides itself on a commitment to be available for consultation whenever possible.

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

About David Anderson & Associates

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

How Differing Standards and Premises of Value Can Affect the Valuation of a Business

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

Can a business be simultaneously worth $10 million, $60 million, $72 million, and $100 million?  It can when different standards of value and premises of value are used by the business valuator.

Several months ago, David Anderson, 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 – was asked to value a bio-technology business owned by the wife in a Pennsylvania divorce case.  In this week’s column, he is using that case to illustrate the different values he could have reached for her business.

There are three standards of value, Anderson said, that business valuators use:

Fair Market Value (FMV): This standard of value is required for Pennsylvania divorces.  The FMV is the price at which a business would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

Among the factors that must be considered by the business valuator employing the FMV standard is a discount for lack of marketability, recognizing there is usually no market for a privately-held business.  Consequently, the seller will generally have to incur additional costs for a business broker, and the sale is likely to take an unknown period of time (during which the seller will not be able to earn a return on the eventual value paid).  In the above-mentioned divorce case, Anderson determined a fair market value of $60 million based upon a 30 percent discount for lack of marketability.

Fair Value (FV): This standard of value is required for New Jersey divorce cases and for minority shareholder oppression cases in Pennsylvania and New Jersey.  FV is essentially FMV but without any discounts.  Had Anderson valued the above-mentioned business in one of these instances, he said he would not have applied the 30 percent discount and would have determined the wife’s company to be worth $72 million.

Strategic or Investment Value (SV or IV): This value is that which would be paid by a buyer who perceived the purchase of this business would result in a synergistic benefit to the buyer.  For example, the buyer might see the purchase as filling in a gap in its product line; or adding customers who would make additional purchases of the buyer’s existing products; or eliminating a competitor, etc.

For these types of reasons, the buyer would be willing to pay more than the FMV of the company.  In the above-mentioned divorce case, three months after the date of Anderson’s valuation, a larger bio-technology company offered to pay $100 million for the wife’s company because it filled a gap in their product line.  Therefore, to this larger company, the wife’s business was worth $100 million instead of the $60 million FMV that Anderson determined.

In addition, Certified Valuation Analyst Anderson said, there are three primary premises of value for businesses.  Each of these can affect the value as determined under one of the three standards:

Book Value: This is the difference between the value of the assets and the value of the liabilities recorded on the books of a company.  It ignores the true market value of the assets shown on the books.  For example, in the above-mentioned divorce case, the value of the bio-technology patents and trademarks of the business were recorded at cost less amortization of that cost.  Their book value ignored the actual higher market value of the patents and trademarks themselves.

Additionally, the business’s technology equipment was recorded on its books at cost less depreciation.  Again, this ignored the active resale market and values the company could have realized by selling the equipment.  Book value usually results in a low valuation for a company.  In the above-mentioned case, the book value of the business was about $10 million.  Despite the low value realized by valuing a business at its book value, many buy-sell agreements, shareholder agreements and partnership agreements contain clauses basing the sales value of shares on book value.  This is primarily because the parties involved in the transaction and their legal advisers are not familiar with business valuation principles.

Going Concern Value: Most business valuations are based upon the assumption the business will continue to operate after the hypothetical sale.  Hence, the business’s value will be based upon the assumption the derived value of the business (as determined under one or more of the Income, Market and Cost methods) will be greater than the book value of the business.  In the above-mentioned divorce case, each of the values reached under the three premises of value was based upon the going concern premise of value.

Liquidation Value: This value refers to the net amount that would be expected to be realized if the business was terminated and its assets were sold on a piecemeal basis either through an orderly or forced sale.  This would clearly have resulted in a very low value for the company in the above-mentioned divorce case (likely less than $10 million) because of the very low prices the company would have realized for the quick piecemeal sale of its assets.

The above explanation provided by Anderson shows how a company can simultaneously have a value of $10 million, $60 million, $72 million, and $100 million.  It is therefore critically important, he emphasized, that the business valuator and the parties involved understand which standards and premises of value should be used in the valuation process.

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

About David Anderson & Associates

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

Tips for Fighting Non-Digital Identity Theft

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

When most people hear the words “Identity Theft,” they think about spam and/or phishing e-mails, malware and computer viruses, or suspicious websites as the source of the identity theft.

Yet, according to David Anderson, of David Anderson & Associates – a Philadelphia forensic accounting firm that provides a full range of fraud deterrence and other forensic accounting services in Philadelphia and the Delaware Valley –53 percent of all identity theft (according to the Center for Identity at the University of Texas at Austin) either doesn’t involve or didn’t start with any of these on-line exploits; instead they involve non-digital means of exploitation.

Non-digital identity theft includes such actions as:

  • Theft of Delivered Packages and U. S. Mail
  • “Dumpster Diving”
  • Theft of Laptops and Smartphones
  • Insider Theft by Family Members, Fellow Employees and/or Visitors

Anderson offers a closer look at each of these actions:

Theft of Delivered Packages and U. S. Mail: This is perhaps the simplest and easiest way for identity thieves to obtain your personal information.  Identity thieves look for and steal packages and U. S. Mail that is not secured – for example, left on a front doorstep, in an unlocked mailbox or, for some apartment buildings or condominiums, on a shelf or table in the mailroom.  Using the information contained in or on the packages or mail, the identity thieves go to work changing delivery addresses, opening new credit cards, etc.  In many cases, the identity thieves use the information from the stolen packages and mail to deliver a change of address card to the U. S. Post Office redirecting your mail to themselves.

Anderson said individuals can fight such theft by opening a post office box at either the local post office or a third-party mail service and have mail delivered there; by having packages delivered to either your office (if your employer permits it) or to a neighbor who is always home.  Additionally, if you live in a building with a front desk, you can ask the front desk to hold packages for you.

“Dumpster Diving:” Identity thieves go through your garbage seeking credit card statements, tax returns and other documents that you or your business have thrown out.  Then, as with stolen packages and U. S. mail, the identity thieves change delivery addresses, open new credit cards, etc.

Individuals should, Anderson suggests, shred all documents containing sensitive information. Many communities have annual or semi-annual shredding days.  Additionally, places like Staples and Office Depot (for a fee) will shred documents for you.  Some people go so far as to remove address information from discarded magazines and junk mail to thwart identity thieves.

Theft of Laptops and Smartphones: Under this scenario, thieves steal laptops, smartphones and other portable devices (such as tablets, iPads, smart watches, etc.).  If the device is not password protected, thieves have ready access to its applications (especially those for which the user ID and password have been saved on a website – such as for your bank account(s) or credit card account(s)).  Additionally, identity thieves have access to texts, e-mails and address books – treasure troves of personal information.  Thieves can also use text, e-mail, and address book information to launch digital identity theft attacks on your friends, family and business associates.

Identity thieves can be thwarted by using password-protected devices.  You should also consider not saving user IDs and passwords for websites.  Additionally, you should consider using locking cables for laptops and tablets to prevent their removal from the premises.  Also, to the extent that you must leave such devices in your car, you should lock them in the trunk instead of leaving them visible to passersby.

Insider Theft by Family Members, Fellow Employees and/or Visitors: Sometimes identity thieves operate right under your nose.  For example, your children, relatives, friends or other visitors to your home (think delivery people, home services people, etc.) may have access to mail or other documents left out in the open.  Furthermore, if you leave home computers or other devices on and logged in, they may have access to all the information on those devices.

Similar problems arise at work.  People often leave their computers logged in while away from their desks for meetings, lunch, etc.  Other employees and/or visitors can easily access information on those computers (and, many people also store personal information on their work computers).  Anderson said he often has observed such unattended logged in computers in the accounting departments of clients he was visiting.  Additionally, people often leave sensitive documents in the open when away from their desks at work.

Avoid leaving sensitive documents lying around at both home and work.  Children and other family members who use family computers should be provided with separate profiles and log-ins to prevent access to sensitive data and applications on shared computers.  Additionally, timed logouts should be set up on all home and work computers to prevent their staying on when the user is away.  Sensitive documents should also be stored in locked filing cabinets.

As can be seen from the above discussion, you not only have to be alert for digital attacks by identity thieves, by also for non-digital attacks. Working with an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help you prevent such nefarious activities.

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

About David Anderson & Associates

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

Close the Door on Business Fraud Before Your Money Has Disappeared

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

“Don’t shut the stable door after the horse has bolted.”

This idiom can be traced to the 1390 English poem “The Lover’s Confession” by John Gower, however – says David Anderson, of David Anderson & Associates – a Philadelphia forensic accounting firm that provides a full range of fraud deterrence and other forensic accounting services in Philadelphia and the Delaware Valley – the message is just as timely today.

It begs the question, he said, why don’t more businesses, non-profits, and government offices implement fraud deterrence procedures before fraudsters infiltrate their finances?

“There are two main reasons more organizations don’t have fraud deterrence programs,” said Anderson, a Certified Fraud Examiner, “and they boil down to management not understanding how easily fraud occurs or how easily and cost effectively it can be prevented.”

Anderson said the initial issue is that business leaders don’t believe fraud ever could occur in their organization. Most managers feel their employees are trustworthy and loyal and because they believe that they would inherently somehow “know” if fraud was occurring.  Secondly, he said, owners and executives think, incorrectly, that fraud deterrence programs are expensive and time-consuming, making the cost outweigh the benefit.

“Given the appropriate opportunity, even the most trustworthy and loyal employees can find themselves under pressure to commit fraud,” said Anderson.  “In fact, it often is the most highly trusted employee who turns out to be the fraudster.”

He said management is generally so focused on running its business that it has neither the time nor the inclination to examine financial details that might reveal evidence that fraud is occurring.

On the cost issue, Certified Fraud Examiner Anderson said organizations need to understand that the median loss due to fraud has been determined by the Association of Certified Fraud Examiners to be approximately $130,000 for each occurrence.  But basic fraud deterrence procedures – such as management review of financial reports; a fraud hotline; a code of conduct; mandatory vacations; job rotation, and surprise audits – cost significantly less than that.  Even with the addition of fraud deterrence training for managers and employees, the cost remains significantly lower than the median loss from just one case of fraud, he said.

“We all take preventative measures to forestall bad things from happening,” Anderson said.  “We brush with fluoride to prevent tooth decay.  If a faucet or pipe starts to leak, we call the plumber before it worsens.  And we spend $40 to change the oil and oil filter on our car to avoid paying hundreds or thousands of dollars in engine repair bills down the road.

“Establishing anti-fraud controls is the same thing,” Anderson said.  “If you engage a Certified Fraud Examiner to design a cost-effective fraud deterrence program for your organization now, you are greatly lessening the chances that you will be the victim of a more expensive fraud in the future.”

Anderson recommends any business owners, non-profit leaders, or government officials who suspect fraudulent activity already is occurring in their business to immediately request a comprehensive fraud investigation. Such an examination is best conducted, he said, by a professional from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  The longer you postpone a fraud investigation, Anderson said, the greater your losses are likely to be.

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

About David Anderson & Associates

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

Two Valuation Issues to Consider Regarding Privately Held Businesses

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

Under what conditions does $4 million divided by four NOT equal $1 million? When you are a 25 percent owner of a privately held business, sometimes the math just doesn’t work out they way you’d like it to.

According to David Anderson, 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 – experts who are asked to determine the worth of individual shareholder stakes in such a privately held operation consider factors that can significantly reduce the value of an individual’s holdings.

“There are two key factors that can impact the value of a privately held business — lack of marketability and lack of control,” Certified Valuation Expert Anderson said. “Depending on the circumstances, they can pull the value down by as little as 10 percent or less to as much as 90 percent or more.  This is definitely something you want to consider if you own shares in a privately held company or are thinking about buying or selling this type of shares.”

Anderson said lack of marketability refers to the difficulty of selling shares in a privately owned business.  While it is easy to sell shares in a publicly traded company simply by contacting a stockbroker to handle the transaction, the same is not true for a privately held company, he said.

“There is no ready market for the shares of a privately held company,” said Anderson, a business valuation expert in Philadelphia.  “Selling these shares usually requires the services of a business broker and even using a broker takes time.  Of course, the longer it takes to sell the shares, the less the value they hold because they are tying up your money.  If the shares could be sold immediately, you would have the option to reinvest the proceeds immediately.”

In addition, Anderson explained, unless the privately held business pays regular distributions or dividends, the shareholder does not receive interest or dividends on the investment while the stocks are being sold.

A business broker also is likely to require a greater commission or fee to sell shares of a privately held company than a stockbroker would charge for selling shares of a publicly held company, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley.  Finally, he said, if the ownership stake is subject to a shareholder’s agreement, the agreement may contain additional restrictions on the sale of shares.

“A Certified Valuation Analyst must consider each of these issues to determine the amount of discount that will be applied to the shares due to the lack of marketability,” Anderson said.

Lack of control — the other key factor a business valuation expert must consider in determining the worth of a privately held business — refers to the inability of a minority shareholder to make key decisions affecting the company, Anderson said.  For example, he said, a majority shareholder can set salaries, benefits and bonuses or decide to sell part or all the company.  A minority shareholder lacks the power to make those decisions and usually lacks the ability to compel or influence others to make them.

Because of this lack of control, the business valuation expert will further discount the pro-rata value of the interest to satisfy the expectations of potential buyers.

“A business valuation expert must analyze the lack of marketability, the lack of control and many other factors to determine a reasonable discount and, consequently, the true value of your shares,” Anderson said.

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

About David Anderson & Associates

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

Report on Fraud 2018, Part Five: You’ve Been Defrauded, Now What?

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.

This blog – the last in a series of five articles by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – continues Anderson’s discussion of the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.

This final installment focuses on how companies and organizations react after a fraud has been discovered and what their experiences are in attempting to recover fraud losses:

  • Sixty-five percent of victim companies and organizations terminated the perpetrator while another 10 percent permitted the perpetrator to resign.
  • However, 14 percent of companies and organizations allowed the perpetrator to remain with the organization either with probation or on suspension (8 percent) or no punishment at all (6 percent).
  • Only 44 percent of all owners and executives were terminated by the victim company or organization. Thirty-one percent were permitted to leave or resign without being terminated, and 19 percent remained with the organization.
  • Fifth-eight 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.
  • Twenty-three percent of victim companies and organizations filed civil suit against the perpetrator. This has remained steady over the past ten years.
  • Fifty-three percent of perpetrators referred to law enforcement pled guilty or no contest while another 20 percent of perpetrators were convicted at trial.
  • In 18 percent of cases referred to law enforcement, the authorities declined to prosecute (most likely 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).
  • Only 1 percent of cases referred to law enforcement resulted in the perpetrator being acquitted.
  • Fifty-three percent of companies and organizations that filed civil suits received a judgment in their favor while another 27 percent of such suits were settled before a verdict was reached.
  • Perpetrators obtained a favorable judgment in 15 percent of civil cases (most likely because the company or organization could not produce sufficient documentation and other evidence to convince the trier of fact of the perpetrator’s guilt).
  • Victim companies and organizations which decided not to refer cases to law enforcement cited the following reasons for their decision:
    • Fear of bad publicity (38 percent of non-referred cases)
    • A belief that internal discipline was sufficient (33 percent of non-referred cases)
    • The belief that pursuing a conviction would be too costly (24 percent of non-referred cases)
    • The company or organization reached a private settlement with the perpetrator (21 percent of non-referred cases)
    • The lack of sufficient evidence to persuade law enforcement to pursue the matter (12 percent of non-referred cases)
  • Fifty-three percent of victim companies and organizations recovered nothing from either the perpetrator or other sources (such as insurance).
  • Thirty -two percent of victim companies and organizations made a partial recovery and another 15 percent made a full recovery.
  • The larger the loss, the less the likelihood that the victim company or organization will make a full recovery:
    • For losses under $10,000, 30 percent of victim companies and organizations made a full recovery.
    • For losses between $10,000 and $100,000, 16 percent of victim companies and organizations made a full recovery.
    • For losses between $100,000 and $1,000,000, 13 percent of victim companies and organizations made a full recovery.
    • For losses over $1,000,000, 8 percent of victim companies and organizations made a full recovery.

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.

Focus on Fraud in 2018, Part Four: Corralling Corruption

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.

This blog – the fourth of a five-part series by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – continues Anderson’s look at the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.

In this week’s installment, Anderson explores the significant role corruption plays in corporate and organizational fraud.

  • 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 2018 Report shows that 38 percent of all frauds involve some form of corruption with the median loss from corruption being $250,000, and the fraud lasting an average of 22 months.
  • The 2018 Report identifies four main types of corruption:
    • Conflicts of interest, including purchasing schemes and sales schemes
    • Bribery, including invoice kickbacks and bid rigging
    • Illegal gratuities
    • Economic extortion
  • Corruption is the most pervasive form of fraud worldwide.
  • Seventy percent of corruption cases were perpetrated by someone in a position of authority (32 percent by owners or executives and 38 percent by managers)
  • The industries with the highest proportion of corruption cases are:
    • The Energy Sector (53 percent)
    • Manufacturing (51 percent)
    • Government and Public Administration (50 percent)
  • Corruption is the most likely fraud committed by employees of companies and organizations with fewer than 100 employees.
  • Fifty percent of all corruption cases are detected by a tip.
  • 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 or kickbacks.
    • Bid rigging can also be achieved by working 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.
  • The most common red flags identified in corruption cases were:
    • Living beyond one’s means (identified in 43 percent of corruption cases)
    • Unusually close association with a vendor or customer (identified in 34 percent of corruption cases)
    • Known personal financial difficulties (identified in 23 percent of corruption cases)
    • “Wheeler-dealer” attitude (identified in 21 percent of corruption cases).

Next week’s blog article will look at how companies and organizations react after a fraud has been discovered and what their experiences are in attempting to recover fraud losses.

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.

Focus on Fraudsters, Part Three: Which Controls Work, and Which Don’t

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.

This blog – the third of a multi-part series by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – continues Anderson’s look at the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.

In this week’s installment, Anderson discusses the various controls that companies and organizations put in place to prevent fraud and how effective these controls are.

The 2018 Report to the Nations identified 18 specific anti-fraud controls and noted that all 18 were associated with lower fraud losses and quicker detection of the frauds.

  • The most-common anti-fraud controls employed by companies/organizations were:
    • Putting in place a code of conduct (present in 80 percent of the companies/organizations)
    • Having an external audit of the company’s/organization’s financial statements (present in 80 percent of the companies/organizations)
    • Having an active internal audit department (present in 73 percent of the companies/organizations)
    • Having management certification of the company’s/organization’s financial statements (present in 72 percent of the companies/organizations)
    • Having an external audit of the internal controls over the company’s/organization’s financial reporting (present in 67 percent of the companies/organizations)
    • Performing regular management review of financial reporting (present in 66 percent of the companies/organizations)
    • Having a confidential tip reporting hotline (present in 63 percent of the companies/organizations)
    • Having an independent audit committee (present in 61 percent of the companies/organizations)
  • The effectiveness of these most common controls were:
    • Putting in place a code of conduct reduced the median loss by 56 percent and the duration of the fraud by 46 percent
    • Having an external audit of the company’s/organization’s financial statements reduced the median loss by 29 percent and the duration of the fraud by 38 percent
    • Having an active internal audit department reduced the median loss by 46 percent and the duration of the fraud by 50 percent
    • Having management certification of the company’s/organization’s financial statements reduced the median loss by 43 percent and the duration of the fraud by 50 percent
    • Having an external audit of the internal controls over the company’s/organization’s financial reporting reduced the median loss by 50 percent and the duration of the fraud by 50 percent
    • Performing regular management review of financial reporting reduced the median loss by 50 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 50 percent
    • Having an independent audit committee reduced the median loss by 20 percent and the duration of the fraud by 48 percent

As can be seen from these statistics – despite the heavy reliance on external audits to prevent or reduce fraud – the procedure was considerably less effective than other controls.

Interestingly, two of the lesser-used anti-fraud controls – the use of proactive data monitoring/analysis and surprise audits (each used by only 37 percent of companies and organizations) – were the most effective controls.  These two techniques reduced the median loss by 52 percent and 51 percent, respectively, and they reduced the duration of the frauds by 58 percent and 54 percent, respectively.

Other anti-fraud controls used less frequently by companies/organizations included:

  • Creating employee support programs (especially for those suffering from addictions/dependencies or experiencing depression)
  • Creating and implementing an anti-fraud policy
  • Providing fraud training for managers/executives and employees
  • Having formal fraud risk assessments performed by outside parties
  • Implementing job rotation and/or mandatory vacations
  • Providing rewards for whistleblowers

Next week’s blog article will discuss corruption and its impact on companies and organizations.

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

About David Anderson & Associates

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

A Closer Look at Fraudsters, Part Two: How They Are Caught and Who They Are

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.

This blog continues the discussion started last week by forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia. Over the next few weeks, Anderson will be looking at the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations – 2018 Global Study on Occupational Fraud and Abuse.  This week, Anderson examines how frauds are detected and the characteristics of the people who commit fraud:

  • Most people believe that having a financial audit will detect fraud. However, the 2018 Report found that only 4 percent of all frauds were detected by external auditors.  The percentage of frauds detected by accident was 7 percent – nearly double the audit rate.
  • The most frequent method by which frauds were detected came from tips – the 2018 Report found that 40 percent of all frauds were detected from tips. Employees were the source of 53 percent of all tips, followed by customers (21 percent), vendors (8 percent) and competitors (3 percent).
  • Internal auditors detected 15 percent of all frauds.
  • Management review detected 13 percent of all frauds.
  • The 2018 Report found that although owners and executives committed only 19 percent of all frauds, the median loss from such frauds was $850,000. Managers committed 34 percent of all frauds with a median loss of $150,000, and lower level employees committed 44 percent of all frauds with a median loss of $50,000.
  • Tenure with the organization correlated with the amount of fraud loss. The median fraud loss from employees with 5 years or less tenure was about $100,000.  This grew to $173,000 for employees with 6 to 10 years tenure, and to $241,000 for employees with more than 10 years tenure.
  • Men were responsible for 69 percent of all frauds with a median loss of $156,000. Women were responsible for 31 percent of all frauds with a median loss of $89,000.  The lower loss level is most likely due to the lower number of women in senior positions.
  • The perpetrator’s age followed a bell curve with 67 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.
  • Ninety-six percent of all perpetrators had no criminal background.
  • Eighty-five 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
    • 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

Next week’s blog article will discuss the various anti-fraud controls that businesses/organizations employ, and the effectiveness of each of the controls.

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.