Blog

Forensic Accountants Can Help Detect, Prevent Trust and Escrow Fraud – Part 2

Posted by & filed under Blog Articles, 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.

My previous blog discussed trust and escrow account fraud perpetrated by the Trusted Party who is in control of the account or assets held for the beneficiaries.  This blog will discuss fraud perpetrated by third parties who fraudulently induce the Trusted Party to improperly disburse funds or sign over assets.

As a reminder, a Trusted Party can be appointed to take control of the bank accounts, investment accounts, or other assets of one or more beneficiaries in a variety of ways:

  • A trust document can designate the Trusted Party (“Trustee”);
  • A will can designate the Trusted Party (“Executor/Executrix”);
  • A court can appoint the Trusted Party (“Trustee”, “Guardian” or other);
  • A title insurance company or other party can be designated to hold funds in escrow for a real estate transaction (“Escrowee”);
  • An attorney can be designated to receive, hold, and disburse funds related to legal settlements or court orders.

There are several ways in which the Trusted Party can be induced to improperly disburse funds or sign over asset.  These include:

  • Coercion or improper influence
  • Identity theft or spoofing
  • Counterfeit check scams
  • Forged or fake trust account checks

Coercion or improper influence can occur when a Trusted Party is pressured into improperly disbursing funds.  A recent case in South Jersey highlights this. An elderly, cognitively impaired mother was the trustee for her child’s special needs trust.  An acquaintance convinced her to grant him power of attorney which he then used to gain access to the trust’s bank accounts.  This was compounded by the fact that the notary who notarized the power of attorney never witnessed either the trustee or the acquaintance sign the power of attorney.  The acquaintance then used his access to embezzle more than $350,000 from the trust’s bank accounts.

Identity theft or spoofing can occur in a variety of ways.  If the identity of a beneficiary has been stolen, the fraudster can e-mail the Trusted Party and request that funds be wired or sent to him/her.  Upon receipt the funds, the fraudster drains the receiving bank account.  Spoofing can occur, particularly with real estate transactions, when a fraudster obtains sufficient information to allow him or her to pose as the seller.  He or she then e-mails the escrowee and provides wiring instructions for a bank account under his or her control.  As with identity theft, the fraudster drains the receiving bank account upon receipt of the fund.

Counterfeit check scams typically target attorneys, usually those involved in commercial debt collection.  Under this type of scam, the fraudster e-mails the attorney and engages him or her to collect some type of debt. The fraudster may even provide fraudulent documentation of the alleged debt. The attorney will draft and send a demand letter to the debtor and will then receive a letter and certified bank check from the debtor for some or all the alleged debt. The attorney will deposit the funds into the trust account, and, usually within 24 hours of the deposit, the client will demand payment of the funds via wire. Since the funds were paid via certified bank check, the attorney will usually wire the funds (net of collection costs) immediately. Several days later, the attorney’s bank will contact him or her, advise that the check was counterfeit, and remove the funds from the attorney’s trust account.  Of course, the fraudster has already drained the wired funds from his or her bank account and disappeared.

Fraudsters also can obtain trust account information (account number and routing number) via fraudulent means and use the information to create fake checks payable to cash.  In one instance, an executor was notified by phone that the estate was due a security deposit refund by a fraudster posing as the employee of a local utility. The fraudster stated that the utility was required to send the funds via ACH (Automated Clearing House) and persuaded the executor to give him the estate account’s number and routing number.  The fraudster then used the information to create a fake check, forged the executor’s signature and cashed the check at a local check cashing service. Although the executor eventually recovered the stolen funds from the bank, the estate had to open a new estate bank account, and deal with the fund shortage until the funds were received from the bank.

None of the above frauds resulted from Trusted Party misconduct or knowing breach of fiduciary duty, but rather because sophisticated fraudsters were able to exploit the trust of the Trusted Parties.  The solutions to deterring or preventing fraud in these cases depend on the specifics of each case:

  • In the case of potential coercion or improper influence, there may have been other family members or professionals who may have noticed that something improper was occurring and could have acted to at least question it. For example, the accountant who prepared the trust’s tax returns, and could have noticed the unusual account activity.  Or the bank relationship manager who could have noticed the unusual account activity.
  • In the case of identity theft or spoofing, the Trusted Party should refuse to rely just upon e-mail but should seek to contact the beneficiary or the seller using the phone information in the Trusted Party’s files. This should also apply if the Trusted Party is contacted via phone by someone claiming to be the beneficiary or the seller. The Trusted Party should at least confirm that the contacting phone number matches that in his/her files.
  • Attorneys can reduce the likelihood of losses from counterfeit check scams by adding one or more of the following procedures:
    • Verifying the identity of the client and the debtor before accepting the engagement;
    • Establishing a policy of holding payments for at least some period (within the bounds of regulations) to allow sufficient time for the certified check to clear the bank process (and informing the client of this policy); and/or
    • Contacting the issuing bank to verify the validity of the certified check.
  • Trusted parties can minimize the likelihood of being victimized by forged or fake trust account checks by more carefully guarding bank account information and by frequently reviewing bank account transactions. In the example presented above, the executor should have asked the phone caller to provide a phone number so that he could call back.  He should then have compared that phone number with the one shown on the utility bill.  If they were not the same number, he should then have called the utility at the number shown on the bill and inquired about the refund.  He would then have found out that the original caller was a fraudster.

Forensic accountants can help Trusted Parties establish policies and procedures that can reduce or eliminate the likelihood of them being victimized by fraudsters. If you require a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

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

Forensic Accountants Can Help Detect, Prevent Trust and Escrow Fraud – Part 1

Posted by & filed under Blog Articles, 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.

My next two blogs will discuss trust and escrow account fraud.  For purposes of this discussion, I will include IOLTA (Interest on Lawyer Trust Accounts) issues as well.

First, some definitions:

  • A trust account is a legal arrangement through which funds or assets are held by a third party (the trustee) for the benefit of another party (the beneficiary).
  • An escrow account is an account where funds are held in trust while two or more parties complete a transaction.
  • An IOLTA account means a pooled interest- or dividend-bearing attorney’s client trust account, established with an eligible financial institution, for the deposit of nominal or short-term funds of clients or third persons, and from which funds may be withdrawn upon request as soon as permitted by law.

In each of the above instances, the beneficiary of the account funds or assets depends upon the trustworthiness of the party who is in control of the account or assets.  Trust and escrow account fraud can occur in two primary ways:

  • If the party who is in control of the account or assets (“Trusted Party”) commits fraud through misappropriation or self-dealing; or
  • If a third party fraudulently induces the Trusted Party to improperly disburse funds or sign over assets. This week’s blog will discuss the first type of fraud, and my subsequent blog will discuss the second type of fraud.

A Trusted Party can be appointed to take control of the bank accounts, investment accounts, or other assets of one or more beneficiaries in a variety of ways:

  • A trust document can designate the Trusted Party (“Trustee”);
  • A will can designate the Trusted Party (“Executor/Executrix”);
  • A court can appoint the Trusted Party (“Trustee”, “Guardian” or other);
  • A title insurance company or other party can be designated to hold funds in escrow for a real estate transaction (“Escrowee”);
  • An attorney can be designated to receive, hold, and disburse funds related to legal settlements or court orders.

In each case, the Trusted Party has a fiduciary responsibility to act in the best interest of the beneficiary or beneficiaries.  Fraud occurs when the Trusted Party misappropriates the funds or assets or engages in self-dealing to the detriment of the beneficiaries.  The following are examples of frauds which I have investigated, or which have been in the recent news:

  • An Executrix who was also a real estate broker arranged the sale of her grandmother’s house as part of the settlement of the estate. She collected an excessive broker’s fee (10 percent) for the transaction as well as arranged a set aside of $15,000 from the sale proceeds to pay for repairs to the house.  However, no repairs were ever made.  Instead, she split the $15,000 with the buyers.  The fraud was discovered when one of the estate beneficiaries complained about the lack of estate proceeds, and the court ordered a forensic investigation of the estate transactions.
  • A title insurance company held real estate funds in escrow accounts on certain transactions for which the real estate taxes were under appeal. The accounting manager of the title insurance company improperly transferred funds to the title insurance company’s operating account and then made payments of those amounts to companies which he controlled (and which never performed any services for the title insurance company).  The fraud was discovered when one real estate tax matter was settled, and payment of escrow funds was requested while the accounting manager was on vacation. When senior management authorized payment from the corresponding escrow fund, they found that there were no funds left in that escrow account.
  • Funds from a trust were invested with a broker who, contrary to the directions of the trust, invested the funds in risky (and ultimately money-losing) investments which paid high commissions. Additionally ,the broker engaged in frequent transactions meant to generate additional commissions (“churning”).  The fraud was discovered when the beneficiary requested funds to pay off certain medical bills and learned the trust account balance was less than 5 percent of the original amount invested just five years earlier.
  • Gloria Byars of Delaware County, PA operated a firm which served as court-appointed guardian for elderly and disabled beneficiaries. Over several years, Byars stole funds and assets of beneficiaries by writing checks from guardian accounts to companies which she and co-conspirators controlled (and which never performed any services for the beneficiaries).  Additionally, Byars stole Krugerrands from the safe deposit box of a beneficiary.  Byars’ fraud was discovered when authorities began investigating complaints that beneficiaries’ medical bills weren’t being paid.
  • Alex Murdaugh, the South Carolina attorney whose wife and son were murdered, and who allegedly hired a “hitman” to kill him so that his remaining son could collect on his life insurance policy, has also been the news recently because he secretly negotiated a settlement in the death of his housekeeper, and diverted several million dollars of that settlement from his firm’s IOLTA account to a company under his control. The fraud was apparently discovered when the housekeeper’s estate’s attorneys found out about the secret settlement and demanded payment for the beneficiaries.

Each of the above frauds was facilitated by the relative lack of oversight of the Trusted Parties.  Had there been stronger oversight, such frauds may have been deterred.

It also behooves the beneficiaries or some additional person acting on behalf of the beneficiaries to demand regular accounting from the Trusted Parties.  Forensic accountants can provide the additional oversight and accounting analysis which can help protect beneficiaries from trust and escrow account fraud.

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

About David Anderson & Associates

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

It’s Not Enough to Just Have a Disaster Recovery or Contingency Plan; It Must Be Tested

Posted by & filed under Blog Articles, Business continuity, Company News, Disaster Recovery, Forensic Accounting.

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.

Hurricanes; Tornados; Active Shooter/Shelter in Place; Fires; Floods; Terrorist Attacks; Sexual Harassment Scandals; Financial Impropriety.

In today’s world, businesses, governments, and other organizations need to have plans in place to deal with these disasters as well as other unexpected threats.  Sadly, most do not have such plans.  But, even many of those that do find their plans are ineffective.

Why is this so?  Primarily because they have failed to regularly test and update their disaster recovery and contingency plans.

The historic impact to New York City from Hurricane Ida earlier this month, which flooded subways and caused drowning deaths in basement apartments, is another example of how poor planning and lack of testing of disaster plans can adversely affect the population.  NYC’s Mayor Bill de Blasio acknowledged that the storm, following closely on the heels of Hurricane Henri, caught the City unprepared

Recently when visiting a new business client, I asked whether they had a disaster recovery or contingency plan.  They proudly showed me their plan.  But, when I read through the plan, I noted several serious problems:

  • The plan coordinator no longer worked at the company, and the position had never been reassigned;
  • The company had moved to its present location two years ago, but the plan addressed disasters occurring at the old location;
  • The plan was over five years old.

Additionally, the CEO admitted the plan never had been tested, and that new employees had never been trained to implement the plan.

Regular testing and updating of disaster recovery and contingency plans are main reasons why first responders and many organizations regularly schedule drills (remember fire drills from grade school?). The purpose of such drills is not only to run through the plan, but also to observe problems with the plan (including being outdated) so they can be fixed and tested again.

For example, when I worked for the Resolution Trust Corporation (RTC), we regularly had fire drills.  Each floor of the office building I worked in had a fire drill coordinator who was responsible for making sure that everyone had vacated the floor.

However, in the middle of one day’s drill, the fire drill coordinator was out sick, and the backup person identified in the fire drill plan had previously left the organization.  This problem was identified because of the drill, and a backup person was quickly put in place.  Had the RTC not done so on a timely basis and a real fire occurred, someone might have been hurt.

If your organization does not have a disaster recovery or contingency plan in place, you need to start putting one together now.  But even if you do have such a plan, it needs to be regularly tested and updated to keep your employees and organization safe.

If you need a comprehensive contingency and disaster recovery plan or require 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.

Forensic Accountants Can Aid in Recovery from Natural Disasters

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

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.

American businesses large and small suffered a great deal of damage recently when the East Coast took a double hit from hurricanes Henri and Ida. Hopefully most, if not all, of these corporations had business interruption insurance to cover lost profits and extra expenses. However, engaging the services of a forensic accounting expert can help them effectively navigate the complex process of calculating lost profits and filing the necessary economic damage claim.

“The aftermath of a disaster is a trying time for any business,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, including development, implementation, and management of comprehensive contingency and disaster recovery plans.

“Amid the turmoil, determining how to calculate lost profits, analyzing the extra expenses and assuring the insurance claim is properly filled out are responsibilities best left in the hands,” Anderson said, “of a forensic accounting expert.”

To make an economic damage claim, Anderson said a forensic accountant must calculate what the business profits would have been during the business interruption period had the disaster not occurred, and then compare that with the actual profits of the business during the same period.  The difference represents the company’s lost profits.

The four most commonly used methodologies for calculating lost profits are the Before and After Method, the Sales Projection Method, the Yardstick Method and the Market Model Method, said Anderson, who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

  • The Before and After Method determines whether pre-disaster profits were growing, declining or level to calculate what the profits would have been during the business interruption period. The forensic accountant then compares these profits with the actual profits after the disaster occurred.
  • The Sales Projection Method relies on forecasts and budgets the company had for the business interruption period, analyzes the past accuracy of forecasts and budgets, and calculates lost profits based on the analysis.
  • The Yardstick Method usually applies to businesses with little history (for example, a company that started business a month before the disaster). Under the Yardstick Method, the forensic accountant analyzes profits of companies in the same industry to calculate lost profits.
  • The Market Model Method typically is reserved for companies that are large enough to have a measurable share of their local or national market (for example, one of the Atlantic City casinos that was affected by Hurricane Sandy). Under the Market Model Method, the forensic accountant compares the overall market share of the company before the disaster to the market share during the business interruption period to calculate the company’s lost profits.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, said forensic accountants also work to identify and calculate the extra expenses the company incurred to recover from the disaster.  For example, he said, qualified extra expenses might be cleanup costs or the cost to re-enter lost computer data.

A forensic accounting expert also can assure a company’s business interruption claim does not include disallowed items.  Anderson said that when an F2 tornado destroyed one of his client’s corporate headquarters and primary warehouse, the company continued to pay employees during the two weeks it took to relocate to a temporary facility, even though most employees stayed home or worked only part time.

The company included the wage payments in their economic damage claim, but Anderson discovered that the policy covered only wages for actual work performed. As a result, the client adjusted the claim.  Had they not done so, Anderson said, the insurance company would have disallowed the expense and required the company to revise the claim, causing payment to be delayed.

Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, recommends that companies consult with a forensic accounting expert to assure that their business has a comprehensive contingency and disaster recovery plan in place before misfortune occurs.

“Recovering from a disaster can be very difficult and very stressful,” said Anderson.  “Forensic accountants can help companies prepare for the worst.  And should disaster strike, your forensic accountant can lessen some of the pain by guiding you through the complex process of filing a business interruption claim.”

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

About David Anderson & Associates

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

Update on the Impact of COVID-19 on Business Valuations

Posted by & filed under Blog Articles, 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.

Last year, in two blog articles, I discussed how business valuations were being affected by the COVID-19 pandemic.  In this blog article, I discuss additional observations based upon business valuations I have either prepared or that others have prepared, and I have reviewed as well as the changing impact of the COVID-19 pandemic.

One key aspect of business valuations is that any information must be known or knowable as of the valuation date.  However, in many divorce cases, the valuator is also required to update the business’s value for changes that have occurred since the original valuation date.  This past year, I encountered several opposing divorce expert valuation updates which were dated in mid-to-late September 2020.

In each case, the opposing expert relied upon the 2nd quarter 2020 economic activity reports and forecasts which showed such a significant drop in economic activity due to COVID-19.  At that time, 2020 was forecast to have a full year decline of 18%.  Each valuation therefore showed a significant decline in business value based upon this.

However, in each case, there was easily obtainable data from reliable sources (such as the Federal Reserve, etc.) showing a significant recovery during July, August, and early September. In fact, as of September 16, 2020, the Federal Reserve Board revised its 2020 full year decline down to 3.7% from the previous forecasted 18% decline.  By the December 16, 2020 Federal Reserve Board forecast, this 2020 full year decline was down to just 2.4%.

Also, as of December 16, 2020, the Federal Reserve Board was forecasting economic growth of 4.2%, 3.2% and 2.4% for 2021, 2022 and 2023 respectively.  By the June 16, 2021 forecast, the Federal Reserve Board had increased the 2021 growth projection to 7.0%.  But, of course, all of this was before the Delta variant exploded during the last month and a half.

This is already causing discussion of additional mandates and lockdowns which could reduce economic activity for the second half of 2021.  In fact, a recent Commerce Department report showed that retail sales had declined from expected levels in July 2021, portending a potential economic slowdown.

Nevertheless, I expect some divorce valuation experts to “rush out” valuations in September to use the higher forecasted numbers from June.  Such higher numbers will, of course, result in higher values for the subject businesses.   Such valuations would improperly ignore the information occurring in July, August, and September.

As in the “gaming” of economic forecasts, I have also seen some opposing expert valuations which relied upon the precipitous drops in company revenues and profits in the first half of 2020 to project significant losses for 2020 and beyond.  In one case, the valuation concluded that the business was likely to shut down by the end of 2020.

However, the business did turn around in the last half of 2020, and has exceeded first half 2019 profitability in the first half of 2021.  Again, these valuations were “rushed out” before the turnaround trends could be established.

I expect we will see similar attempts by some divorce valuation experts to use the positive early 2021 revenues and profitability to show higher business values before the full impact of the Delta variant can be determined.

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

About David Anderson & Associates

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

Forensic Accountants Can Play Key Role in Resolving Family Inheritance Disputes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About David Anderson & Associates

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

Be Vigilant to Help Thwart Hackers and Cyberattacks: 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.

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

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

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

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

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

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

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

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

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

In each of the above cases, the employee’s failure to adhere to the established policies and procedures resulted in security lapses. To avoid the “insecurity” failures Anderson detailed both in this last column and does so again this week, he makes the following recommendations:

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

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

About David Anderson & Associates

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

Be Vigilant to Help Thwart Hackers and Cyberattacks: 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.

Many businesses implement a wide range of policies and procedures to protect their property, assets, and data.  However, according to forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, even the best of policies and procedures are ineffective if employees don’t adhere to them.  The following is Part 1 of a two-part series featuring examples of security failures Anderson has observed in his work:

When Security Badges Aren’t Effective:

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

When Security Badges Still Aren’t Effective:

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

When Terminals or Desktop Computers Aren’t “Secure:”

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

When Confidential Records Aren’t Secure:

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

Taking Secured Data Files Home to an Unsecured Computer:

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

Becoming Victimized by E-Mail Spoofs:

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

—–     —–     —–     —–     —–

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

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

About David Anderson & Associates

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

Tricks of the Trade: Finding Fraud Behind the Numbers

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 forensic accounting services including fraud investigation, fraud deterrence, business valuation, and marital dissolution in Philadelphia and the Delaware Valley.

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

In part of the normal procedure of analyzing financial and accounting information, a forensic accountant will look closely at the numbers themselves.

Such tight scrutiny can help unearth potential fraud or other abuse of financial information, according to 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.

A prime example that proves the value of this practice, Anderson said, is the analysis of auto mileage claimed on small business tax returns, typically Schedule C. In one marital dissolution case, the husband was a physician who operated out of two offices located eight miles apart and regularly claimed over 20,000 miles per year in deductible auto mileage, explained Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia. (NOTE: The IRS allows deductions for mileage between offices when both are visited on the same day).

“If I assumed the physician visited both offices every day, and worked six days per week with no vacations or holidays, the maximum mileage he would have had in any year would be eight miles a day times six days per week times 52 weeks per year = 2,496 miles, which is considerably fewer than the 20,000-plus miles claimed each year,” said Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley.

In another instance, Anderson said the husband claimed to have driven exactly 30,000 miles each year. Statistically, he noted, it is very unlikely that someone can hit the same exact round number of miles each year. For each of the previous four years, explained Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, the husband claimed to have driven this number of business miles in his four-year-old Chrysler, in addition to normal commuting mileage which he estimated to be about 20,000 miles per year.

“When I visited his office, I asked to check the odometer in his car, which he still had at the time, and the odometer showed fewer than 70,000 miles,” Anderson said. “Based on his claims, the total mileage should have exceeded 200,000 miles.”

Another area that Anderson, a Certified Fraud Examiner in Philadelphia, said a forensic accountant can analyze is the numbers associated with non-descriptive general ledger accounts. These can include such accounts as:

  • Exchange
  • Transfer
  • Reserve
  • Miscellaneous Expenses
  • Other Expenses
  • Other Services
  • Cash Over
  • Short

Depending on the name of the account, Anderson said a forensic accountant will analyze the transaction detail and period-ending balance.

For example, the first three accounts – “Exchange,” “Transfer” and “Reserve” – typically are used to temporarily balance a transaction entry which requires further research to determine the correct account to be used, explained 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.

This means a forensic accountant will expect to see amounts come into these accounts from other transactions, and corresponding amounts come out of the account as the company determines the correct account to use, said Certified Fraud Examiner and forensic accounting expert Anderson. If a forensic accountant sees significant balances at the end of the year, or significant differences in amounts going into and out of the account, he said it could indicate fraud.

Accounts with “Miscellaneous” or “Other” in their title should typically be used for relatively small amounts that cannot reasonably fit any other expense category. Again, explained 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, if a forensic accountant sees significant balances in these accounts, it merits further detailed analysis because of the potential for fraud or abuse.

The categories “Cash Over” and “Short” are used by retail businesses, said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia, to account for the difference between the cash in cash registers versus what the point of sale accounting system says the cash balance should be. It is not unusual, Anderson said, to have small differences.

In one marital dissolution case, however, a restaurant regularly experienced large cash shortages (over $100 each time) two to three times a week. By the end of the year, total cash shortages exceeded $20,000. The husband, who owned this business, did not seem particularly alarmed by this shortage. Further investigation by Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations and establishing comprehensive fraud deterrence programs in the Delaware Valley, revealed the husband regularly took cash out of the register and pocketed it to reduce his profits and, by extension, the value of his 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.

Tricks of the Trade: Numbers Can Decode the Presence of Fraud

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

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

In conducting investigations, a forensic accountant often will analyze times and dates to determine if fraud or minority shareholder oppression may be present.

Date and time analysis can be used for a variety of purposes, 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.

For example, Anderson said many fraudsters with access to business accounting systems enter transactions after hours or on weekends, so no one can observe them. Hence, in analyzing the date and time of transaction entries, a forensic accountant will conduct additional analysis of transactions entered after hours or on weekends to determine the propriety of those transactions, said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia. He added that the forensic accountant also can investigate online off-hours access to systems to determine whether unauthorized outsiders have accessed the company’s systems.

In minority shareholder oppression cases, as well as in marital dissolution cases, a forensic accountant will analyze the date and time of reimbursable travel, meal, and entertainment expenses, Anderson said.

“In one recent case, I found that over a period of three years the majority shareholder had submitted reimbursable meal expenses for more than 100 meals on Friday nights, Saturdays, Sundays, nights before a holiday, and on the holidays themselves,” 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.

When deposed, Anderson said the shareholder, whose company was a retail business, claimed each of these meals – some of which were for hundreds of dollars – were for entertaining customers. However, no customers were specifically identified with any of the meals.

Furthermore, when the shareholder did provide the names of specific customers that he claimed to have entertained, all but one of the customers had purchased less than $500 from the business over the three-year period, said Anderson, a Philadelphia forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

In a marital dissolution case, Anderson – a Certified Fraud Examiner in Philadelphia – said he noted frequent travel, meal, and entertainment reimbursements that occurred over weekends and holiday periods. This travel included international travel even though the business was a local business. In analyzing the supporting documents, forensic accounting expert Anderson said he found that all the travel was for vacations for the business owner and his girlfriend.

Dates of birth can also be utilized by forensic accountants to verify the validity of employee social security numbers, Anderson said. Certain tables are available that provide approximate information regarding when an individual applied for his/her social security number, explained 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.

Running these tables against the birthdates of employees can identify potential mismatches, such as a 30-year-old worker whose social security number falls in the range of numbers that were issued prior to 1950, said Certified Fraud Examiner and forensic accounting expert Anderson. These mismatches, he said, can then be further investigated to determine whether the employee has furnished a valid social security number.

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: Look to Names, Numbers to Fight Fraud

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of 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 who was 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:’ Using Physics to Uncover Fraud

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

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of 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.

Anonymous Tip Line Can Help Detect Ongoing Corporate Fraud

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

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

Is, as many business executives and owners believe, performing a formal financial audit each year the most effective way of detecting and deterring fraud?

The answer, in a word, no.

Less than four percent of all fraud is detected by a formal financial audit; in fact, nearly twice as many frauds are discovered by accident than by formal audit.

So then, what is the best way to detect and prevent fraud?  You might be surprised.

A recent “Report to the Nations” from the Association of Certified Fraud Examiners (ACFE) shows tips are responsible for uncovering fraud more so than any other method.  More than 39 percent of all frauds were exposed as the result of information provided by tipsters.

And who were the main source of these tips?

By far, the study showed, a company’s own employees are its best source of information about ongoing fraud. The ACFE reports a surprisingly high 52 percent of all frauds reported via tips came from company employees.

“Employees can be your first line of defense against fraud,” said Anderson, of David Anderson & Associates. “Employees may see fraudulent or suspicious activity but may be reluctant to be identified as the source of a tip, either because they fear retribution from other employees or because they’re not absolutely sure that fraud is occurring.”

So how do you encourage employees to come forward?  The best way is to set up an anonymous tip hotline.

“Employees are far more willing to report illicit activity if their anonymity is protected,” said Anderson, a Certified Fraud Examiner and an ACFE member.  “The anonymous tip hotline provides them with the vehicle they need to do the right thing and bring the fraud to the attention of people in charge.”

Companies do not have to set up the tip hotline themselves, Anderson said. Third-party companies can be hired for a reasonable fee to set up and operate the hotline to ensure employee confidentially.  In fact, having an outside party manage the hotline further assures employees their identity will not be revealed by something they say or by speaking with someone who recognizes their voice.

In addition to tip hotlines, the ACFE Report referenced by Anderson shows many companies also are providing mechanisms for receiving tips through e-mail and/or through their websites.

Companies that provide tip hotlines for their employees typically find both the duration of fraudulent activity and amount of the losses are reduced by 50 percent.

A tip hotline is an important component of a comprehensive fraud deterrence program that, Anderson said, can be created by a firm that provides forensic accounting services in Philadelphia and the Delaware Valley. Anderson also said he urges organizations to protect themselves by contacting a Certified Fraud Examiner to conduct a thorough fraud investigation at the first sign of suspicious activity.

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.