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How COVID-19 Has Affected Business Valuations – Part Two of Two

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

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

In my previous blog article, I discussed how the date of valuation for a business valuation has been affected by the COVID-19 pandemic; in this blog article, I discuss how business income which is used as the basis for valuing a business has been affected.

Most small-sized and many medium-sized businesses do not keep budgets and forward-looking financial projections.  As a result, the valuations of these businesses use historical operating results as the basis for their valuations.  This is used in the Capitalization of Earnings method.

However, this historical information will not take into effect the COVID-19 pandemic.  If no budgets and forward-looking financial projections are available, then the primary way to adjust for the COVID-19 pandemic is to adjust the Company Specific Risk factor and expected long-term growth rates used to capitalize the earnings (alternatively, the Equity Risk Premium could be adjusted).

When calculating the Company Specific Risk factor, the business valuator must consider, among others, the following questions:

  • What industry is the company in?
  • What has been the impact of the COVID-19 pandemic upon the industry?
  • How and to what degree has the company been affected?
  • How long will it take the company to recover to pre-pandemic impact operating levels?
  • If the company has furloughed or laid off staff, how will it re-staff, and how long will it take to achieve the re-staffing?
  • Has the company lost any critical employees? If so, what has the impact been, and how long will it take to replace those employees?
  • Has the company lost customers, will it be able to recover those customers, and how long will it take to do so?
  • Has the company lost key suppliers/vendors, will it be able to recover those suppliers/vendors, and how long will it take to do so?
  • Will the company still be able to retain its outside financing, and if not, will it be able to obtain new outside financing, and how long will it take to do so?
  • Will the company be able to recover at all?

To the extent that the answer to some or all the questions show increased risk, the business valuator can increase the Company Specific Risk factor (and therefore, decrease the capitalized value of the company).

The business valuator can also adjust the long-term expected growth rate for similar factors based upon similar questions regarding the company, the industry, the United States economy and the world economy.  However, remember that this is the long-term expected growth factor – if the company/industry/economy is expected to recover within the next year or so, the reduction in the long-term expected growth factor may not be significant.

If the company does produce forward-looking financial projections, then the business valuator can use the Discounted Cash Flow (DCF) method to value the business under the income approach.  However, there are several caveats which must be followed:

  • The business valuator may not be involved in any way in the creation of the forward-looking financial projections. Otherwise, the business valuator’s independence is impaired.
  • The company cannot “game” the system by retroactively creating forward-looking financial projections. For example, if in March 2021, the company needs a business valuation with a valuation date of June 30, 2020, it cannot create forward-looking financial projections at that point.  Instead, it can only use forward-looking financial projections which had been created as of the June 30, 2020 valuation date.
  • The business valuator cannot accept the forward-looking financial projections “as is”. He/she must test the reasonableness of the underlying assumptions which went into creating the financial projections (for example, if the business is a dine-in restaurant with a valuation date of June 30, 2020, and restrictions on dining in were removed on June 30, 2020, the valuator must consider the reasonableness of projections showing either a return to 100% of pre-pandemic operating levels within 30 days or a projection showing no sales revenues for the next year).  Because something must be known or knowable as of the valuation date (which in this example is June 30, 2020), the business valuator cannot consider using actual operating results from July 1, 2020 to February 28, 2021 as a reasonableness check, since those actual operating results were not known or knowable at June 30, 2020.

As with the Capitalization of Earnings method, the business valuator can also adjust the Company Specific Risk (or Equity Risk Premium) and long-term growth rate in calculating the value under the income approach.  However, the business valuator must make sure that these adjustments do not duplicate the assumptions which the company used in creating its forward-looking financial projections or else it will “double” the impact of the adjustments.

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.

How COVID-19 Has Affected Business Valuations – Part 1

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

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

A number of clients and colleagues have asked me how business valuations have been affected by the COVID-19 pandemic.  After consulting with business valuation experts and reviewing relevant literature, I will discuss the impact over the next two blogs.  Up first, how the date of valuation is impacted.

As I have mentioned in previous blogs, the information relevant to valuing a business must be known or knowable as of the valuation date.  I will explore the impact based upon the following valuation dates:

Valuation date of December 31, 2019 or prior

Valuation experts generally agree that as of December 31, 2019, almost nothing was publicly known about the COVID-19 (I use the term “publicly known” because Federal intelligence community briefings which may have discussed the COVID-19 would not have been known to the general public.  Hence, a willing buyer or seller would not have taken the COVID-19 into consideration.).  In fact, China only notified the World Health Organization (WHO) on December 31, 2019, of several instances of a flu-like illness in Wuhan.

Accordingly, any valuations as of December 31, 2019 or prior would not consider the impact of the COVID-19 pandemic.

Valuation date between January 1, 2020 and January 31, 2020

Although the COVID-19 began to get some attention in January 2020, the following relevant public information was available:

  • January 21, 2020 – 1st case of COVID-19 reported in United States.
  • January 23, 2020 – WHO meets and decides to not declare the COVID-19 a Public Health Emergency of International Concern.
  • January 28, 2020 – United Airlines suspends all flights to China from the United States.
  • January 29, 2020 – Several other airlines suspend all flights to China.
  • January 29, 2020 – White House creates COVID-19 task force.
  • January 31, 2020 – President Trump issues a limited travel ban for persons entering the U.S. from China. The limited travel ban applied to non-U.S. citizens, other than the immediate family of U.S. citizens and permanent residents, who were prohibited from entering the U.S. if they had traveled to China within the previous two weeks.
  • January 31, 2020 – Total COVID-19 cases in the United States – 6. Number of deaths from COVID-19 in the United States – 0.

Based upon the above, it is most likely that the impact of the COVID-19 pandemic was not generally known or knowable to businesses in the United States.  However, if there is documentation which a business possesses (e-mails and other notifications from vendors and/or clients and/or industry sources) which describes projected impacts of the COVID-19 pandemic, this could lend credence to a company’s argument that the impact of the COVID-19 pandemic was known or knowable at this early date.

Valuation date between February 1, 2020 and February 29, 2020

In February 2020, the following relevant public information was available:

  • February 4, 2020 – In his State of the Union address, President Trump pledges to safeguard Americans from the COVID-19.
  • February 11, 2020 – The worldwide death toll from the COVID-19 surpasses 1,000 – mostly in China.
  • February 19, 2020 – The worldwide death toll from the COVID-19 surpasses 2,000 – mostly in China.
  • February 24, 2020 – The Trump administration sends a request to Congress to provide $2.5 billion in funding to fight the COVID-19.
  • February 24, 2020 – President Trump announces that the COVID-19 is under control in the United States.
  • February 25, 2020 – San Francisco declares a state of emergency over the COVID-19.
  • February 25, 2020 – The Center for Disease Control (CDC) announces that the spread of COVID-19 to the United States is likely and that people should prepare.
  • February 26, 2020 – President Trump states that there are only 15 people with the COVID-19 in the United States and that the COVID-19 is about to disappear.
  • February 29, 2020 – Washington state declares a state of emergency.
  • February 29, 2020 – 1st death reported in the United States attributable to COVID-19. Worldwide death toll is under 2,900 of which less than 100 are outside of China.

Based upon the above, it is still likely that the impact of the COVID-19 pandemic was not generally known or knowable to businesses in the United States.  There was only one death reported (subsequent updates to this number were not known or knowable until a later date), and as late as February 26, 2020, President Trump was stating that the impact was insignificant.  However, if there is documentation which a business possesses (e-mails and other notifications from vendors and/or clients and/or industry sources) which describes projected impacts of the COVID-19 pandemic, this could lend credence to a company’s argument that the impact of the COVID-19 pandemic was known or knowable at this early date.

Valuation date between March 1, 2020 and March 31, 2020

The impact of the COVID-19 pandemic began to take off in the United States in March 2020.  During the first week of the March 2020, Florida, California, Maryland and New York declared states of emergency. By March 10, 23 states had declared a state of emergency.  By March 13, President Trump declared a national state of emergency, and Pennsylvania and 15 other states announced school closures.  Almost all major sporting and college sporting events were cancelled/postponed.  On March 21, 2020, New Jersey’s governor implemented a “Stay at Home” order.  This was followed by Philadelphia (March 23), Delaware (March 24) and Pennsylvania (April 1).

Based upon the above, it is likely that the impact of the COVID-19 pandemic could be argued as to having been generally known or knowable to businesses in the United States by the end of the first week in March or at latest by March 13 when the national state of emergency was declared.  If there is documentation which a business possesses (e-mails and other notifications from vendors and/or clients and/or industry sources) which describes projected impacts of the COVID-19 pandemic, this could lend credence to a company’s argument that the impact of the COVID-19 pandemic was known or knowable at one of these early dates.

Valuation date of April 1, 2020 or after

In my professional opinion, the impact of the COVID-19 pandemic was generally known or knowable to businesses in the United States by April 1, 2020 and thereafter.

Divorce Valuations

When valuing a business for a divorce, three valuation dates could be applicable:

  • Date of marriage
  • Date of separation
  • Current date for decline in value claim

The above valuation date information certainly applies for date of marriage and date of separation.  However, if a spouse intends to claim that the current value of his/her business has declined in value due the COVID-19 pandemic, the business valuator would examine the business’s value as of some current date.  To the extent that the current date is April 1, 2020 or thereafter, the impact of the COVID-19 pandemic was generally known or knowable to businesses in the United States.

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.

The State of Fraud in 2020: Final of a Six-Part Series

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

03David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

This blog completes a series of narratives by forensic accounting expert David Anderson that analyzes the Association of Certified Fraud Examiners’ (ACFE) “2020 Report to the Nations – 2020 Global Study on Occupational Fraud and Abuse.”  In this final installment, Anderson – from David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – focuses on how non-profits were affected by fraud over the past two years:

  • Non-profit organizations can be more susceptible to fraud due to having fewer resources available to prevent and recover from a loss.
  • Non-profit organizations are particularly vulnerable because of less oversight and lack of certain internal controls.
  • The 2020 Report showed that the median loss was $75,000, while the average loss was $639,000 (meaning that several non-profit organizations had very large losses due to fraud).
  • The most prevalent fraud schemes faced by non-profit organizations were:
    • Corruption – 41 percent (see Anderson’s previous blog on corruption schemes)
    • Billing fraud – 30 percent (typically involving diversion of membership dues and contributions)
    • Expense reimbursement fraud – 23 percent
    • Theft of cash on hand – 17 percent
    • Theft of other assets – 16 percent
  • In 39 percent of the cases, an executive perpetrated the fraud, resulting in a median loss of $250,000.
  • In 35 percent of the cases, a manager or supervisor perpetrated the fraud, resulting in a median loss of $95,000.
  • In 23 percent of the cases, a non-management employee perpetrated the fraud, resulting in a median loss of $21,000.
  • The top three control weaknesses at non-profits which enabled the fraud were:
    • Lack of internal controls – 35 percent
    • Lack of management review – 19 percent
    • Override of existing internal controls – 14 percent
  • The top four anti-fraud controls used by non-profits were:
    • Internal audit department – 57 percent (generally practical only for larger non-profits)
    • Management review – 44 percent
    • Formal fraud risk assessments – 24 percent (generally performed by an outside expert such as a CFE)
    • Surprise audits (21 percent)
  • The top four ways that these frauds against non-profits were detected were:
    • Tip – 40 percent
    • Internal audit – 17 percent
    • Management review – 13 percent
    • By accident – 7 percent

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

About David Anderson & Associates

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

The State of Fraud in 2020: Fifth of a Six-Part Series

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

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

This blog continues the analysis by forensic accounting expert David Anderson of the Association of Certified Fraud Examiners’ (ACFE) “2020 Report to the Nations – 2020 Global Study on Occupational Fraud and Abuse.”  This week, Anderson – from David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – 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-six percent of victim companies/organizations terminated the perpetrator while another 10 percent permitted the perpetrator to resign.
  • However, 14 percent of companies/organizations allowed the perpetrator to remain with the organization either with probation/suspension (nine percent) or no punishment at all (five percent).
  • Only 45 percent of all owners/executives were terminated by the victim company/organization.
  • Fifty-nine percent of victim companies/organizations referred the matter to law enforcement. This percentage has steadily declined from 69 percent of companies/organizations which did so in 2008.
  • Twenty-eight percent of victim companies/organizations filed civil suit against the perpetrator. This increased over the 20-to-25 percent average during the past ten years.
  • Fifty-six percent of perpetrators referred to law enforcement pled guilty or no contest while another 23 percent of perpetrators were convicted at trial.
  • In 12 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/organization could not produce sufficient documentation and other evidence for the authorities to be confident that they could obtain a conviction).
  • Only two percent of cases referred to law enforcement resulted in the perpetrator being acquitted.
  • Forty-one percent of companies/organizations that filed civil suits received a judgment in their favor while another 36 percent of such suits were settled before a verdict was reached.
  • Perpetrators obtained a favorable judgment in 21 percent of civil cases (most likely because the company/organization could not produce sufficient documentation and other evidence to convince the trier of fact of the perpetrator’s guilt).
  • Victim companies/organizations which decided not to refer cases to law enforcement cited the following reasons for their decision:
    • A belief that internal discipline was sufficient (46 percent of non-referred cases)
    • Fear of bad publicity (32 percent of non-referred cases)
    • The company/organization reached a private settlement with the perpetrator (27 percent of non-referred cases)
    • The belief that pursuing a conviction would be too costly (17 percent of non-referred cases)
    • The lack of sufficient evidence to persuade law enforcement to pursue the matter (10 percent of non-referred cases)
  • Fifty-four percent of victim companies/organizations recovered nothing from either the perpetrator or other sources (such as insurance).
  • Thirty percent of victim companies/organizations made a partial recovery and another 16 percent made a full recovery.

The next and final blog article in this series will examine how non-profits were affected by fraud over the past two years.

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

About David Anderson & Associates

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

The State of Fraud in 2020: Fourth of a Six-Part Series

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

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

This blog continues the analysis by forensic accounting expert David Anderson of the Association of Certified Fraud Examiners’ (ACFE) “2020 Report to the Nations – 2020 Global Study on Occupational Fraud and Abuse.”  This week, Anderson – from David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – focuses on corruption:

The organization “Transparency International,” a global coalition against corruption (www.transparency.org), defines corruption as: “The abuse of entrusted power for private gain. It can be classified as grand, petty, or political, depending on the amounts of money lost and the sector where it occurs.”

The 2020 ACFE report shows that 43 percent of all frauds involve some form of corruption with the median loss from corruption being $200,000, and the fraud lasting an average of 18 months.

The 2020 Report identifies four main types of corruption:

  • Conflicts of interest, including purchasing schemes and sales schemes
  • Bribery, include invoice kickbacks and bid rigging
  • Illegal gratuities
  • Economic extortion

Corruption is the most pervasive form of fraud worldwide:

  • Sixty-two percent of corruption cases were perpetrated by someone in a position of authority (owners/executives or managers).
  • The Purchasing Department is the department most at risk for corruption. 81 percent of cases involved Purchasing Department fraud.

The industries with the highest proportion of corruption cases are:

  • The Energy Sector (66 percent)
  • Telecommunications (56 percent)
  • Transportation and warehousing (52 percent)

Corruption is the most likely fraud committed by employees of any size companies/organizations (those with fewer than 100 employees and those with 100+ employees).

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 unusually reserved for larger customers). NOTE: Favored parties are often friends, relatives or parties in which the purchaser has a financial interest.

Bribery cases principally involve:

  • Kickbacks to the purchaser for purchasing either more goods or services than would be normally purchased or at higher prices than would normally be paid.
  • Bid rigging whereby the purchaser provides inside information to a favored vendor in return for payments/kickbacks. NOTE: Bid rigging also can 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 next blog article in this series will discuss how companies/organizations react after a fraud has been discovered and what their experiences are in attempting to recover fraud losses.

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

About David Anderson & Associates

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

The State of Fraud in 2020: Third of a Six-Part Series

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

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

This blog continues the dissection and analysis by forensic accounting expert David Anderson of the Association of Certified Fraud Examiners’ (ACFE) “2020 Report to the Nations – 2020 Global Study on Occupational Fraud and Abuse.”  This week, Anderson – from David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – discusses the various controls that companies/organizations put in place to prevent fraud and how effective these controls are:

The 2020 Report 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:

  • Having an external audit of the company’s/organization’s financial statements (present in 83 percent of the companies/organizations)
  • Putting in place a code of conduct (present in 81 percent of the companies/organizations)
  • Having an active internal audit department (present in 74 percent of the companies/organizations)
  • Having management certification of the company’s/organization’s financial statements (present in 73 percent of the companies/organizations)
  • Having an external audit of the internal controls over the company’s/organization’s financial reporting (present in 68 percent of the companies/organizations)
  • Regular management review of financial reporting (present in 65 percent of the companies/organizations)
  • Having a confidential tip reporting hotline (present in 64 percent of the companies/organizations)
  • Having an independent audit committee (present in 62 percent of the companies/organizations)

The effectiveness of these most common controls were:

  • Having an external audit of the company’s/organization’s financial statements reduced the median loss by 46 percent and the duration of the fraud by 38 percent
  • Putting in place a code of conduct reduced the median loss by 51 percent and the duration of the fraud by 50 percent
  • Having an active internal audit department reduced the median loss by 50 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 50 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 37 percent
  • 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 49 percent and the duration of the fraud by 33 percent
  • Having an independent audit committee reduced the median loss by 33 percent and the duration of the fraud by 33 percent

Despite the heavy reliance upon external audits to prevent or reduce fraud, it was either equal to or less effective than other less expensive/less intrusive controls.

Over the past decade, four anti-fraud controls have seen significant increases in use:

  • Use of tip hotlines – an increase of 13 percent
  • Implementing an anti-fraud policy – an increase of 13 percent
  • Providing fraud training for employees – an increase of 11 percent
  • Providing fraud training for managers/executives – an increase of 11 percent

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)
  • Having formal fraud risk assessments performed by outside parties
  • Proactive data monitoring/analysis
  • Surprise audits
  • Implementing job rotation and/or mandatory vacations
  • Providing rewards for whistleblowers

The next blog article in this series will discuss corruption and its impact on companies/organizations.

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

About David Anderson & Associates

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

The State of Fraud in 2020: Second of a Six-Part Series

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

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

This blog continues the dissection and analysis by forensic accounting expert David Anderson of the Association of Certified Fraud Examiners’ (ACFE) “2020 Report to the Nations – 2020 Global Study on Occupational Fraud and Abuse.”  This week, Anderson – from David Anderson & Associates, a Certified Fraud Examiner in Philadelphia – discusses how frauds are detected and the characteristics of the people who commit fraud:

  • Most people believe having a financial audit will detect fraud. However, the 2020 Report found that only 4 percent of all frauds were detected by external auditors.  The percentage of frauds detected by accident was 5 percent – higher than the audit rate.
  • The most frequent method by which frauds were detected came from tips – the 2020 Report found that 43 percent of all frauds were detected from tips. Employees were the source of 50 percent of all tips, followed by customers (22 percent), anonymous tips (15 percent) and vendors (11 percent).
  • Internal auditors detected 15 percent of all frauds.
  • Management review detected 12 percent of all frauds.
  • The 2020 Report found that although owners and executives committed only 20 percent of all frauds, the median loss from such frauds was $600,000. Managers committed 35 percent of all frauds with a median loss of $150,000, and lower level employees committed 41 percent of all frauds with a median loss of $60,000.
  • 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 $190,000 for employees with 6 to 10 years tenure, and to $200,000 for employees with more than 10 years tenure.
  • Men were responsible for 72 percent of all frauds with a median loss of $150,000. Women were responsible for 28 percent of all frauds with a median loss of $85,000.  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.
  • 89 percent of all perpetrators had no criminal background.
  • 85 percent of perpetrators displayed at least one behavioral red flag. These included:
    • Living beyond their means
    • Having known financial difficulties
    • Having an unusually close relationship with a customer or vendor
    • Having control issues, including an unwillingness to share duties
    • Experiencing divorce or other known family problems
    • Having a “Wheeler-Dealer” attitude
    • Displaying frequent irritability, suspiciousness or defensiveness
    • Having known addiction problems (drugs, gambling, alcohol, etc.)
    • Frequent complaining about inadequate pay

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

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

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

About David Anderson & Associates

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

The State of Fraud in 2020: First of a Six-Part Series

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

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

Every two years, the Association of Certified Fraud Examiners (ACFE) commissions a survey of fraud in the United States and abroad.  The ACFE recently released its 2020 study entitled “Report to the Nations – 2020 Global Study on Occupational Fraud and Abuse.” Over the next several weeks, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, will discuss some of the key findings from the 2020 report.

Up first, some general observations regarding fraud:

  • The ACFE study estimates that the typical business/organization (including non-profit organizations) is losing about 5 percent of revenue each year to fraud.
  • The median loss from fraud is $125,000. This is down 4 percent from the $130,000 median loss identified in the 2018 Report;
  • Twenty-five percent of all frauds result in a loss of over $600,000;
  • The median duration of reported frauds is 14 months, down 12.5 percent from the 2018 Report duration of 16 months;
  • Smaller businesses (those with fewer than 100 employees) lost twice as much to fraud from billing and payroll schemes as larger businesses. Smaller businesses also lost four times as much to fraud from check alteration and payment schemes as larger businesses.
  • Asset misappropriation schemes (frauds involving the theft of cash, inventory, supplies, equipment or other company assets) remained the most common scheme, comprising 86 percent of all fraud schemes (versus 89 percent in the 2018 Report). Median asset misappropriation losses fell from $114,000 in the 2018 Report to $100,000 in the 2020 Report;
  • Financial statement fraud remains the least common scheme at 10 percent but results in the highest losses – $954,000 per fraud in the 2020 Report. The loss amount is up 19 percent from the $800,000 median loss shown in the 2018 Report;
  • Internal control weaknesses, including inadequate separation of duties, were responsible for nearly one-third of all frauds reported in the 2020 Report;
  • The 2020 Report identified 18 different anti-fraud controls that companies had implemented (Anderson will discuss these controls in greater detail in an upcoming blog in this series.) The report found that every control implemented resulted in a reduction in both the duration and amount of fraud.

Anderson’s next blog article will discuss how frauds are detected and the characteristics of the people who commit fraud.

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

About David Anderson & Associates

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

Count on a Forensic Accountant to Ferret Out Hidden Assets

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

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

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

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

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

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

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

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

About David Anderson & Associates

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

An Outsourced CFO Might Be the Answer to Your Accounting Needs

Posted by & filed under Blog Articles, Company News, Forensic Accounting, Outsourced CFO.

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 in the small-to medium-size range often have an accounting manager or controller take care of routine financial matters. For most transactions, this can suffice.

However, what happens if a short-term situation arises and these highly competent, hard-working individuals do not have the level of skills required to deal with this change? What happens when the more specialized services of a Chief Financial Officer (CFO) are needed, but the company can’t afford to pay for this type of expertise, or doesn’t need such a position filled on a permanent basis?

That’s an easy question to answer: Bring in an outsourced CFO.

“Good, experienced controllers and accounting managers are very well suited for activities such as preparing monthly, quarterly and annual financial reports; paying vendors; collecting accounts receivable, and handling payroll and payroll tax reporting,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of outsourced CFO services and other forensic accounting services in Philadelphia and the Delaware Valley.  “But for more complex, specialized issues, a company really needs the expertise and knowledge of a CFO.”

These activities might include such outsourced CFO tasks as:

  • Obtaining bank loans and/or lines of credit
  • Raising additional funds through issuance of equity or hybrid securities
  • Investor relations
  • Insurance, including liability and property and casualty insurance
  • Employee benefits, including health care insurance, dental, vision, 401-K plans, profit-sharing plans, etc.
  • Cash management and short-term investments
  • Human Resources issues, including employee manuals, policies & procedures, training, job succession, etc.
  • Regulatory and compliance reporting of both financial and operational matters
  • Budgeting and long-range financial planning, including strategic plans
  • Information technology, including computer security, systems life-cycle planning, systems maintenance and enterprise software
  • Disaster recovery planning
  • Assisting company ownership in exit strategy planning

While these are the types of matters that are best left in the capable hands of an experienced CFO, Anderson said bringing aboard a full-time CFO is often not an option for small- to medium-sized businesses.

“CFOs can be not only difficult to find, but also quite expensive,” said Anderson, a forensic accounting expert in Philadelphia who provides outsourced CFO services in Philadelphia and the Delaware Valley.  “Many CFOs also expect that part of their compensation package will include an ownership interest in the company and that is something most business owners are reluctant to offer.  The outsourced CFO is the perfect solution for a small- to medium-sized businesses.”

An outsourced CFO is hired on a contract basis for as long or short a time period as the business needs, Anderson said.  Some businesses will engage an outsourced CFO only for the time it takes to complete specific projects.  Other companies contract with an outsourced CFO for an extended period to work a certain number of days per week or hours per month, he explained.

“Using outsourced CFO services in Philadelphia or anywhere in the country gives small- to medium-sized businesses access to the knowledge and experience they need whenever they need it,” said Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley.  “Companies get all the benefits of having a CFO on staff, but they don’t have to pay top-dollar salary and compensation packages that include benefits and bonuses, nor do they have to worry about relinquishing a partial ownership interest in the company.”

If your business is in need of outsourced CFO services in Philadelphia and the Delaware Valley or any other forensic accounting services in Philadelphia, 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 in Philadelphia and the Delaware Valley.  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.

Vigilance Can Stave Off These Common Payroll Fraud Schemes

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

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

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

  • Ghost Employees: In this scheme, the fraudster creates a non-existent employee in the payroll system. The fraudster then enters time for the non-existent employee, resulting in production of a paycheck. The fraudster intercepts the paycheck and either deposits it in an account under his/her control or has a confederate either cash the check or deposit it in an account under the confederate’s control.
  • Terminated Employees: In this scheme, the fraudster works with a terminated employee. The fraudster keeps the terminated employee on the books and enters time for the terminated employee, resulting in production of a paycheck. As with a ghost employee, the fraudster intercepts the paycheck and forwards it to the terminated employee.  The terminated employee either cashes the check or deposits it in an account under the terminated employee’s control (and shares the proceeds with the fraudster).
  • Fraudulent Hours: In this scheme, the fraudster enters a higher number of hours worked either for him/herself or for another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster.  This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Pay Rate: In this scheme, the fraudster adjusts either his/her pay rate or that of another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster. This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Bonus Pay: In this scheme, the fraudster either adds him/herself to the list of employees receiving a bonus; or adjusts his/her bonus amount; adds a confederate to the list of employees receiving a bonus; or adjusts the confederate’s bonus amount. If entered for a confederate, that person shares the increased proceeds with the fraudster. This fraud can also result in the fraudster or confederate earning larger pension credits than the credits to which he/she is entitled.
  • Fraudulent Expense Reimbursement: In this scheme (which applies to companies/organizations that reimburse employee business expenses through payroll), the fraudster enters a higher expense reimbursement amount either for him/herself or for another employee. This results in a larger pay amount than that to which the employee or confederate is entitled. If entered for a confederate, that person shares the increased proceeds with the fraudster.

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

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

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

About David Anderson & Associates

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

Forensic Measures Can Fend Off Restaurant Fraud, Keep Your Cupboards Full

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

Restaurant Owners, While Your Business is Closed or Reduced Due to the Coronavirus, Here Is Something to Consider for Protecting Your Business’s Future

 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.

 “I originally wrote this blog before the coronavirus caused the local and state government officials to close down or reduce the business of most restaurants.  However, while your business is closed or reduced, you might want to consider the issues raised and recommendations offered in this blog for protecting your business when you reopen.” – DAA

Restaurants lose between $3 billion and $6 billion to employee fraud each year, according to the National Restaurant Association.

Recent surveys, says David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, show about 75 percent of inventory shortages and 4 percent of sales shortages are due to employee theft.

In fact, approximately three-fourths of employees steal at least once and approximately one-half steal repeatedly.

Given these startling statistics, how can restaurants fight this fraud? Anderson, a Certified Fraud Examiner, wants you to know some of the more common types of restaurant fraud, and ways these different frauds can be prevented or minimized:

Cash Skimming: In these schemes, employees use various methods to divert cash.  These include such practices as:

  • Entering lower sales amounts or less expensive items into the cash registers than were sold and pocketing the difference;
  • Recording unauthorized discounts or refunds but keeping the difference,
  • Voiding sales and pocketing the proceeds; and
  • Giving back more change to an accomplice than that person is entitled to. For example, being paid with a $10 bill, but giving back change as if the person had paid with a $20 bill.
  • Among the ways to combat cash skimming are:
    • Utilizing a point-of-sale ordering and cash register system;
    • Requiring employees to enter their employee number when using the cash register;
    • Limiting each employee to using a single cash register during his or her shift at restaurants with multiple cash registers; and
    • Installing cameras to record cash register usage.

Inventory Theft: In these schemes, employees use various methods to misappropriate inventory.  These include such practices as:

  • Outright theft of inventory;
  • Overpours of liquor. This involves serving more liquor than is recorded by the bartender and often results in a higher cash tip – and
  • Under-charging friends and family for meals. This is like the cash skimming schemes, but instead of pocketing cash, the friends and family receive more expensive meals than those for which they are charged.
  • Among the ways to combat inventory theft are:
    • Utilizing a point-of-sale ordering and cash register system;
    • Having a manager regularly count all inventory, or at least such more expensive items as lobster, steak, etc.;
    • Utilizing liquor control systems to provide precise pours and track liquor usage; and
    • Installing cameras to monitor employee exit doors to see if employees are leaving with inventory.

Payroll Fraud: In these schemes, employees either:

  • Clock other employees in or out even when the other employee is not present; or
  • Managers clock former employees in and out, and then split the pay with the former employee.
  • Among the ways to combat payroll fraud are:
    • Requiring multiple levels of approval for time sheets/time cards, including reconciling schedules with time sheets and time cards;
    • Having a third party – or the owner – hand out paychecks;
    • Using an outside payroll service; and
    • Installing cameras to monitor time clocks.

Of course, the most important way to combat restaurant fraud is to regularly inform employees that fraud and theft will not be tolerated, and that management is watching.

Some restaurant owners have told Anderson that many of these recommendations are too expensive for them to implement.  However, when they learn just how expensive restaurant fraud can be for them (for example, a restaurant with $1,000,000 in annual sales is likely losing $200,000 over a five-year period – using the above-mentioned 4 percent of sales lost to fraud number), they quickly understand that spending a fraction of that number can save them many thousands of dollars.

If you are experiencing restaurant fraud, or fear you might be, you should be working with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. When you need 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 him 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.

Cash Isn’t Always the Target in Corporate Fraud Schemes

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

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

Although most fraudsters go after cash because it is easier to misappropriate, more and more organizations are being hit with misappropriation of inventory and fixed assets (equipment, furniture, computers, vehicles, etc.).

In this article, Anderson, a Certified Fraud Examiner in Philadelphia, focuses on one key type of such misappropriation – substitution schemes.  Simply put, he explains, the fraudster in these schemes substitutes a less expensive item of inventory or a less expensive fixed asset for the actual item, and then sells the misappropriated item for personal profit.

Here are some examples of substitution schemes:

  • The Parts Department manager of a large auto dealership purchased cheaper aftermarket auto parts and substituted them for the auto parts purchased from the manufacturer. He then sold the manufacturer’s parts to other auto dealers, pocketing the cost difference.
  • The Technology manager at an advertising agency was responsible for implementing a computer replacement program that required him to replace existing high-end Apple computers with new ones every two years. He was supposed to remove the advertising and design software from each replaced computer and sell it to a used computer dealer. Instead, he purchased cheap, older-model used Apple Computers, substituted them for the replaced computers (which were then sold to the used computer dealer), and sold the replaced high-end computers (with the advertising and design software still on each computer) via a website he set up.
  • A trusted employee at a commodities broker was given access to the company’s precious metals safe, and over time replaced dozens of 10-ounce platinum bars (worth approximately $10,000 each) with 10-ounce silver bars (worth approximately $180 each). Part of the reason he could get away with this substitution scheme was that the bars were stacked, looked almost the same to the casual observer, and he made sure that the top several bars were platinum ones.
  • A Fortune 1000 company furnished its New York City sales office with more than $500,000 worth of artwork. Although the company was audited, because there were no financial transactions handled by the New York City sales office, and because its total fixed assets (including the artwork) were low relative to the company’s total fixed assets, the auditors never even visited the New York City sales office. Responding to a tip provided on the company’s fraud hotline, forensic accountants found that employees of the New York City sales office had substituted cheap artwork (including, in one case, a paint-by-numbers piece that had been completed by a child) for the more expensive artwork.  Most of the replaced artwork had been sold off by the employees, although several pieces were found in some of their homes.
  • The owners of a financially failing paper products company removed tens of thousands of dollars of paper products from their boxes, filled the boxes with trash and used paper, and resealed the boxes. After the bank took over the failed company, it hired an auctioneer to sell off the boxes of inventory. Only after the auction did buyers discover that they (and the bank who had to reimburse them for their purchases) were the victims of a substitution scheme.

So, how can your business avoid becoming the victim of a substitution scheme?  Here are some basic steps:

  • For inventories, implement a scheme of classifying inventory items by their relative value and frequency of sale. High dollar and high-volume medium dollar inventory should have the top classification, followed by medium dollar and high-volume low dollar inventory, and at the bottom, low dollar inventory. Employees from a separate department (usually the accounting department or, if it is not practical to use internal employees, from an outside company such as a forensic accounting firm) should conduct periodic physical checks of the inventories based upon the classification.  For example, checking the highest classification biweekly or monthly; checking the middle classification bimonthly or quarterly, and checking the lowest classification at least annually.
  • For fixed assets, institute a fixed asset tracking system. Under such a system, each fixed asset is tagged with a bar coded label. The system will have a database that separately identifies each fixed asset with date purchased, description of the fixed asset, purchase price, location of the fixed asset, and the bar code label number.  Then, as in the above inventory checking methodology, institute a periodic checking of fixed assets based upon dollar values (highest dollar value items most frequently, lowest dollar value item least frequently).  This regular checking should include retired or replaced fixed assets that are still on the books.
  • For fixed assets that are being disposed of or sold, again have employees from a separate department or third-party company inspect the assets prior to sale to ensure the assets being sold are the correct ones and are in the condition the company expects.

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

About David Anderson & Associates

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