Blog

Is Your Bank Unknowingly Promoting or Enabling Fraud?

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

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

Several frauds I have investigated during my tenure as a forensic accountant have been strikingly similar.  In each case, a trusted employee misappropriated funds by writing checks either to themselves or an associate. Management was unaware of the fraud largely because their bank had stopped providing paid, cancelled checks or copies.  When each fraud was finally discovered, the losses were significant because of the long duration of each employee’s scheme.

As regular readers of my column are well aware, a trusted employee is one who – by virtue of such factors as longevity with the company, past demonstrations of loyalty and/or hard work, and social and/or familial relationships with management – has earned a level of trust and faces less oversight than other employees.

Add to this the fact that many small businesses are unable to install the internal controls related to separation of duties – primarily because they lack enough knowledgeable and experienced employees to allow for separation of incompatible duties – and you can end up with an employee who can write checks, enter the paid check information into the company’s accounting system, and sometimes even perform bank account reconciliations.

Because the employee is trusted, management is less likely to closely monitor the employee’s activities.  These kinds of situations could lead to the trusted employee misappropriating funds which, because of the reduced likelihood of detection, could result in significant losses.

In the past, I recommended the owner or CEO (not the Controller or CFO because of the separation of duties and oversight issues) have the bank send the monthly bank statements directly to him/her so that he/she can review the paid checks (or copies) to identify any unusual payees (either in name, frequency of payment, or in amounts paid).

Beginning about 15 years or so ago, many banks stopped returning the paid, cancelled checks with the bank statements as a means of reducing operating costs.  Instead, they provided reduced size copies of the front of each paid, cancelled check.

However, even more recently, many banks also have stopped providing these check copies.  Instead, the banks give companies the means to access a copy of each paid check online.  Accessing each paid check online can be quite time consuming, especially when a company issues hundreds of checks each month.

As a result, it has become impractical for the owner or CEO to conduct this review.  In one instance of fraudulent activity by a trusted employee, the owner turned to his trusted employee to conduct the review, unaware that the trusted employee was the one writing the improper checks.

Given that banks have not been providing paid, cancelled checks or copies, here are some updated recommendations I am suggesting to small business owners:

  • Arrange to pay the bank to provide either paid, cancelled checks or copies (the fee will be much less than the potential fraud loss) so that the owner can review them; or
  • If your bank won’t provide such, consider changing banks to one that will provide either paid, cancelled checks or copies; or
  • Engage a reliable outside person, such as a forensic accountant, to regularly review paid checks online.

Additionally, I recommend the small business owner:

  • Establish a company policy, in writing, that fraud is wrong and will not be tolerated by the company. Additionally, the small business owner should have each employee read the policy statement and sign an acknowledgement that he/she has read and understood the company policy.
  • Let employees know that management is watching and has instituted fraud prevention measures (without going into detail regarding the specifics of the measures).
  • Hold periodic training sessions on spotting and reporting fraud.
  • Inform employees management will be conducting surprise audits of bank accounts (again, without going into detail regarding the specifics of when and how the surprise audits will be conducted).
  • Consider having a reliable outside person, such as a forensic accountant, perform bank account reconciliations.

The cost of implementing such measures will be much less than the potential fraud faced by not implementing them.  By instituting the above-mentioned anti-fraud controls, small businesses can significantly reduce the likelihood that the cessation of banks providing paid, cancelled checks or copies will facilitate fraud by trusted employees.

If you require the services of an experienced forensic accountant 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.

Termination, Discrimination Cases Can Benefit from Forensic Accounting Assistance

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

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.

There are times when a forensic accountant may be asked to calculate damages for wrongful termination and employment discrimination lawsuits.

“Whether you are dealing with wrongful termination or employment discrimination, the methodology for calculating damages is similar,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley.

“The key basis for calculating damages is the difference between what the plaintiff would have earned over his/her lifetime had the wrongful termination or employment discrimination not occurred, and the actual and expected earnings of the plaintiff after having experienced the wrongful termination or employment discrimination,” explained Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley.

Anderson outlined the steps of the damage calculation this way:

  • To begin with, the date the damages started is determined. This typically is the date that the plaintiff was allegedly wrongfully terminated or the date that the employment discrimination allegedly began.
  • Next, the wage or salary rate and associated benefits as of the beginning date of damages are identified.
  • Then, these rates and benefits are extrapolated through the normal date of retirement, or another date if there is a reasonable basis to assume that the plaintiff would have retired earlier or later than normal retirement age.
  • This is followed by identifying the actual wage or salary rate and associated benefits earned by the plaintiff from the beginning date of damages until the date of the damages calculation.
  • The forensic accountant must then extrapolate these rates and benefits through the normal date of retirement, or another date if there is a reasonable basis to assume that the plaintiff would have retired earlier or later than normal retirement age.
  • Finally, the difference between the two different extrapolations are calculated.

Anderson, a forensic accounting expert in Philadelphia whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, said the extrapolations rely upon several assumptions, including:

  • What the expected career path of the plaintiff would have been had the wrongful termination or employment discrimination not occurred.
  • What the actual and expected career path of the plaintiff is due to the wrongful termination or employment discrimination. Typically, the wrongfully terminated person will have a period of unemployment and is likely to have to take a lower-level position or a position paying less, etc. Similarly, the person experiencing employment discrimination will either have a harder time finding employment or, if already employed, will have a slower or lower career path.
  • What the associated wage or salary and benefits growth rates would have been for each of the above.
  • What the associated benefits would have been for each of the above. This includes insurances, pension or profit-sharing benefits, 401-K contributions and company matches, etc.
  • What mitigating steps the plaintiff has taken or is expected to take to obtain employment, and the reasonableness of those steps. For example, if the plaintiff previously was a high-powered executive, what is the plaintiff doing to find alternative employment? Also, what is a reasonable amount of time for finding a new job? If the plaintiff has found a new job, is it comparable to what would be expected?
  • The rate to use to discount the differences back to present value. Please note that under Pennsylvania law, neither inflation-based wage increases nor discounting to present value are allowed.
  • Any applicable permitted interest on past differences.

Anderson, a forensic accountant whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, including expert witness testimony in Philadelphia, said the forensic accountant/expert witness generally will rely on an associated report by a qualified employment and compensation expert regarding the expected career paths and associated salaries over time, unless the forensic accountant/expert witness also is a qualified expert in that area.

If you need help in calculating damages for wrongful termination or employment discrimination cases, or if you require the services of a forensic accounting expert in Philadelphia and the Delaware Valley for any other reason, 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 services, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.  Anderson also has provided expert witness testimony in the Greater Philadelphia area and served as a forensic consultant on both civil and criminal cases.

Marketability and Control are Key Factors in a Privately Held Business Valuation

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

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

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

According to David Anderson, of David Anderson & Associates – a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley – experts who are asked to determine the worth of individual shareholder stakes in such a privately held operation consider factors that can significantly reduce the value of an individual’s holdings.

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

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

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

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

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

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

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

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

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

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

About David Anderson & Associates

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

Forensic Accountants Can Oversee, Mediate Family Inheritance Issues

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.

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

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

What is a Calculation of Value?

Posted by & filed under Blog Articles, Business Valuation, 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 business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

There are many circumstances under which a business valuation is required.  These can include:

  • For estate and gift taxes
  • For divorces
  • For certain business disputes and other litigation, including minority or disaffected shareholder oppression suits
  • As required under certain business or partnership operating agreements, including for shareholder or partner buyouts
  • As required for firms that are audited and have goodwill or purchase price allocation needs
  • When a business is being sold and the acquirer makes a business valuation a requirement of the purchase agreement
  • For insurance purposes (either to obtain business insurance or to support a claim)
  • To meet certain government regulations (such as Department of Labor regulations for Employee Stock Option Plans)

Professional business standards require a business valuator follow certain procedures when performing a business valuation.  These generally include:

  • An analysis of the nature and history of the business
  • Analysis of the economic outlook in general and the condition and outlook of the specific industry in particular
  • A detailed analysis of the business’s economic performance and condition as well as a comparison to other similar businesses in the same industry
  • Making normalization adjustments to the financial statements of the business
  • Consideration of asset-based, income and market approaches in determining business value
  • Application of marketability, control and other premiums and discounts
  • Consideration of non-operating assets and liabilities
  • Preparation of a report documenting all the above items

Sometimes, however, a business owner would merely like to know the value of either his/her business or one which he/she is considering acquiring.  In such cases, while a traditional business valuation can be performed, a less rigorous type of analysis known as a Calculation of Value may be performed instead.

Under a Calculation of Value, the client and the business valuator agree on a more limited scope of procedures to be performed.  For example, they may agree to not analyze the economic outlook and/or industry outlook; to not perform a detailed analysis of the business’s economic performance relative to that of similar businesses in the same industry; to not consider one or more of the three approaches to determining business value; and/or to not consider one or more valuation methods under particular valuation approaches.  By limiting the procedures performed, the cost of the service will likely be reduced.

Typically, a Calculation of Value will result in an estimated range of values for the business (for example, the result may be an estimate of between $500,000 and $800,000).  The Calculation of Value report will include the caveat that this is the result determined based upon the limitations in procedures performed, and that had all the normal business valuation procedures been performed, the results may have been different.

Nevertheless, when a business owner is seeking a reasonable estimate of business value (as opposed to a “scientific” opinion of value as determined under a business valuation), a Calculation of Value may be a reasonable and less costly alternative.

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.

Serial Fraud Shares Traits with Other Types of Crime Sprees

Posted by & filed under Blog Articles, 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.

Serial crimes, such as murder and arson, have certain characteristics in common with fraud.

According to Certified Fraud Examiner David Anderson of the Philadelphia forensic account services firm of David Anderson & Associates, serial fraudsters tend to start out “small” and their initial crimes may occur in a hasty and sloppy manner.

As time progresses, he said, they learn from their “mistakes,” and the crimes are better planned and better designed to avoid detection of their involvement in the crime.  In addition, Anderson noted, the time period between incidents of the serial crimes may get shorter and shorter as their need for gratification gets stronger and stronger.

There may also be a sudden halt in the serial criminal’s activities or an unusually long period of time between the crimes, he explained, that often is attributed to such factors as incarceration (for another crime), treatment or some other disruptive influence.

Over his years of work as a fraud deterrence expert, Anderson said he has found similar characteristics in frauds. Here are just two examples:

“In one case, the Controller of a medium-sized business found herself short of funds going into a three-day holiday weekend,” he said, going on to say “her solution was to ‘borrow’ from the company’s petty cash.  Because she didn’t consider herself to be a criminal, she left a signed personal check payable to the company for the amount that she “borrowed”.  The next payday, she paid back the funds and took back her check.”

Anderson said the Controller, a month or two later, once again found herself short of funds for several credit card bills.

“She again ‘borrowed’ funds from petty cash,” Anderson said, continuing the explanation, “this time a larger amount, and again left a signed personal check payable to the company for the amount that she ‘borrowed’.”

The cycle, he said, continued at shorter intervals and for larger amounts until she had ‘borrowed’ the full amount of petty cash and was unable to pay it back from her next paycheck.  Her ‘solution’ to this problem was to submit phony expense documentation (such as copies of already reimbursed expenses and phony receipts obtained from the Internet) to cover the ‘borrowed’ amounts she was unable to repay.

“However,” Anderson said, “she feared the sudden jump in her reimbursable expenses would be noticeable, so she began using other methods to obtain funds including paying phony vendors, ghost employees – keeping certain terminated employees on the payroll and splitting paychecks with them – and accounts receivable fraud — writing off the accounts receivables of friends, neighbors and family members who had purchased items from this business – in return for a portion of the written-off amounts.”

Anderson, a Certified Fraud Examiner, said his company’s investigation showed that over time, the amounts and frequency of the fraud grew until it was discovered.  This pattern of growth in amount and frequency, he said, was typical of other frauds the firm has investigated.

In another recent case, Anderson said one family member of a family-owned retail business began embezzling funds from customer invoices for which the customers paid cash.

Because the company had a manual cash register system, the family member removed both cash and the corresponding invoices from the deposit slips and invoices he provided to the accounting clerk who entered the information into the company’s QuickBooks accounting system. He additionally hid the cash shortages by delaying payments to vendors (telling them that business was bad).

“When I investigated the fraud,” Anderson said, “interviews with employees revealed that this family member frequently gambled in Atlantic City.  This led me to suspect that his embezzlement was tied to his gambling losses.”

Because the family member in question was a member of the comp clubs at each of the four casinos at which he gambled, Anderson said he was able to obtain documentation of his daily cash winnings and losses from each casino.  His embezzlement activities generally mirrored his gambling losses.

“During my initial investigation,” Anderson said, “I also noted an 11-month break in his embezzlement activities.  When I matched his embezzlement activities with his gambling wins and losses, I noted that during that same 11-month period, he had consistent net gambling gains from the casinos.  Since he was winning, there was no need for him to embezzle funds.  However, once he lost all these gains, he went back to embezzling funds again.”

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.

Just Having a Disaster Recovery or Contingency Plan is Not Enough

Posted by & filed under Blog Articles, Business continuity, 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.

Two weeks ago, the city of Sioux Falls, South Dakota was hit by tornadoes, and activated its contingency plans.  Those plans included setting off sirens to warn the populace.  However, most of the sirens were not activated because, among other failures, Sioux Falls did not regularly test its emergency plans.

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 in order to continue to protect your organization and employees.

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.

 

Five Common Business Valuation Mistakes to Avoid – Part Two

Posted by & filed under Blog Articles, Business Valuation, 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 business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

Our two-part study of the most significant mistakes made while performing a business valuation concludes as Philadelphia forensic accountant and Certified Valuation Analyst David Anderson takes a closer look at three additional issues often encountered in this process.

Three: Relying on outdated business transactions and industry growth rates:

According to David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, recent business cycles saw peak transactions prices paid around 2000 and 2006.

However, due to more recent economic history, including the “great recession,” Anderson said prospective buyers would not expect to see comparable prices in the present.  Similarly, economic growth rates around those same time periods were much higher than currently expected growth rates, said Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley. Relying on this outdated transaction and growth rate information, he said, results in overstated business values.

Four: Failing to add back in the value of non-operating assets:

Many businesses have assets on their books that, said Anderson – a Certified Valuation Analyst in Philadelphia – are not used in current business operations.  Examples include: Cash and/or marketable securities over what is needed to meet working capital requirements, vacant land, investments in outside businesses, artwork (unless the business is a gallery), and antique vehicles.

Professional valuation standards, as explained by Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, call for identifying such non-operating assets, valuing them separately and adding them back to the value of the business (the logic being that a prospective buyer could purchase the business, operate it without these assets, sell these non-operating assets, and pocket the proceeds).

Five: Ignoring the capital structure of the business:

Equity investors typically require a greater rate of return to accommodate the risks they take investing in a business, Anderson explained. However, many businesses can borrow from banks and other lenders at considerably lower rates.  The company being valued may already have long-term debt at such a rate or it may be the norm for companies in the same industry to have a capital structure that includes long-term debt.

In such cases, said Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, the valuator must consider the overall capital structure of the company to determine the blended (or weighted average) expected rate of return (which will be lower than the equity rate of return alone).  Considering such a lower overall rate of return is likely to result in a higher equity value for the business than would be determined if the capital structure of the business were ignored, noted Anderson a Certified Valuation Analyst in Philadelphia.

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

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.

Five Common Business Valuation Mistakes to Avoid – Part One

Posted by & filed under Blog Articles, Business Valuation, 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 business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

The business valuation process, in almost all instances, follows proper professional procedures; however, there are times when a financial professional fails to follow accepted standards of practice. In this first of a two-part series, Philadelphia forensic accountant and Certified Valuation Analyst David Anderson takes a closer look at two of the five most frequently made business valuation miscues. The other three will be studied in Part Two.

One: Concentrating on just one approach (the income approach) for valuing a business:

Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, explains that valuation standards require a valuation professional to consider three different approaches for valuing the business – income approach, market approach, and asset approach.

Although the income approach is often the easiest, and least-expensive, approach to consider (the market approach requires researching public company transactions and utilizing costly databases; and the cost approach frequently requires the use of real estate, fixed asset and/or inventory appraisals as well as potentially requiring additional valuation analysis for intangible assets), Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley says it is not always the most reliable approach for all companies and all circumstances.

For example, a company with operating losses in some years may be deemed to have no value under the income approach, but it could have positive value under the asset approach and/or the market approach.  Additionally, says Anderson, a Certified Valuation Analyst in Philadelphia, a relatively new company or start-up (particularly a technology company) may not have sufficient operating history to which the income approach can be effectively applied, but may have a significant value as determined under the market approach.

Two: Ignoring normalization adjustments:

The unadjusted earnings of many privately held companies, according to Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, may not be comparable to other similar companies because they may be paying more, or less, than market-level compensation and benefits to their owners and officers.

Additionally, said Anderson, the owners may have had the business pay certain non-business costs, or the business may have received certain one-time revenues or incurred certain one-time costs that would not have to be experienced by a future owner.  As a result, Anderson, a Certified Valuation Analyst in Philadelphia, noted it is necessary to adjust to these revenues and expenses to make the business comparable to that of similar companies.

Next Week: Mistakes Three, Four, and Five.

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.

When an Expert’s Report is Challenged in Court

Posted by & filed under Blog Articles, Company News, Litigation Support.

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

In typical litigation involving economic damages, one or both sides will engage an economic damages expert.  Usually the plaintiff’s expert will analyze the available data and likely produce a written report concerning the calculated value of the damages.  Upon submission to the court, the opposing side’s expert may produce a rebuttal report challenging some or all the findings and conclusions in the submitted written report.  Each side’s expert may be deposed and may also offer testimony during the trial.

However, in certain instances, the opposing side may challenge the admissibility of the expert’s report.  In Federal court, this is known as a Daubert challenge (after the case, Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993)).  In Pennsylvania, the Daubert case is not used.  Instead, an earlier case, Frye v. United States, 293 F. 1013 (D.C. Cir. 1923), is used (hence, in Pennsylvania, this is called a Frye challenge).  New Jersey uses a modified version based upon the Daubert case (this is sometimes called “Daubert-Lite”).  In Delaware, the Daubert case is used.

Under Daubert, the Court decided that:

  • The trial judge has a duty to act as a “gatekeeper” to view evidence under stricter scrutiny to ensure that it meets the requirements of Rule 702 of the Federal Rules of Evidence. Rule 702 states that:
  • “A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.”

  • The trial judge is to ensure that the expert’s testimony is “relevant to the task at hand” and that it rests “on a reliable foundation;”
  • A conclusion will qualify as “scientific knowledge”if the proponent can demonstrate that it is the product of sound “scientific methodology” derived from the scientific method; and
  • For a “scientific methodology” to be considered reliable, it should meet the following criteria:
  • Be generally accepted with the specific scientific community where the methodology is employed;
  • Have been subjected to peer review and publication;
  • Can be and has been tested;
  • Have a known or potential rate of error which is acceptable.

By contrast, under Frye, the standard is less broad:  an expert opinion is admissible if the scientific technique on which the opinion is based is generally accepted as reliable in the specific scientific community.  Under Frye, the trial judge does not serve as a gatekeeper.

By way of example, the “valuation” method discussed in last week’s blog (Rules of Thumb) would not meet either the Daubert standard or the Frye standard since it is not generally accepted within the valuation community as a reliable scientific methodology.

In a recent Federal court case, Rover Pipeline, LLC v. 10.55 Acres of Land, More or Less, in Ashland County, Ohio, et al., United States District Court, Northern District of Ohio, Eastern Division, Case No. 5:17-cv-239 (September 14, 2018), the court rejected one expert’s valuation due to, among other things, that expert’s reliance on unsubstantiated information presented at a continuing education class rather than an authoritative guide generally accepted in the valuation community (although the opposing counsel did not initiate a Daubert challenge, the court’s decision supported the failure of the expert to meet the Daubert criteria).

Hence, for an expert’s report to successfully survive a Daubert challenge, the expert’s “scientific methodology” must meet the specific criteria discussed above.  Use of unsubstantiated and/or unreliable methodologies which are not generally accepted by the relevant community (such as the valuation community or economic damages community), can place an expert at risk for losing either a potential Daubert or Frye challenge, and having the expert’s report or testimony excluded.

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

About David Anderson & Associates

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

(NOTE: David Anderson will be on vacation Labor Day week, but his column will return to its regular weekly schedule on Monday, September 9.)

‘Rules of Thumb’ Can Leave You ‘All Thumbs’ In Most Business Valuations

Posted by & filed under Blog Articles, Business Valuation, 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 business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

Some trade associations and business brokers, among others, use what are called Rules of Thumb to explain to business owners the “value” of their company. While this may provide some general ballpark approximations of worth, Philadelphia forensic accountant and Certified Valuation Analyst David Anderson said there are many problems with relying on this general principle that could be generally close but not completely reliable or accurate.

Anderson – principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley – explains there can be significant differences between the value developed using a Rule of Thumb and the value determined by a qualified professional business valuator using professional valuation standards.

In the context of business valuation, Rules of Thumb are theoretical units of comparison.  They usually are expressed as a range of multiples of either sales or SDE (seller’s discretionary earnings, which equal the total of owner’s compensation and net profit).  For example, a Rule of Thumb for a certain industry may be that a business is worth 1.1 to 3.8 times sales or 3.5 to 6.4 times SDE.

Rules of Thumb generally presume the business being valued is an average business.  They may be based upon transactions that represent the sale of the assets of a business or, instead, that represent the sale of the equity of a business.  Anderson – a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley – said Rules of Thumb also may be based – in some cases – on the presumption the business buyer is paying 100 percent of the purchase price in cash or – in other cases – on the presumption the business buyer is paying a combination of cash and debt or cash and a percentage of future earnings.

Unfortunately, most Rules of Thumb (including those in many business reference guides) provide limited information, if any, regarding the specifics of the underlying transactions which gave rise to the Rule of Thumb ranges.  Accordingly, Anderson, a Certified Valuation Analyst in Philadelphia, said such Rules fail to recognize differences in profitability, business lines, customer concentration, capital structure, management, geographic location, and other important factors. Furthermore, local Rules of Thumb may differ from national Rules of Thumb.

Given the shortcomings of Rules of Thumb, most professional business valuation standards discourage using Rules of Thumb.  For example:

  • NACVA (the National Association of Certified Valuators and Analysts) professional standards state “Rules of Thumb are acceptable as reasonableness checks, but should not be used as a standalone method.”
  • AICPA (the American Institute of Certified Public Accountants) professional standards state “A Rule of Thumb is typically a reasonableness check against other methods used and should generally not be used as the only method to estimate the value of the subject interest.”
  • ASA (the American Society of Appraisers) professional standards state “Rules of Thumb may provide insight into the value of a business, ownership interest, security or intangible asset. However, value indications derived from the use of Rules of Thumb should not be given substantial weight unless they are supported by other valuation methods and it can be established that knowledgeable buyers and sellers place substantial reliance on them.”

Similarly, the courts rarely accept Rules of Thumb as a valuation method. Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley, cited a case addressing this issue was In re:  Marriage of Hagar – 2010 WL 4807559 (Iowa App.) (Nov. 24, 2010).  In this case, a divorcing couple in Iowa had a disagreement regarding the value of a jointly owned dry cleaning business.  The husband’s expert made four “calculations” of the value of the business ranging from negative $120,000 to positive $79,329.   The expert testified:

“… this is not a valuation.  This was a computation utilizing Rules of Thumb that are documented as industry standards but not using the judgment, simply using calculations following each of four suggested formulas”

Furthermore, on appeal, the wife pointed out the husband’s expert’s use of Rules of Thumb and industry standards did not require the same professional judgment as a complete valuation.  In this matter, Anderson, a Certified Valuation Analyst in Philadelphia, said the appeals court rejected the husband’s expert for not using judgment and using Rules of Thumb instead of issuing a professional opinion of value.

Rules of Thumb can be useful for obtaining a ballpark range of value for a business.  However, a professional business valuation is necessary if the value of a business needs to be determined in any of the following situations:

  • Divorces
  • Shareholder Disputes
  • Economic Damages Calculations
  • Litigation
  • Tax Matters Such as Gift Taxes and Estate Taxes
  • Accounting Compliance Matters (For Audits) Regarding Goodwill Impairment; Purchase Price Allocation; And Other Fair Value Measurements
  • Sale, Purchase or Merger of a Business

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.

Forensic Accountants Help Fight Fraudulent Conveyance Litigation

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

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

Facing losses from such occurrences as foreclosures, divorces and other legal proceedings, shady business owners sometimes resort to the fraudulent conveyance or transfer of property or other assets to lessen or eliminate their losses by hiding valuable assets.

When that happens, it is the role of the forensic accountant to uncover the improperly transferred assets and determine their value.

“Black’s Law Dictionary defines fraudulent conveyance or fraudulent transfer as ‘the illegal transfer of property by a debtor to avoid creditors or claims’,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides litigation support services and expert witness testimony in Philadelphia and the Delaware Valley. “It is a blatant action intended to undermine often legitimate claims filed by creditors, ex-spouses and other parties.

Anderson said the resulting fraudulent conveyance litigation typically involves civil suits bought by creditors or bankruptcy trustees seeking to recover improperly transferred assets or business. Examples of these transfers include:

  • Payments to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends or business partners of the debtor;
  • Transfer of title of assets from the debtor to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends or business partners of the debtor;
  • Sales of assets at bargain prices from the debtor to related parties, including other businesses in which the debtor has an ownership interest, and relatives, friends or business partners of the debtor;
  • Transfer of business (sales) to other entities in which the debtor or relatives, friends or business partners of the debtor have an ownership interest; and
  • Gifts made by the debtor during a period of financial stress, including donations to charity.

In cases of fraudulent conveyance litigation, attorneys rely on forensic accountants to document the alleged fraudulent transfer; identify and locate improperly transferred assets and calculate the lost value of improperly transferred assets or business, said Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia.

Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley who has performed forensic work in multiple fraudulent conveyance matters, recalled one such case that later became the basis for his case study, “The Sore Losers.”

He said the case involved business owners who wanted to avoid a creditor’s foreclosure action by draining funds from the company. Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, said the business owners improperly paid themselves special bonuses and distributions, drastically increased rents charged to the business on real estate owned separately by the business owners, and ran personal expenses through the company. Anderson, a Philadelphia forensic accountant who also is a Certified Fraud Examiner in Philadelphia, was able to identify each of the transactions and calculate the total amount of the payments, thereby facilitating the creditor’s recovery of the payments.

Anderson, a forensic accounting expert in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, recalled another case in which a husband who planned to divorce his wife sought to reduce the value of his business so as to decrease the amount of his future divorce settlement.

The husband sold certain assets to his girlfriend at a bargain price and also had a friend set up a competing business, to which the husband directed his own customers. After the divorce was completed, the plan was to have the friend sell a majority interest in the new business to the husband at a bargain price, according to Anderson, a Philadelphia forensic accountant.

The fraudulent transactions were discovered after Anderson was engaged by the wife’s counsel to value the husband’s business. “During my investigation, I noted a significant decline in the business as well as the sale of certain assets during the two years preceding the divorce,” he said. “The investigation revealed the transfer schemes, and I was able to value the husband’s business as if these improper transfers had never occurred, thereby increasing the divorce settlement paid to the wife.”

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

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide 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. Anderson also has provided expert witness testimony in the Greater Philadelphia area and served as a forensic accounting consultant on both civil and criminal cases.

Leave No Stone Unturned in Your Search for Fraud

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

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

The Director of Operations at a large national financial services firm did such a good job reducing costs during a recent business downturn that his company saw savings of $50,000 a year.

However, as part of that expenditure reduction, the Director pocketed $100,000 a year for himself.

“The fraud perpetrated by this trusted employee was ingenious in that the very program he initiated to save the company money was, in fact, the same program that allowed him to siphon a significant amount of money out of the company and into his own hands,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.  “The company was thrilled that the program performed as well as the Director said it would.  There was not a single person in the company who had any reason to suspect illicit activity.”

The fraud investigation found that the Director of Operations could set the wheels in motion on the fraud from the very beginning.  He negotiated a deal for a significant discount on office supplies with a major office products company that would become the sole supplier of office products for the company’s more than 100 offices in all 50 states, Anderson said.  He then set up a system that allowed each office to submit a requisition for office supplies monthly.

As the requisitions came in each month, the Director consolidated them into a single order with deliveries scheduled for each office.  He then used the monthly invoice from the office products supplier to assign costs to the applicable offices and forward the approved invoice to the corporate accounts payable department for payment, said Anderson, a Certified Fraud Examiner who recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

During the fourth year of the program, a newly hired accounts payable clerk was processing the latest invoice when she noticed an oddity.  One of the shipments had been delivered to a small eastern Montana town that was near her own hometown, but it was charged to the Helena office more than 300 miles away.

Anderson said the clerk reported the discrepancy to the Corporate Controller, who contacted the Helena office to inquire about the shipment.  The Helena office manager denied any knowledge about the shipment and denied receipt of the items shipped.  Suspicious, the Controller checked all the shipments on that month’s invoice and found that while some shipments went to company offices, many them went to locations nowhere near company offices.  He took the information to senior management and a forensic accounting expert was engaged to conduct a comprehensive fraud investigation.

What the fraud investigation uncovered — and the Director of Operations admitted — was that once the agreement with the office products supplier had been negotiated, the Director set up his own website to sell office supplies at discounted prices.  As buyers placed orders and paid for them through the website, the Director forwarded the orders to the office products supplier to fill.  When the monthly invoice arrived from the supplier, the Director assigned the cost of each invoiced shipment to the nearest company office.  So, the Helena office — the only office in Montana — was charged for all shipments to Montana, both those ordered by the office and those ordered on the website by unrelated companies or individuals in Montana.

The Director admitted to the forensic accounting expert that his website transactions exceeded more than $100,000 per year, meaning he had shaved $450,000 off the company’s office supplies expenditures over the three years, but stole $300,000 of that for himself.

“He really was very good at his job,” Anderson said.  “He also, unfortunately, was a crook.”

Had the alert accounts payable clerk not noticed the discrepancy with the Montana shipment, Anderson said the theft might have continued much longer.  He added that the entire scheme could have been short circuited simply by having the accounting department assign the invoice costs to each office instead of allowing the Director of Operations to do so.

If your fraud deterrence measures need an overhaul, it’s time to engage a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  A Certified Fraud Examiner can examine your accounting and purchasing programs and procedures and make recommendations for enacting strong fraud deterrence measures that will help safeguard your company, Anderson said.

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

About David Anderson & Associates

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