How Forensic Accountants Discover Fraud Schemes: Part Two

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 week I conclude my two-part series on how certain frauds were discovered and what steps the defrauded companies could have taken to prevent them.

These steps include:

  • Enforce mandatory vacations – Both of the first two cases presented in my previous blog (stolen cash receipts and improperly written checks to the perpetrator) would have been discovered much earlier had the company enforced mandatory vacations. Often, the highly dedicated employee who refuses to take a vacation or even a sick day when sick, needs to be in the office every day to prevent discovery of his/her fraud.  Mandatory vacations (and requiring sick employees to stay home) can help uncover these frauds, and possibly deter the fraudster (who would fear the fraud being discovered while he/she was out).
  • Regularly review bank statements, bank reconciliations, and cancelled checks – in the cases of the improperly written checks to the perpetrator, the duplicate written checks, and the misappropriation of the title insurance company’s escrowed funds, if the owners had regularly reviewed bank statements, bank reconciliations and cancelled checks, the frauds would have been discovered much sooner (because many banks do not provide copies of paid checks, the company may have to incur additional costs to receive copies of the paid checks, but it is worth it in the long run). Because the perpetrators are often trusted employees, the business owner should have company bank statements sent directly to his/her home to prevent the perpetrator from manipulating the bank statement prior to the owner seeing it.
  • Limit the size of the petty cash account and take surprise petty cash counts – The petty cash account should only hold up to a few hundred dollars unless there is a very good reason for the amount to be higher. To protect against misappropriation of petty cash funds, the business owner should take surprise petty cash counts – at least once a month.  The counts should be on different days and at different times.  Such counts are designed to discourage those with access to petty cash from committing fraud.
  • Require senior management approval of either all internal credits or those over a certain dollar amount – such a requirement would have prevented the accounts receivable clerk from misappropriating customer payments and replacing them with internal credits.
  • Require senior management approval and tracking of vacation and sick days for other managers – In the case of the finance director who abused vacation and sick days, the finance director was responsible for tracking of vacation and sick days for others, but no one had approval and tracking responsibility for her vacation and sick days. Since accounting and finance managers are often the ones who perpetrate frauds because of their trusted positions, having such a policy as this will prevent and/or discourage such abuse.
  • Senior management (or in the case of the auto dealership fraud, the owner) should regularly review the inventory, including having aging reports (reports showing how long particular items have been in inventory) – Not only would this have prevented the general manager from perpetrating his fraud, but also could have helped the owner with inventory control in general since review of the aging reports could have helped identify stale inventory.

All these steps require that owners or senior managers to spend additional time reviewing various aspects of their business.  If such review would be burdensome, the owners or senior managers should consider engaging a trusted third party such as a forensic accountant to perform some of the above steps.  The additional cost is likely to be well worth it.

About David Anderson & Associates

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

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