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 hope you, your families, and loved ones have so far successfully navigated the COVID-19 crisis. This blog is devoted to discussing an unexpected impact of COVID-19 that I have seen in new client cases and have learned about from other fraud experts.

In a number of cases, changes in business operations caused by the COVID-19 crisis have led to the discovery of ongoing fraud schemes that otherwise might not have been discovered for many more months.  I have detailed some of these below:

Accounts Payable Fraud

 Because many businesses were closed for a period of time in the Spring (or are still closed), many business owners began collecting their business’s mail themselves.  As a result, several owners who had never opened their bank statements previously now opened and reviewed their bank statements.  Some of them found such distressing information as:

• Bank balances that were considerably lower than the balances shown on reports provided to them by their CFO, controller or bookkeeper
• Multiple bounced vendor checks due to lack of funds
• Checks written to employees (when they would not have expected such checks to have been written)
• Checks written to either unknown vendors or vendors with whom they had not done business for many years.

Additionally, some of these owners were also surprised, upon opening mail from vendors, to see vendor statements stamped as past due or in collection (again due to an unexpected lack of funds).

In each of these cases, if the owner had regularly reviewed the bank statements and paid checks (a procedure which takes a short time every month), the owner would have discovered the frauds much sooner.  And, if not for the COVID-19 crisis, these same owners are likely to not have discovered the fraud for many more months.

Payroll Fraud

 In several instances, business owners who applied for funds under the CARES Act Payroll Protection Program (PPP) discovered they were the victims of payroll fraud.  In applying for the PPP program, these business owners reviewed payroll reports which they had not previously reviewed.  These business owners discovered one or more of the following:

• “Ghost” employees – non-existent employees who had been paid via direct deposit
• Terminated employees who were still on the payroll and had been paid via direct deposit
• Current employees who had been paid at higher pay rates than the business owner had authorized
• Current employees who had been paid for more hours worked than the business owner had authorized

In each of these cases, a trusted employee (either payroll manager, controller or CFO) had perpetrated these schemes, and the fraud was only caught because of the owner’s payroll review for the PPP program.  If the owner had regularly reviewed the payroll reports (a procedure which, again, takes a short time every month), the owner would have discovered the frauds much sooner. As above, if not for the COVID-19 crisis, these same owners are likely to not have discovered the fraud for many more months.

Accounts Receivable Fraud

 With their businesses being closed, many business owners also began to review accounts receivable and make collection calls to customers.  By doing so several business owners discovered that they had been the victims of accounts receivable fraud.  These frauds took two forms:

• Open accounts receivable balances resulting from diverted payments: In two of my cases, the business owner learned, upon speaking with his customers about past due invoices, that the invoices had actually been paid. We obtained copies of the paid customer checks and determined that they had been deposited into third-party bank accounts (which we traced to accounting department employees in each company).
• Accounts receivable balances to which internal credits had been applied in order to eliminate outstanding balance amounts: In one case, the business owner, upon reviewing accounts receivable, noticed an unusual number of large internal credits having been posted to certain customer accounts. Upon speaking to these customers, the owner learned that the customers had actually paid the invoices to which the large internal credits had been applied.  As with the above cases, we obtained copies of the paid customer checks, and determined that they had been deposited into a bank account owned by the controller’s spouse.

In each of these cases, the fraud was only caught because of the owner’s review of outstanding accounts receivable balances.  If the owner had regularly reviewed accounts receivable reports (a procedure which takes a short time every month), the owner would have discovered the frauds much sooner.  And, if not for the COVID-19 crisis, these same owners are likely to not have discovered the fraud for many more months.

The above cases show that regular management review of bank statements, payroll reports and accounts receivable reports can help pick up existing frauds and provide a deterrent against potential future frauds.  We noted an unexpected positive from the COVID-19 crisis has been that many business owners were forced to perform these reviews as a result of their companies being closed, and they picked up on certain frauds much earlier than they normally would have.

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.