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More Than Just Tax Returns and Bank Statements Are Needed for Litigation and Valuation Engagements

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.

When I am approached by attorneys seeking my expert witness services for either a litigation or valuation engagement (and sometimes for both), I provide these attorneys with a list of information I will need in order to effectively provide my services.

However, several times a year, an attorney will tell me they have obtained copies of relevant tax returns and bank statements, but that because discovery is closed, they are unable to obtain the other information. This presents a potential problem because the information in tax returns and bank statements is often insufficient for me to perform the necessary comprehensive analysis. I will discuss the whys of this below.

Let’s start with tax returns. Business tax returns contain items which are total summaries of information presented. For example, Salaries and Wages are shown as a single line item. Such information is of no value when it is suspected that certain family members or significant others of shareholders are being paid salaries in excess of the actual services they provide to the business.

Another example is Purchases (under the category of Cost of Goods Sold). In a recent litigation matter, more detailed analysis of the Purchases revealed that the majority shareholders were recording all company credit card expenses as purchases. However, when counsel subpoenaed the credit card records, I found that the credit card expenses included many personal, non-business items including payment for the cost of a family member’s wedding, expensive prescription medications and purchases of recreational water vehicles for certain family members.

Similarly other categories of expenses could also contain personal, non-business items. When I have been involved in divorce cases, I often find that the spouse who owns the business will expense his/her personal divorce attorney through the business under the category of Legal and Professional Services.

One additional category of expense that might harbor personal, non-business items is Miscellaneous Expense. The category name itself does not provide any clue to the forensic accountant regarding the nature of the Miscellaneous Expense. In another recent litigation matter, I noted that the company routinely recorded over $100,000 per year as Miscellaneous Expense. When detailed financial records were provided to me, I was able to show that most of these expenses were for vacations, personal meals, tuition, and other non-business purposes.

One final area of concern is that the accountant preparing the company’s tax returns will likely have made various adjustments to amounts recorded on the business’s books in order to arrive at the amounts shown in the tax return. Without having access to this information, it may be difficult to determine the basis for these adjustments and how it impacts the net profits and value of the business.

Accordingly, without having access to detailed financial records supporting the line items in the tax return, the tax returns alone are often insufficient for comprehensive litigation and/or valuation analysis.

Bank statements contain deposit, withdrawal, account transfer, and debit card charge information as well as bank debits and credits but may be missing critical details. For example, most bank statements do not provide copies of paid checks.

Accordingly, if this information is not separately available, it is difficult if not impossible to determine the validity of checks paid. Also, many bank statements do not identify the bank account to which or from which transfers occurred. As a result, we cannot tell if funds were received or sent to business or personal bank accounts nor can we tell the purpose of such transactions.

Another area of concern is cash withdrawals – either via ATMs or at teller windows. We can see that cash was withdrawn, but the bank statement does not provide any detail regarding the business purpose of the cash withdrawal.  Bank deposits can also be missing critical details. We may be able to see the net total amount deposited, but without seeing deposit slips, we don’t know the actual amount of funds received.

Case in point: I was engaged by counsel to investigate improper transactions in the personal bank accounts of a client by the person holding power of attorney for those accounts. Because we were able to obtain detailed bank records over and above the bank statements themselves, we were able to identify over $300,000 in fraudulent transactions by the person holding the power of attorney. This included bank deposits wherein the power of attorney person would cash out several thousand dollars from each deposit and also would withdraw funds via counter checks.

Because the power of attorney person “reconciled” the bank accounts, the actual account holder was unaware of these transactions. Without access to the detailed supporting records, it is unlikely we would have been able to identify these fraudulent transactions.

While having tax returns and bank statements for litigation and business valuation matters may initially appear to be sufficient for comprehensive forensic analyses, the above discussion shows why it is critical to have additional detailed financial records to support the analyses.

If you would like to speak about these and any other issues with 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 to Look for to Avoid Accounts Receivable Fraud

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

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

Among the less-frequent but more-expensive frauds are those targeting Accounts Receivable.  In this column, I’ll discuss some of the Accounts Receivable-related frauds I have encountered.

Fraudsters can manipulate Accounts Receivable to conceal their diversion of payments made by customers.  A common element of these diversions is that the fraudster has set up separate bank accounts under his/her control, and that the bank account names are similar to that of the business being defrauded.

For example, if the business being defrauded is ABC Services Company, the fraudster may set up a business entitled “ABC Company”.  The fraudster can then deposit checks made payable to ABC Services Company by its customers.  Additionally, the fraudster can provide new wire instructions to ABC Services Company customers with the ABC Company name.

Because the names are so similar, most customers won’t notice the small difference in company name.  Additionally, banks allow leeway in processing checks made out to a similar name and may not notice the difference either. (For example, some customers may just make their checks out to “ABC.”)

If the perpetration of the fraud is based on diverting customer checks, the fraudster either needs to provide customers with a new mailing address (such as a P. O. Box under the fraudster’s control) or have the ability to open mail and remove the customer’s checks before entry into the company’s accounting system.  If the perpetration of the fraud is based on diverting customer wires, the fraudster needs the ability to “hide” receipt of the wires into the alternate bank account.

So, how can the fraudster manipulate the fact that payments have not been received by the company?  Here are a few ways:

  • If the fraudster has control of credit, collections, and bad-debt write-offs, the fraudster can just allow the unpaid customer invoices to sit on the system and get older and older. Eventually, the fraudster writes off the unpaid invoices to bad debts.
  • Depending on the type of accounting system in place, the fraudster can cancel the customer invoice. Of course, if the accounting system is tracking inventory, the cancellation would cause the system to show a higher amount of inventory than exists. However, if the accounting system does not track inventory or if the company is providing services instead of products, this won’t be a problem for the fraudster.
  • If the fraudster has the ability to post credits against a customer’s account, the fraudster can post a credit (for such things as sales discounts, sales adjustments, sales returns and allowances, etc.) against the invoice paid by the diverted check or wire to eliminate the invoice balance.

Because the above schemes are more complex than other fraud schemes (such as theft of cash or inventory), it is usually a higher-level accounting person (such as a Chief Financial Officer, Controller or Accounting Manager) who perpetrates this type of fraud.

So, how can a company defend itself against Accounts Receivable fraud.  Here are a few recommendations:

  • Management should require and review a regular monthly report of open invoices by age. Once an invoice reaches a certain age (for example 45 days past the billing date), a more senior employee outside the accounting department should be asking the customer why the invoice is unpaid and when it will be paid.
  • Management signoff should be required (and documented) for any credits posted to customer accounts, whether for sales discounts, sales adjustments, sales returns and allowances, etc.
  • Management should implement an invoice numbering system that allows for tracking of invoice numbers. It should require and review a regular monthly report of invoice numbers to include customer name and billing date. An explanation should be required for any gaps in invoice numbers.
  • Management (or a more senior employee outside of the accounting department) should periodically verify with each customer’s accounts payable department the check mailing addresses and wire instructions to make sure they have not been changed.

In cases where management lacks the time to perform the above tasks, or the company is too small to separate duties sufficiently, corporate leaders should consider engaging a reliable and impartial outside forensic accounting expert to perform these services.

If you would like to speak with such 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.

Ethical Approach by Superiors Sets the Proper ‘Tone at the Top’

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

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

In my previous discussions about the Fraud Triangle – the three factors that must be present for fraud to occur – one of those factors was Rationalization: The mental process a potential fraudster goes through to justify committing the fraud. Without being able to rationalize to oneself why it is OK to commit the fraud, a potential fraudster with Opportunity and Pressure – the other two key factors in the Fraud Triangle – is unlikely to proceed.

Tone at the Top – management’s attitude towards honesty and ethical behavior – can have a significant impact upon an employee’s likelihood to commit fraud. Employees typically take their cues from management. If management has clearly stated that fraud is unacceptable in the company’s written policies, in employee training, and in how management acts, then employees will be less likely to commit fraud.

However, regardless of what management says, if management shows a disdain for fighting fraud or plays “fast and loose” with rules and regulations, employees are more likely to rationalize it is OK for them to commit fraud.

Here are a few examples:

  • In a large real estate development company, the owner had his CFO rent, at the company’s expense, a luxury apartment for the owner’s girlfriend to use, and had the company acquire an expensive car for the girlfriend to drive. The girlfriend was neither an employee nor contractor of the company. When the CFO saw an opportunity to exploit a weakness in the company’s payroll software, he used the weakness to embezzle over $3 million from the company. When caught and questioned, he stated that since the owner of the company was cheating the government, he figured it would be okay to cheat the company.
  • Similarly, the owner of furniture store chain regularly bragged to his controller that he was having the company pay for an expensive home theater room and expensive bathroom hardware for his vacation home. He directed the controller to hide the expenses so that “the IRS won’t find out.” The controller began to have personal financial problems and started taking money from the company through various fraudulent schemes. When confronted by the owner, she threatened to turn him in to the IRS if he reported her. The owner allowed her to keep working for another year, and to keep taking funds through other schemes, and finally contacted his lawyer about how to manage this. If he had contacted us (or a good lawyer), we would have advised him he could have filed amended tax returns with the IRS and paid the additional taxes plus some interest and penalties, instead of allowing the controller to continue to commit fraud.
  • The owners of a consulting business regularly charged personal expenses, including vacations and personal purchases to their company credit card. They told the controller to record the personal expenses as business expenses. The controller ordered an additional company credit card in her name, charged her own personal purchases to the company credit card, and recorded the charges as the company’s business expenses. When we investigated and confronted her, she, too, stated that since the owners were “cheating” she figured it would be okay for her to cheat the company.
  • A construction company owner had his bookkeeper “adjust” employees’ work records to show fewer hours than they actually worked. He also regularly instructed his bookkeeper to not pay certain vendors until the vendors threatened to sue the company. He would then negotiate reductions in the vendors’ bills. The bookkeeper’s husband became ill and was laid off from his job. Because of the financial pressure, the bookkeeper began writing checks to herself to help her cover her expenses. She recorded the checks as having been paid to various vendors. When we investigated and confronted her, she told us that because she needed the money, and saw how the owner regularly defrauded others, she felt it was okay to defraud him since she was only taking monies to which he was not entitled.

The above examples illustrate how the Tone at the Top of each of these companies contributed to the fraudsters’ rationalization that it was okay for them to improperly take funds from the company. In essence, each fostered a culture of improper behavior, and each suffered because employees reflected the behavior of management.

If you would like to speak with such 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.

Beware the “Phisher-Men”

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.

The e-mails started coming in January. They seemed innocent enough – several people, who apparently had obtained my e-mail address from publicly available websites of tax preparers, were looking for a new tax accountant.  Each of the e-mails explained why they were seeking a new tax accountant, such as:

  • They had moved and their previous accountant could no longer service them; or
  • They (or their spouse) had previously prepared their own tax returns, but now their situation was too complex for them to handle this; or
  • Their previous accountant had either died or proven incompetent.

In each case, they had either enclosed an attachment or a link (apparently to a Google drive, a Dropbox account, a SecureFilePro account or other similar account) containing their previous year’s tax returns and other relevant information, and asked me to review these items and provide them with a quotation for my services.

The e-mails continued to come, averaging about one a day. By late March, the e-mail messages became more desperate – typically that they knew it was late in the tax season, but they had just gotten the necessary documents together, and they really hoped that I would take them on as a new client. Some even offered to pay a premium due to the lateness. Additionally, I began to receive e-mails in late March/early April, apparently from existing clients, who apologized for not getting their completed Tax Planner and other requested documents to me earlier and hoping that I could still complete their returns prior to April 15 with the attached items.

In all, I received over 75 such e-mails this tax season. You would think that I would be delighted to have obtained 75 new clients. But there was only one problem – none of them were real, and all of them were phishing attacks designed to get me to click on an attachment or link from an unknown person and likely download malware onto my system.

As a forensic accountant, I have learned to be skeptical of e-mails and texts from unknown individuals (or individuals who claim to be known to me but are not in any of my address books). In each case, further investigation confirmed my suspicions. For example:

Several e-mails came from a person – let’s say John Smith – but the e-mail address was for Mary Jones or some person other than John Smith;

  • Several e-mails came from people who needed taxes prepared for their business. But in each case, the business e-mail address turned out to be a business located on the other side of the U. S. or in Canada – highly unusual;
  • A number of e-mails had return e-mail addresses with foreign extensions, such as .rs (Serbia), .id (Indonesia), .jp (Japan), .ru (Russia) and .fr (France);
  • None of the e-mails addressed me specifically, instead they were all generic;
  • None of the e-mails were follow-ups of previous e-mails;
  • One day, two e-mails came in within 5 minutes of each other – from two entirely different people but with the exact same language in the e-mail, down to the same misspelled word;
  • The links were suspicious – in some cases, if I “moused” over the link, it revealed a different address from the link. In others, the link was misspelled – such as SecureitFilePro.com instead of SecureFilePro.com.

The fact that they are going after accountants points to how sophisticated phishing attacks are becoming. Of course, I still receive such attacks on my phone or personal email account (from a bank about an account problem or from Amazon about a package being held up or from some company confirming that they have charged my credit card for $849.52), but my experience points to how a business can also be the target of a phishing attack.

What is your business doing to protect itself from phishing and other attacks on your data? Do you have policies and procedures in place to have employees be on alert for suspicious emails and to definitely NOT click on attachments or links that have not been verified?  Are they also on alert for e-mails which appear to come from a company senior executive requesting wiring of funds or providing confidential information? If not, you should consider having a forensic accountant come into your business to help you protect your data from the
“Phisher-Men,”

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.

Family Inheritance Disputes Can Be Resolved by a Forensic Accountant

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

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

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

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

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

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

In many cases such as these, Anderson said, 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.

Forensic Accountants Can Uncover Fraudulent Conveyance Issues

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 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 to decrease the amount of his future divorce settlement.

The husband sold certain assets to his girlfriend at a bargain price and 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 need 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.

In Divorce-Related Valuations, Remember to Calculate Personal Good Will

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.

When determining the value of professional services businesses – such as law firms; medical practices; or accounting, engineering. or consulting operations – it is important, according to a noted Philadelphia forensic accountant and Certified Valuation Analyst, to consider the personal goodwill associated with the professional or business owner.

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, explains the Internal Revenue Service defines “goodwill” as “the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor.”  Recent court decisions, Anderson said, have recognized a distinction between the goodwill of a business itself and the goodwill attributable to the owners/professionals of that business. This second type is typically referred to as personal goodwill.

Personal goodwill differs from overall business goodwill in that personal goodwill represents the value stemming from an individual’s personal service to that business, and is an asset owned by the individual, not the business itself, said Anderson, a forensic accounting expert in Philadelphia with experience conducting business valuation services in the Delaware Valley  This value would encompass an individual’s professional reputation, personal relationships with customers or suppliers, technical expertise, or other distinctly personal abilities that provide economic benefit to a business.  Anderson said this economic benefit is more than any normal return earned by the company.

An example of this can be seen from one of past cases overseen by Anderson, a Certified Valuation Analyst. This situation involved the divorce of a specialist physician who had a reputation as being one of the top doctors in his field on the East Coast. As a result, he was sought out by patients up and down the East Coast – a far greater geographic area than most of the practice served. Because of the larger than normal number of patients that visited the practice to see him and because he performed more expensive and complex procedures than most of the other doctors in his practice, he generated considerably more income for the practice than any of the other doctors.

To calculate the personal goodwill of this physician, Anderson – principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation services in the Delaware Valley – obtained compensation and productivity data for the “typical” physician in his specialty with the same level of education and experience. He compared this to the husband’s actual earnings and productivity.

Anderson then capitalized the stream of income arising from differences in revenue generated minus the differences in compensation.  This capitalized amount was the personal goodwill associated with the husband. He subtracted the value of this personal goodwill from the value of the entire practice to determine the business value of the practice. It was this value that was used in the marital dissolution proceeding. In this case, the personal goodwill of the physician represented almost half of the value of the entire practice.

In another case involving a physician who did not possess such a significant reputation or level of expertise, Anderson calculated that the amount for personal goodwill was less than 5 percent of the value of the entire practice.

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.

Be On the Lookout for These Business Fraud Trends in 2025

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.

Each year, the Association of Certified Fraud Examiners (ACFE) publishes its list of the top fraud trends for the upcoming year. This year’s list includes the following:

  • A decrease in “Pig Butchering” Schemes – This type of fraud which arises from the loneliness of its victims (particularly seniors who have lost long time spouses/partners) and is a type of romance scam wherein the victim is persuaded to invest in sham cryptocurrency or sham digital assets.
    • Although, action by law enforcement as well as news reporting and awareness campaigns have helped reduce the number and duration of such scams. However, as long as lonely people seek solace through the Internet, criminals will continue to evolve their tactics for victimizing these people.
  • Other cyber-scams will continue to grow – Even though Pig Butchering is likely to decline, criminal organizations will continue to develop cyber-scams. Many of these scams will be aided by generative AI for such schemes as phishing, business e-mail compromises, account takeovers, impersonations, etc.
    • As with Pig Butchering, such scams will continue to use cryptocurrency and digital assets as an easy way to make money without leaving an auditable trail.
  • Synthetic identity fraud will increase – Various AI tools will continue to be used to create deepfakes as well as image, document and text generation of fraudulent persons or organizations. From such scams as the phone call from a relative claiming to have been arrested and needing money to post bail to companies receiving e-mails purportedly from a traveling executive requesting the immediate wiring of funds, criminals will continue to perpetuate frauds using synthetic identities.
    • These synthetic identities will also be used to fraudulently create new bank and financial accounts, take out loans, obtain government benefits and persuade companies to pay fraudulent invoices.
  • Financial institutions, money service businesses and telecommunications companies can expect increased blame – With the continuing increase in frauds, people are looking to point fingers at someone, and frequently they are pointed at those whose businesses have been involved to some extent as part of the frauds.
    • This means that financial institutions whose accounts have been used to facilitate funds transfers as well as telecommunications companies whose e-mails, chats, calls and messages have been used to target victims can expect to face increased pressure from governments, regulators, and victims to help prevent these frauds.
    • This tendency has been aided by the number of significant data breaches which have been publicized in the last few years. The result of this is that these companies will have to spend additional money on fraud prevention.

These fraud trends will require companies and professionals to develop a better understanding of how AI is being used as well as to develop new tools and technology to fight these frauds.

If you would like assistance fighting these and other types of business fraud, or if you require the services of a Certified Valuation Analyst, or business valuation expert 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, 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, a Certified Valuation Analyst, and a business valuation expert in Philadelphia.

Yes, A Business Can Have Value Even Without Profit

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.

Unearthing value in an unprofitable business might seem to make as much sense as wringing water out of a rock, but – by putting forensic accounting principles to work – a knowledgeable business valuation expert can do just that.

“Business valuators look to three primary methods for valuing a business: The Income Method, the Market Method, and the Asset Method,” said David Anderson, a Certified Valuation Analyst and principal 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.

“Most valuators primarily rely on the Income Method,” Anderson explained, “because a ‘hypothetical’ buyer is looking for value from the profits and cash flows of a business. It then makes sense that if a business isn’t making a profit, it would not be of any value to a potential buyer. That, however, is not necessarily true.”

How can this be? There are several scenarios under which an unprofitable business can have value.

  • The first is a startup business. Typically, the costs of starting up a business and ramping up its sales can be incurred over several years. During that time, the business usually operates at a loss. However, because of the future earnings potential, investors are willing to give a business value based on this potential.
    • Case in point: Just Eat Takeaway, a European-based online food ordering and delivery company that purchased Grubhub in 2021, lost $5.7 million in 2022 on revenues of $5.6 million, and also had losses in each of the last four years. This hasn’t stopped investors from putting hundreds of millions of dollars into the company. Today, it is publicly traded with a market cap of approximately $3 billion.
  • Similar to startup businesses are those that are in bankruptcy. Such companies typically have been unable to produce sufficient profits to cover operating costs and debt service (the cost of repaying debt with interest). Through the bankruptcy process, these companies are able to shed their debt which makes them attractive to potential investors who focus on the potential future profitability of the debt-free company.
    • Case in point: Core Scientific, which engages in digital currency mining, had been losing money almost each year, and filed for bankruptcy in December 2022. Although it emerged from bankruptcy in January 2024, it still traded publicly prior to that emergence with a market cap of over $100 million. Since emerging from bankruptcy, its market cap has grown to over $4 billion.
  • A third type of unprofitable business that can have value is one that has assets with a value that exceeds the liabilities and debts of the business. In this case, notes David Anderson & Associates, a business valuation expert in Philadelphia that also serves as a Philadelphia forensic accounting firm, a potential purchaser is less concerned with the profitability of the business it is acquiring, and is very interested in the assets of the business, and the value they will add to the purchaser’s business.
    • Case in point: Algonquin Power & Utilities Corp., a Canadian utility serving customers in both the United States and Canada had negative net income in 2023. Because its assets exceed its liabilities by approximately $7 billion, it had a market cap of over $4 billion at the end of 2023.

 

Unprofitable businesses can have value to the “hypothetical” and real buyer, concludes David Anderson, a business valuation expert in Philadelphia. In each of these scenarios, the purchaser sees the potential for value in the future operations of the business.

If you require the services of a Certified Valuation Analyst, or business valuation expert 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, 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, a Certified Valuation Analyst, and a business valuation expert in Philadelphia.

Some Ways Differing Standards, Premises of Value Can Affect 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.

Can a business be simultaneously worth $10 million, $60 million, $72 million, and $100 million?  It can when different standards of value and premises of value are used by the business valuator.

Recently, 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 – was asked to value a bio-technology business owned by the wife in a Pennsylvania divorce case.  In this column, he is using that case to illustrate the different values he could have been reached for her business.

There are three standards of value, Anderson said, that business valuators use:

Fair Market Value (FMV): This standard of value is required for Pennsylvania divorces.  The FMV is the price at which a business would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

Among the factors that must be considered by the business valuator employing the FMV standard is a discount for lack of marketability, recognizing there is usually no market for a privately held business.  Consequently, the seller will generally have to incur additional costs for a business broker, and the sale is likely to take an unknown period of time (during which the seller will not be able to earn a return on the eventual value paid).  In the above-mentioned divorce case, Anderson determined a fair market value of $60 million based upon a 30 percent discount for lack of marketability.

Fair Value (FV): This standard of value is required for New Jersey divorce cases and for minority shareholder oppression cases in Pennsylvania and New Jersey.  FV is essentially FMV but without any discounts.  Had Anderson valued the above-mentioned business in one of these instances, he said he would not have applied the 30 percent discount and would have determined the wife’s company to be worth $72 million.

Strategic or Investment Value (SV or IV): This value is that which would be paid by a buyer who perceived the purchase of this business would result in a synergistic benefit to the buyer.  For example, the buyer might see the purchase as filling in a gap in its product line; or adding customers who would make additional purchases of the buyer’s existing products; or eliminating a competitor, etc.

For these types of reasons, the buyer would be willing to pay more than the FMV of the company.  In the above-mentioned divorce case, three months after the date of Anderson’s valuation, a larger bio-technology company offered to pay $100 million for the wife’s company because it filled a gap in their product line.  Therefore, to this larger company, the wife’s business was worth $100 million instead of the $60 million FMV that Anderson determined.

In addition, Certified Valuation Analyst Anderson said, there are three primary premises of value for businesses.  Each of these can affect the value as determined under one of the three standards:

Book Value: This is the difference between the value of the assets and the value of the liabilities recorded on the books of a company.  It ignores the true market value of the assets shown on the books.  For example, in the above-mentioned divorce case, the value of the bio-technology patents and trademarks of the business were recorded at cost less amortization of that cost.  Their book value ignored the actual higher market value of the patents and trademarks themselves.

Additionally, the business’s technology equipment was recorded on its books at cost less depreciation.  Again, this ignored the active resale market and values the company could have realized by selling the equipment.  Book value usually results in a low valuation for a company.  In the above-mentioned case, the book value of the business was about $10 million.  Despite the low value realized by valuing a business at its book value, many buy-sell agreements, shareholder agreements, and partnership agreements contain clauses basing the sales value of shares on book value.  This is primarily because the parties involved in the transaction and their legal advisers are not familiar with business valuation principles.

Going Concern Value: Most business valuations are based upon the assumption the business will continue to operate after the hypothetical sale.  Hence, the business’s value will be based upon the assumption the derived value of the business (as determined under one or more of the Income, Market and Cost methods) will be greater than the book value of the business.  In the above-mentioned divorce case, each of the values reached under the three premises of value was based upon the going concern premise of value.

Liquidation Value: This value refers to the net amount that would be expected to be realized if the business was terminated and its assets were sold on a piece-meal basis either through an orderly or forced sale.  This would clearly have resulted in a very low value for the company in the above-mentioned divorce case (likely less than $10 million) because of the very low prices the company would have realized for the quick piece-meal sale of its assets.

The above explanation provided by Anderson shows how a company can simultaneously have a value of $10 million, $60 million, $72 million, and $100 million.  It is therefore critically important, he emphasized, that the business valuator and the parties involved understand which standards and premises of value should be used in the valuation process.

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.

David Anderson & Associates wishes you a safe and pleasant holiday season. Our next blog will be posted on Monday, January 6, 2025.

Retain Forensic Accountants Early for More Effective Litigation Support

Posted by & filed under Blog Articles, Company News, Expert Witness, Forensic Accounting, 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.

A forensic accounting expert in Philadelphia or elsewhere in the U.S. often requires very specific, detailed financial documents for analysis before providing litigation support services and expert witness testimony during legal proceedings. The effectiveness of such a strategy, however, can be compromised if that expert is engaged late in the process.

“On some occasions, I have been brought on board after the legal team requested and received insufficient financial data from the opposition.,” 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.

“When I was retained late in discovery or even after discovery has closed,” he said, “I learned the only financial records counsel requested were income tax returns and bank statements. The attorneys believed those documents contained sufficient financial information for my analyses and reports. Unfortunately, they did not.”

Anderson, whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes litigation support services and expert witness testimony in Philadelphia, notes that income tax returns contain only summary level information. For example, he said, sales revenue is shown as a single amount. No detail is provided concerning the dollar amounts or numbers of specific products or services sold.

“In one of my cases, counsel wanted to know how much was being paid to non-officer family members,” explained Anderson, a Philadelphia forensic accountant. “But counsel had obtained only the income tax return, which merely showed total wages and salaries paid to all employees, not to each individual. The tax return could not be used to answer the question.” Anderson said the attorney could have overcome this hurdle if detailed company payroll information had been requested during discovery.

In another case, explained Anderson, a forensic accounting expert in Philadelphia, counsel suspected that the majority shareholders were running personal expenses through the company – such as auto expenses, travel, meals, entertainment, etc. But again, because the income tax returns showed only summary level information, Anderson was unable to determine whether any of the expenses were of a personal nature.

“Had counsel asked for detailed general ledger information and copies of invoices supporting all expenses, I would have had the necessary information to conduct my forensic examination,” explained Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley.

Bank statements also are frequently requested in discovery, but they too lack detailed information. The Philadelphia forensic accountant said bank statements seldom show deposit detail – what checks, cash and/or incoming wire transfers made up each deposit and from where the checks or incoming wire transfers came.

In addition, bank statements do not provide detail regarding checks written against the account – only check number, amount and date charged against the account, said Anderson, whose Philadelphia forensic accounting firm provides litigation support services and expert witness testimony in Philadelphia. Bank statements may show debits or credits posted against the account as well as cash withdrawals and transfers to/from the account, but with little detail.

Generally, the only real details contained in bank statements are for outgoing wires (showing to whom the wire was sent), for debit card purchases, and for recurring ACH (automated clearinghouse) payments, said Anderson, a Philadelphia forensic accountant.

“Attorneys can overcome bank statement shortcomings,” he said, “by requesting copies of all deposited items, including deposit slips; copies of all cancelled checks; copies of all documents supporting debits, credits, transfers to/from and withdrawals from the bank account; detailed general ledger information; and copies of invoices supporting each cancelled check.”

However, Anderson cautions, each case is different and carries with it its own unique set of circumstances. The best way an attorney can be sure he or she has requested the financial documentation necessary to generate the reports that will support the case is to retain the services of a forensic accounting expert early in the discovery process.

If you require the services of a forensic accounting expert in Philadelphia and the Delaware Valley for litigation support or expert witness testimony, 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.

Cash Transactions Can Complicate a Business Valuation During a Divorce

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 forensic accounting services including fraud investigation and fraud deterrence programs in Philadelphia and the Delaware Valley.

The decision to end a marriage is a messy affair that becomes undoubtedly more complicated when the division of property includes a business that must be valued; the situation becomes even trickier when claims of unreported cash transactions taking place in that business are involved.

In these cases, determining a fair value for the business is best left in the hands of a forensic accounting expert who has experience serving as a marital dissolution accountant and a business valuation expert.

“The issues that have to be considered in a business valuation during divorce proceedings are complex and numerous,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley. Such issues can be particularly thorny, he emphasized, when the business in question may or may not have had unreported cash sales.

The overall valuation process, he said, “usually begins in an educational vein as the forensic accountant explains to the spouses and their attorneys how a forensic accounting expert addresses valuation issues in a divorce.”

One key business valuation issue which arises repeatedly in marital dissolutions, said Anderson, a Certified Valuation Analyst and marital dissolution accountant in Philadelphia and the Delaware Valley is the presence and impact of unreported cash sales.

During divorce proceedings, an out-spouse often will tell the divorce accountant the in-spouse’s business has unreported cash sales, explained Anderson, a divorce accountant and business valuation expert who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The forensic accountant must then determine if the claim is true, and, if so, uncover the amount of the unreported sales.

This task is accomplished by performing a variety of analyses, including:

  • Investigating deposits into the in-spouse’s bank and investment accounts to determine how many of the deposits were cash;
  • Analyzing the gross margin of the business (sales less the cost of sales) and comparing that gross margin to industry averages; and
  • Searching for missing invoice or receipt numbers (very often the in-spouse will complete an invoice or receipt for a cash sale, but not record it on the books of the business).

Other specific analyses also may be required depending on the type of business, said Anderson, a Certified Valuation Analyst forensic accounting expert in Philadelphia and the Delaware Valley. These analyses will allow a forensic accountant to confirm or deny the out-spouse’s claim, and, if confirmed, estimate the amount of the unrecorded cash sales that need to be added to the business’ revenues, he said.

“I once had a case in which the out-spouse told me her husband kept cash from unrecorded sales in his dresser at home,” recalled Anderson, a business valuation expert whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley. “I actually went to the home and counted the cash in the dresser as part of my forensic investigation.”

If you need a marital dissolution accountant 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 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 served as a divorce accountant or marital dissolution accountant in Philadelphia and the Delaware Valley.

Forensic Accountants Make Cash Transaction Fraud More Difficult

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

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

There are several reasons why the owner or principal of a business – typically a retail business – that receives payment in cash for a significant amount of sales might try to hide some or all such cash by pocketing it and not entering the sales into their books and records. These primary motivations are:

  • To pay less in taxes; and/or
  • To show reduced cash flow, profits, and business value to divorcing spouses or to shareholders who are not employed in the business (often called non-operating shareholders).

As a firm that offers forensic accounting services in Philadelphia, David Anderson & Associates is often called in to analyze the books, records, and operations of such businesses to determine whether – and, if so, how much – cash sales are not being reported. As part of my fraud investigation, and as a Certified Fraud Examiner, our Philadelphia forensic accounting firm employs many of the same fraud deterrence techniques as the IRS and other taxing authorities to identify non-reported cash sales.

Here is a sampling of some of the techniques that forensic accountants use:

  • Analysis of tax returns and financial statements over a multi-year period: One form of analysis is to compare key operating data over a multi-year period and look for unusual trends. For example, in the case of a retail gardening business, I noted the business had been averaging about $600,000 to $800,000 sales per year with a slight upward trend until the year immediately before the owner commenced divorce proceedings. In that year, sales dropped to about $450,000. The next year, sales recovered to around $600,000, and the following year sales jumped to over $700,000. This was a potential indicator of unreported cash sales.
  • Analysis of tax returns and financial statements in comparison to industry statistics: Forensic accountants have access to industry statistics that can be compared to the financial information reported on a company’s tax returns and financial statements. For example, a pizza restaurant with between $3 million and $5 million in sales will typically have a gross profit in the range of 65 percent to 72 percent of sales. If the pizza restaurant I am investigating has been averaging a gross profit in the range of only 45 percent to 50 percent, this can be a strong indicator of unreported cash sales.
  • Comparison of inventory records with sales records: In the case of a retail beauty products business, I analyzed the inventory records of certain high-value beauty products – including expensive perfumes – and compared those records to the recorded sales of those high-value beauty products. I was only able to trace about 50 percent of the inventory reduction to recorded sales. The owner was unable to explain the other 50 percent inventory reduction. Her initial claim was that her staff must have stolen the other 50 percent, but she then was unable to explain how the staff members obtained access to the locked cage where the products were stored after I determined she was the only one with a key to the locked cage.
  • Analysis of employee time records versus recorded sales: In analyzing the sales of a catering business, I noted multiple instances in which employees were paid for working certain catered events for which no sales were recorded. I then contacted each of the customers for these events and learned that each had paid cash. In this case, I could obtain the actual amount paid from each customer.

As a Certified Fraud Examiner offering forensic accounting services in Philadelphia, some of the other fraud deterrence techniques I have used include observation – in which I have someone observe the number of customers and/or product deliveries that occur during a specific length of time and then compare that information with the number of sales recorded in the company’s accounting system – and interviews with present and former employees, although I have noted that interviews with present employees can be very sensitive because such employees may not want to cooperate for fear of losing their jobs.

Of course, while such techniques can be a strong indicator of unreported cash sales, forensic accountants still must perform other procedures and analyses to validate the amount of such unreported cash sales.  But in the end, if the owner is hiding cash sales, a forensic accountant who also is a Certified Fraud Examiner and is conducting a fraud investigation is very likely to find them.

If you require 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 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.