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Forensic Accountants Can Play Key Role in Resolving Family Inheritance Disputes

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.”

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.

Part Five: Taking a Closer Look at Business Valuation

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

David Anderson is 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.

 This is the last of a five-part series in which Anderson reviews the basics of business valuation.

The process of determining the worth of a business is a complicated one. A business valuation expert must undertake a series of preliminary steps to set the groundwork and then consider the value of the business from three very distinct approaches before forming a professional opinion as to the initial value.  With this process completed, there remains just one final step: considering potential adjustments to the initial value.

“The process is complex,” said David Anderson, 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.  “There are myriad factors that must be considered and weighed by the valuator to reach the point of establishing initial value.  But that initial value still is not accurate until possible adjustments to the value are considered.”

Anderson said business valuation experts must consider four types of potential adjustments:

  • Non-operating asset adjustments
  • Control adjustments
  • Marketability adjustments
  • Other adjustments

Non-operating asset adjustments involve assets and associated liabilities that are not part of the normal operations of a business, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley. As an example, Anderson explained, a food processing company may own a collection of artwork that is not related to its business operations.  Or, a computer consulting firm may own an office building (with a mortgage) that it does not use but leases out to other companies.

Valuators may remove these assets and liabilities from consideration during the business valuation process to assess more accurately the worth of the actual business operations, Anderson said. But once the initial value of the business has been established, these assets and liabilities must be considered because they are owned by the business and therefore affect its overall value.

Control adjustments may be warranted if a business valuation expert is considering the value of some, but not all, of the shares of a business, Anderson said. If the shares being valued would give a buyer control of the business, they carry a higher value than other shares.

For example, Anderson said, a buyer would have control of the company if either the shares are more than 50 percent of the total or they give the buyer more than 50 percent of the total voting rights (assuming a simple majority is all that is required). However, if the shares represent a “minority interest” in the company, the buyer would not have control or significant influence in company operations.  Under that circumstance, Anderson said, the buyer is likely to demand a price adjustment known as a discount for lack of control.  The specific discount (usually a percentage of the price per share) is typically based on data from sales of shares in publicly held corporations.

Marketability adjustments come into play when privately held businesses are being valued, Anderson said. Typically, there are no readily available public markets for privately held businesses.  As a result, it is more difficult to sell shares in a privately held business because it likely will take longer and cost more to find a buyer.

A buyer of shares in a privately held business, therefore, is likely to demand a price discount known as a discount for lack of marketability. The specific discount (usually expressed as a percentage of the value of the business or of the price per share) is typically based on the valuation method(s) selected by the business valuation expert, information regarding marketability discounts of comparable companies, and the particular facts and circumstances of the business being valued.

Other adjustments the business valuation expert must consider determining if they are applicable include:

  • Built-in gains discount
  • Blockage discount
  • Key person discount (also known as personal goodwill discount)
  • Restrictive agreement discount
  • Investment company discount
  • Lack of voting rights discount

Once all potential adjustments have been applied as necessary, the business valuation expert can finally arrive at a final value for the business.

“As you can see, the process of valuing a business is quite involved,” Anderson said. “When a business valuation is made for tax, divorce or litigation purposes, the best way to properly protect the rights of the persons for whom the valuation is being performed is to have the valuation conducted by a qualified, experienced business valuation expert who follows professional business valuation standards.”

If you require the services of a 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.

Part Four: Taking a Closer Look at Business Valuation

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

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

This is the fourth of a five-part series in which Anderson reviews the basics of business valuation.

Business valuation experts must undertake a series of preliminary steps to set the groundwork for determining the worth of a business.  Once those steps are complete, valuators must consider three very distinct approaches to valuing a business.

In earlier postings, David Anderson, principal of David Anderson & Associates, explained the first three steps of the business valuation process — determining the standard of value, deciding on the premise of value, and normalizing financial statements.

In this fourth installment of the series, Anderson reviews the three most-commonly-used approaches to valuing a business: The Income Approach, the Asset-based Approach, and the Market Approach.

“Professional business valuators are required to consider all three approaches,” said Anderson, a business valuation expert in Philadelphia and the Delaware Valley.  “In the end, a business valuation expert must use his or her judgment to determine the best approach or combination of approaches to arrive at a business valuation that is as fair and accurate as possible.”

The most common approaches a business valuation expert will consider are the three noted below:

  • Income Approach values a business by using one or more methods to convert anticipated economic benefits (earnings or cash flow) into a single present amount. There are two primary methods under this approach:
    • Capitalization of Earnings/Cash Flows Method, which is used when there has been a steady level of historical growth, and the
    • Discounted Earnings/Cash Flow Method, which is used when there have been fluctuations in historical growth and when the company can reasonably project earnings for the next five or more years.
  • Asset-based Approach values a business by calculating the value of net assets, which is the difference between total assets and total liabilities. There also are two primary methods under this approach:
    • The Book Value Method, which calculates the net asset value as shown on the books of the business – typically at historical cost, and the
    • Adjusted Net Asset Method, which adjusts the value of assets and liabilities to the fair market value as of the valuation date.
  • Market Approach values a business by comparing it to sales of similar businesses. There are four primary methods under the Market Approach:
    • Analyze transactions of comparable publicly held companies;
    • Analyze transactions of comparable privately held companies;
    • Analyze prior transactions involving shares of the company itself, and lastly,
    • Analyze the ability of the company to pay shareholder dividends and compare that to dividends paid by comparable companies.

“The specific methods used depends on the facts and circumstances surrounding the business being valued,” said Anderson, whose company – David Anderson & Associates – is a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley.

“For example,” Anderson said, “if there are no comparable market transactions or an insufficient number to be meaningful, the Market Approach may not be useful.”

Once the value of the business has been set under each of the approaches, the business valuation expert must determine whether one of the values is the best representation of the true value of the business or if a weighted blend of the values provides a more accurate final business value, he said.

Anderson gives the example of valuing a startup business with little profitability.  The Income Approach might yield a very low value because the startup hasn’t had time to show historical growth, while the Market Approach might result in a considerably higher value based on the sales of comparable businesses.

“Under this scenario, some valuators would select the Market Approach as being most indicative of value and others might choose a blend of the Income Approach and Market Approach with a higher weight on the Market Approach,” he explained.  “It all comes down to the professional judgment of the business valuator, based on his or her experience and knowledge about the business being valued.”

At this point, the complex process of business valuation is nearing an end, but there is still one major step remaining before a final determination on the worth of a business can be made: Consideration of certain adjustments for non-operating assets as well as control, marketability, and other adjustments.

Anderson will explore these adjustments in the next and final installment of “Taking a Closer Look at Business Valuation.”

If you require the services of a 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.

Part Three: Taking a Closer Look at Business Valuation

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

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

 This is the third of a five-part series in which Anderson reviews the basics of business valuation.

Determining the worth of your business can be quite complicated. Before the actual business valuation can begin, several steps must be taken.

“The value of a business often depends on the earnings it generates,” said David Anderson, a business valuation expert in Philadelphia and the Delaware Valley and principal of David Anderson & Associates.

“Small business owners” he said, “have a fair amount of latitude in choosing how they report the financial operations of their business, often selecting alternative accounting practices that lessen their income tax obligation.”

In two earlier posts, Anderson explained the first two steps of the business valuation process — determining the standard of value and deciding on the premise of value.  This third in a series of articles examines the steps a business valuation expert sometimes must take to bring a company’s financial statement on an equal footing.

Because of these alternative practices, he explained, a business valuation expert frequently needs to adjust the historical financial statements before implementing selected business valuation approaches and methods.  Making these adjustments is often referred to as “normalizing” the financial statements.

“Normalizing the financial statements should provide the valuator with a more economically realistic picture of the value of the assets and the financial operating results of the business,” Anderson explained.

These financial statement adjustments represent estimates and often fall into one of the three categories as noted below:

  • Comparability adjustments are intended to make the company more comparable to guideline companies or companies within the industry group that were used in comparative ratio analyses.
    • For example, if the company being evaluated used the last in, first out (“LIFO”) inventory method of accounting while the industry group uses the first in, first out (“FIFO”) inventory method, this adjustment would give a valuator a clearer picture of how the company’s financial statement compares to others in its industry.
  • Non-operating or non-recurring adjustments are removed from the income statement because they are either unrelated to the business operations or unlikely to recur in the future. Non-operating assets or liabilities are elements of the balance sheet that are removed so a more appropriate value of the operating company may be determined. These assets or liabilities are then added or subtracted to the resulting computed value to arrive at the total equity value of the company.
    • An example of these types of adjustments would be the costs associated with discontinuing a portion of the business.
  • Discretionary adjustments are those expenses that are usually under the sole discretion of management, or more typically, the owners of the business. Often these expenses are between the company and the owners of the company (i.e., related party transactions). These adjustments are most appropriately made when valuing a controlling interest in the company and they generally represent the difference between the actual recorded book expense and the expense that would be incurred if transacted between the company and an independent third party.
    • Examples of these types of adjustments include:
      • Officer’s and owner’s compensation,
      • Owner’s perquisites,
      • Entertainment expenses,
      • Automobile expenses (e.g., personal use of company cars),
      • Compensation to family members, and other related party transactions.

Once these three types of “normalization” adjustments have been made to the financial statements, Anderson said, the business valuation expert can begin to analyze the value of the business under each of the different valuation approaches and methods.

In upcoming weeks, Anderson will continue to explore the process business valuation experts undergo to determine the worth of a business.

If you require the services of a 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.

Part Two: Taking a Closer Look at Business Valuation

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

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

This is the second of a five-part series in which Anderson reviews the basics of business valuation.

Knowing how to calculate a value of your business that is fair and accurate is a skill with which every corporate principal should be familiar.

“You don’t want to rely on estimates, gut instinct, or rumored calculation methods to determine business value,” said David Anderson, 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. “When you need to know the true worth of your business, you need to understand the process. And you need the expertise of a highly qualified business valuation expert.”

Earlier in this five-part blog series, Anderson covered the first step of business valuation: Determining the standard of value.

“The second step in ascertaining a company’s worth,” he said, “is to decide on the premise of value.”

The premise of value is the type of transactional circumstances underlying the business or property being valued, Anderson said, adding that there are four premises of value:

  • Going Concern Value
  • Book Value
  • Liquidation Value
  • Replacement Value.

Going Concern Value is the most frequently used premise of value. This method assumes the business is operating and producing revenues . . . and will continue to do so.

Book Value is the difference between a company’s total assets that have been adjusted for depreciation, depletion, and amortization and the amount of total liabilities as listed on the balance sheet. Assets such as real estate, collectibles, and artwork are recorded at historical cost and therefore may be undervalued on the balance sheet. Intangible assets such as patents, copyrights and trademarks also may be undervalued.

Interestingly, many buy-sell and shareholder agreements use Book Value to establish share value when a shareholder wishes to sell shares back to the company or when shares are purchased after a shareholder is terminated or dies. In these cases, disputes often arise when the Book Value of the shares is significantly less than the Going Concern value.

Liquidation Value is the net amount realized if the business is terminated and the assets are sold individually. Liquidation Value typically results in the lowest of the premises of value, Anderson said.

Replacement Value generally is used for specific assets and refers to the current cost of property equivalent to the property being valued. Replacement Value is often used in insurance contracts for calculations involving real estate or tangible personal property and in construction or manufacturing agreements.

“Determining these two crucial steps – the standard of value and the premise of value – will allow a business valuation expert to select the appropriate valuation methodology to decide your company’s worth,” Anderson said.

Over the next several weeks, Anderson will post additional articles on the specific methods business valuation experts use to establish value, the effect non-operating assets have on business valuation and discounts for lack of control and lack of marketability.

 Coming up next in Part Three: An examination of the steps a business valuation expert sometimes must take to bring a company’s financial statement on an equal footing.

If you require the services of a 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.

Part One: Taking a Closer Look at Business Valuation

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

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

This is the first of a five-part series in which Anderson reviews the basics of business valuation.

Do you know what your business is worth? If not, you probably should.

There are many reasons why it’s important to know. These can range from business reasons, such as calculations related to any acquisitions or mergers, to personal issues of estate planning and resolution to marriage dissolution. When the time comes, understanding how a fair and accurate business valuation is determined is of paramount importance.

“The first step in valuing a business is to determine the standard of value,” said David Anderson, 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.

“This is the type of value that is being requested for the business,” he continued. “The three most common standards of value are fair market value, fair value and strategic/investment value.”

The IRS defines fair market value as “The price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Fair market value is the most widely recognized and accepted standard of value, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley.  Fair market value is used to establish value for all Federal tax matters, including estate tax, gift tax and income tax, he said.

This standard also is used for many purchase, sale, and merger transactions; for buy-sell agreements; for regulatory valuations; and for most litigation matters, including partner/shareholder disputes, divorces, and economic damage cases. Fair market value takes into consideration discounts for lack of control and lack of marketability.

Fair value generally is defined as fair market value without considering discounts, Anderson said. Fair value principally is used to value the shares held by a company owner with a minority interest when that person believes he is being forced to receive less than adequate compensation for his shares. Fair value is the standard of value used in divorce cases in New Jersey. Additionally, fair value with a discount for lack of marketability is used in divorce cases in New York.

Strategic/investment value is the value to a particular investor based on individual requirements and expectations, according to Anderson. This standard most often is used for a purchase, sale, or merger in which the buyer expects to realize certain synergies with the seller’s business. Strategic/investment value typically is higher than fair market value because of these synergies.

“The standard of value is one of the key components used to determine the valuation methodology to be employed and, ultimately, the business valuation expert’s decision on the value of your business,” Anderson said.

Over the next several weeks, Anderson will post additional articles on the specific methods business valuation experts use to determine value, the effect non-operating assets have on business valuation and discounts for lack of control and lack of marketability.

Up next in “Part Two: Taking a Closer Look at Business Valuation:” Determining the premise of value, the type of transactional circumstances that underlie the business or property being valued.

If you require the services of a 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.

Despite Being Legal, Cryptocurrency Transactions Can Still Carry Risk

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 fraud investigation and fraud deterrence programs in Philadelphia and the Delaware Valley.

In my previous blogs on cryptocurrency, I discussed the risks involved with Bitcoin and other cryptocurrencies as well as the increased risks of hacking attacks against digital wallets, private keys, and exchanges.

In the past few years, cryptocurrencies have become more popular than ever.  In fact, as of today, cryptocurrency transactions are considered legal in most countries in the world.  Additionally, the financial community has gotten on board with cryptocurrencies.  Cryptocurrencies can even be used for retirement investments including IRAs, Roth IRAs, and certain 401-Ks.

Currently, the American Red Cross, UNICEF, the Rainforest Foundation, and the UN World Food Program accept donations in cryptocurrency.  Other charities also are exploring accepting cryptocurrency donations.

Notwithstanding the above, risks still abound with cryptocurrencies.  On November 11, 2022, FTX, a prominent cryptocurrency exchange, filed for bankruptcy.  This, in turn, has led BlockFi, a lender of cryptocurrency-backed loans, to also file for bankruptcy.  These filings have devastated the cryptocurrency markets.  Additionally, these filings have led to increased scrutiny of cryptocurrencies by Congress and US regulatory agencies.  This scrutiny is likely to lead to further regulations.

Other risks include:

  • Cryptocurrencies are still subject to extreme price swings, making them risky investments. For example, this year, Bitcoin’s price has fallen from $46,310 on January 1, 2022, to $16,928 as of December 1, 2022 (a loss of 63.4 percent in value).  Ethereum, another popular cryptocurrency has fallen from $3,689 on January 1, 2022, to $1,276 as of December 1, 2022 (a loss of 65.4 percent).
  • Digital wallets, private keys, and exchanges are still subject to hacking attacks. Binance, another cryptocurrency exchange, just announced it is freezing withdrawals of certain cryptocurrencies because of suspected hacking.
  • Commissions and fees for investing in and cashing out from cryptocurrencies are still significant. Additionally, there may be withdrawal limits for cashing out.

Gains and losses from cryptocurrency transactions must be reported on your Federal and other income tax returns.  Additionally, the Infrastructure Investment and Jobs Act, passed in November 2021, added certain reporting requirements.  Beginning in 2023, cryptocurrency exchanges and other transaction facilitators will have to track and report on their customer’s cryptocurrency transactions (similar to what your mutual funds and brokers/investment advisers currently do for securities transactions).

Also, starting in 2024, anyone receiving more than $10,000 in cryptocurrency for a product or service will have to report identifying details about the customer (including social security number) just as they currently are required to do for cash transactions over $10,000.  A check box has also been added to Federal income tax returns requiring the taxpayer to declare whether they’ve transacted or had a financial interest in a virtual currency.

Finally, Congress and the Biden administration have been examining the possibility of closing the “wash sale” loophole for cryptocurrencies which currently allows a taxpayer to take a write-off of a loss even if they buy another cryptocurrency within 30 days of a sale.

I will continue to monitor cryptocurrencies and keep you updated.

If you require any 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.

Business Valuation During a Divorce Can Be Complicated by Cash Transactions

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.

Independent Expert Witness Puts Education, Experience on Your Side

Posted by & filed under Blog Articles, Business Valuation, Company News, Expert Witness, 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.

Expert witnesses who are called to testify in litigation are not – contrary to what some people believe – supposed to be advocates for the side that hired them but should serve as independent experts applying their education and experience to the matter.

It should, instead, be the client’s attorney who serves as the advocate for his or her client, 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.

Forensic accountants, business valuators, and CPAs engaged as expert witnesses are subject to professional standards that require them to maintain their independence (there are some exceptions, such as those related to preparation of tax returns). Additionally, expert witnesses also may be required by certain government regulations to maintain their independence.

In discussing independence, Anderson, a Certified Fraud Examiner who recommends every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley, said the professions identify two sub-categories of independence:

  • Independence in fact, and
  • Independence in appearance.

Independence in fact refers to the expert’s mental attitude regarding the matter. It most often reveals itself in the expert’s reports and/or testimony. It should not matter which side has engaged the expert. The expert’s conclusions should be the same (subject to certain assumptions).

However, the expert’s independence could be called into question if:

  • The expert has made certain assumptions (at either the request of the client or the attorney) that clearly are unreasonable, and which benefit the side that engaged him or her. For example, if the expert has assumed a mature business would have been able to grow its revenues at a 20 percent rate solely from its existing products for each of the next 10 years or has assumed employees would accept a 50 percent wage decrease for the next ten years.
  • The expert asserts, without providing any corroborating evidence, certain questionable actions of the side that engaged him or her were reasonable. For example, testifying that certain funds improperly taken by an employee without authorization were advances on his or her inheritance because the employee expected to eventually inherit the business.

Independence in appearance, said Certified Fraud Examiner Anderson, refers to how an uninterested third party might view the expert’s independence considering certain facts. For example:

  • Does the expert have a financial stake in the side that engaged him or her?
  • Does the expert have a familial relationship with anyone on the side that engaged him or her?
  • Is the expert currently performing work for the attorney on another matter or does the expert have an ongoing working relationship with client that engaged him or her?
  • Is the expert owed money by the side that engaged him or her? If so, is it possible that the expert’s report or testimony could be affected by the potential of non-payment in the event the client does not like his or her conclusions or testimony? This is one of the reasons Anderson said he requires upfront retainers and payment in full prior to releasing a draft report or testifying.
  • Does the expert have, or has the expert had, a past adverse relationship with one or more of the parties or attorneys on the opposing side?
  • Has the expert agreed to make certain changes to his or her report or proposed testimony due to pressure or specific direction from either the attorney or the client? This also touches on the concept of making unreasonable assumptions. A recent prominent Federal Tax Court case – Exelon Corp v. Commissioner – was lost, in part, to the expert doing just that.
  • Is most of the expert’s work performed for either plaintiffs or defendants – the so-called “hired gun” – and not a balance of both?

Independence is a critical aspect of being an expert witness. The decider of fact – whether a judge, jury, or arbitrator – often will consider the expert’s independence in deciding on the credibility of the expert. As a result, expert witnesses must be independent in both fact and appearance.

If you engage in, or are anticipating, a legal proceeding, either as a plaintiff or defendant, make sure you have an expert witness who truly is independent. David Anderson is a Certified Fraud Examiner with experience providing forensic accounting services in Philadelphia and the Delaware Valley.

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.

What is a Financial Neutral and Why Might You Need One

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.

You may have heard the term “Financial Neutral” used regarding litigation or alternate dispute resolution. This blog discusses Financial Neutrals and the services they provide.

A Financial Neutral is an independent financial expert who works with both parties in either litigation or an alternate dispute resolution. A Financial Neutral can either be appointed by the court or by an arbitrator, or can be jointly engaged by the parties involved in either mediation or collaborative dispute resolution.

I have been engaged as a Financial Neutral in mediation and collaborative dispute resolution to perform such services as:

  • Business valuation;
  • Analysis of a couple’s assets and debts for equitable distribution in a divorce;
  • Analysis of each spouse’s income for support purposes in a divorce.

Additionally, I have been court-appointed to investigate suspected fraud and to calculate economic damages due to such fraud.

Other potential Financial Neutral appointments include the following services:

  • Analysis of contract and other business disputes, including calculation of financial damages;
  • Analysis of trustee’s or executor’s accounting, and investigation of any improprieties identified;
  • Analysis of investment returns – both past and projected;
  • Appraisal of real estate, artwork, vehicles, and other assets (this usually involves an expert with specific training and experience in appraising assets).

Because a Financial Neutral is independent, the parties not only save the cost of having to engage competing financial experts, but also have confidence in the transparency of the Financial Neutral’s work. Additionally, particularly in mediation and collaborative dispute resolution, the Financial Neutral can explain his/her analysis in detail to the parties involved.

If you could use the services of a Financial Neutral, 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 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.

Think Cash Transaction Fraud is Easy? Forensic Accountants Make It 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.

Forensic Accounting Tips to Help Avoid Costly Revenue Recognition 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.

As noted in my recent six-part series on the state of fraud in 2022 based on the Association of Certified Fraud Examiners’ (ACFE) “Occupational Fraud 2022 – A Report to the Nations,” most fraud losses come from financial statement fraud. One of the most significant causes of such fraud is the overstatement of revenues or revenue recognition fraud.

Recently, the AICPA (Association of International Certified Professional Accountants, formerly American Institute of Certified Professional Accountants) published an article discussing types of revenue recognition fraud and red flags which would identify potential revenue recognition fraud. This blog will discuss key takeaways from that article.

The article identified several types of revenue recognition fraud. These included:

  • Improper timing: This type of revenue recognition fraud usually occurs when a company prematurely records revenues to create the appearance that it is hitting revenue targets (announced either internally or publicly) and therefore making its financial statements appear stronger than they really are. Recent SEC actions against Under Armor and Belden (as well as Sunbeam in the 1990s) were based on the use of improper timing.
  • Delayed revenue recognition: This less-common fraud scheme is the opposite of improper timing. This type of revenue recognition fraud occurs when a company, already having met certain revenue targets, improperly shifts revenue to the future to ensure revenue targets are met in upcoming time periods. One key result of such revenue shifting is to increase executive bonuses based upon meeting certain revenue targets. This type of revenue recognition fraud was the basis for certain recent SEC actions against American Rental Associates.
  • Fictitious revenue: This type of revenue recognition fraud results from a company inflating its revenues and earnings by recognizing revenue related to fake contracts, fake customers, or other non-existent sales. This type of fraud may be harder to commit because it requires overriding key internal controls. Two well-known SEC cases involving fictitious revenue were Satyam Computer Services Limited (2011) and Anicom Holdings (2002).
  • Channel stuffing: This revenue recognition fraud scheme involves companies sending excessive amounts of products to their distributors, wholesalers, or customers over and above demand. This usually occurs near the end of a reporting period for which the companies realize they will miss their targets. To induce the recipients to accept the excess inventory, companies will offer kickbacks, excessive discounts, or other incentives. Well-known SEC cases involving channel stuffing were Bristol-Myers Squibb (2004) and Symbol Technologies (2004).

The article also identified certain red flags which can indicate the potential for revenue recognition fraud. These include:

  • An aggressive sales culture and poor tone at the top.
  • Hitting revenue targets due to sales booked in the last few days (or even the last day) of a sales reporting period.
  • Journal entries, especially manual ones, that can’t be explained or have no support. Such entries include topside adjustments at the end of the sales reporting period.
  • Anomalies or large balances within accounts receivable aging and unusual fluctuations in bad debt reserves.
  • Re-aging of invoices (such as due to a change in payment terms) or canceling and reissuing invoices.
  • Unusual fluctuations or patterns of returns from period to period.
  • Holding the books open beyond the accounting period.
  • Loss of major customers.
  • Pressure from executive management to hit sales targets without any mention or reminder of acting ethically or following company policies or procedures.
  • Distributors or wholesalers with higher-than-normal inventory levels at the end of a reporting period.

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.

Cut Down on Petty Cash Fraud with Effective Oversight

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.

While a company’s petty cash account is designed to provide reimbursement quickly and easily for such small expenditures as office supplies, mileage, and snacks for meetings, these minor amounts can add up to major problems unless your organization has effective fraud deterrence measures in place.

It might be surprising to learn fraud investigations have uncovered cases of petty cash fraud that resulted in major losses, according to forensic accountant David Anderson. It is, however, not the amount of money available in petty cash at any moment, but the cumulative amount in the account over weeks, months, or years.

“Nearly every business keeps an amount of cash on hand to pay unexpected cash expenses, reimburse employees for small expenditures, or provide cash advances to employees who will be traveling,” said David Anderson, a forensic accountant and 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.

“I have seen petty cash funds as low as $50 and as high as $10,000,” he said. “While this might not seem significant, consider that companies with multiple locations usually have petty cash at each location. In addition, the petty cash fund can be replenished as often as several times a week. This means a company with a single petty cash fund of $1,000 that is replenished twice a week could have petty cash expenditures of as much as $100,000 per year.”

Anderson, a forensic accountant who also is a Certified Fraud Examiner in Philadelphia, notes that management usually looks at only the petty cash available at a given time (for example, $1,000) and not the amount of cash passing through the petty cash fund over time. As a result, he said, the amount of cash at risk is considered insignificant and the petty cash fund is usually maintained by a single “trusted” employee who is responsible for disbursing the funds, obtaining receipts for expenditures, and requesting that the petty cash fund be replenished when needed.

“There seldom is any oversight or control over the employee’s management of the petty cash fund, and therein lies the potential for fraud,” said Anderson, a forensic accounting expert in Philadelphia who recommends every company enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

The petty cash fund can be the starting point for an employee to commit fraud, Anderson said. It often starts off small as the employee simply “borrows” a few dollars for the weekend or until the next pay date. Initially, the employee may even leave an “IOU” note in the petty cash box or a check made payable to the company, and the employee usually returns the “borrowed” money as soon as possible, he explained.

But as time goes on and the employee realizes no one is watching, the dollar amounts “borrowed” get larger and the time it takes to return the money gets longer until the employee eventually stops returning the money at all, according to Anderson, a forensic accounting expert in Philadelphia with experience in conducting fraud investigations. When the amount of “borrowed” money approaches the petty cash fund limit, he said, the employee will manufacture reimbursable expenses so that the petty cash fund can be replenished.

I recall one fraud investigation in which I discovered that the perpetrator had submitted multiple photocopies of the same receipt in the petty cash replenishment requests,” said Anderson, a Certified Fraud Examiner in Philadelphia. “In another case, I found handwritten “receipts” from service vendors for cash payments. Handwriting analysis showed that the signatures of the individuals who signed each receipt call came from the same person – the perpetrator.”

So, how do you combat petty cash fraud? There are several fraud deterrence measures that companies can implement to lessen the chance that petty cash fraud will occur in their business, explained Anderson, a forensic accountant whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.

First, he said, management should conduct irregular “surprise” checks of the petty cash fund at least once a month during the year. These mini audits should occur at various times and different intervals. The day before pay day, late on a Friday and the day before a holiday are all times when the trusted employee might not expect anyone to be looking, Anderson said. In addition, these checks should be conducted two weeks apart, four weeks apart, or maybe two checks close together. It is important that checks be conducted randomly to prevent the trusted employee from anticipating when they will occur, he said.

Next, someone at a higher level than the trusted employee should randomly and irregularly scrutinize petty cash replenishment requests, including comparing the latest request with several earlier requests, said Anderson, a forensic accounting expert in Philadelphia.

These two measures will go a long way toward ensuring that petty cash fraud is not occurring at your company, and that the petty cash employee knows that you are watching even this seemingly insignificant fund.

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

About David Anderson & Associates

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