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The shock when a victim discovers that a trusted
employee - and even a friend - has stolen from him or her is absolute.
It's a feeling of betrayal and violation that strikes fear in some,
grief in others and anger in most.
In my experience, it is almost always
accompanied by a sense that the victim should have known it was going
on. The evidence of theft sheds a bright light in the rear-view mirror.
Patterns and circumstances take on a clarity that contemporaneous
experience obscured. Sometimes the clarity was there but for a variety
of reasons it was ignored.
A Case Study
A victim uncovered theft when his
bookkeeper unexpectedly missed a few days of work and he opened a bank
statement. The simple act of thumbing through cancelled checks from one
month's bank statement prompted a phone call to his attorney who
directed him to a forensic accountant. The internal fraud was revealed,
he felt stupid for allowing it to happen and the lesson cost him
several hundred thousands of dollars in uninsured losses.
The forensic accountant uncovered
evidence of a simple but effective embezzlement scheme. The bookkeeper
had set up vendors that were very similar to existing real vendors. For
example, if the real vendor was ABC Service Company then a fake vendor
was established called ABC Service Co. The bookkeeper set up bank
accounts for the fake vendors. That was the hard part. The rest was
easy. The business owner signed hundreds of checks to the fake vendors
thinking the checks went to legitimate business activity.
Since that worked so well, the
bookkeeper began forging checks to pay the vendors, personal expenses,
and provide cash gifts to family and friends. And, since all that
worked without detection by the business owner, the bookkeeper took an
unauthorized increase in salary.
It was bold. It was also easily
discovered and should have been easily prevented. The bookkeeper was
quickly arrested and has spent time in jail.
Fraud Prevention 101
The following are fraud prevention
steps that were ignored and could have prevented the theft:
- Know
your employee.
In this particular case the business owner recounted that he knew
the prior employer of the bookkeeper well. He was aware that the
bookkeeper had left the prior employer on less than positive terms
but figured it was none of his business and hired the bookkeeper
because of knowledge of the industry. A phone call to the prior
employer/friend after the embezzlement was discovered revealed
that the bookkeeper was probably stealing from the current
employer to pay off a judgment obtained by the prior employer to
recover embezzled funds.
- Do
a background check.
Embezzlers tend to be repeat offenders. This is an obvious
follow-up to the prior point. A simple background check is not
expensive, is easy to do and, in this case, would have prevented a
bad hiring decision. It would have confirmed the ill-at-ease feeling
the employer had at the time of hiring.
- Open
your own mail.
Let the bookkeeper do the bookkeeping. You cannot abdicate other
important (and seemingly unimportant) functions because the clerk
is always around and does his or her job well. Vendor
communications, bank statements, and bills from vendors and
suppliers are important sources of information.
- Separate
functions and duties.
Many small business owners are so busy that they tend to overlook
common sense when assigning work. In this case a bookkeeper was
eventually given the responsibility for answering the phones,
opening all the mail, writing checks, making deposits, preparing
invoices, reconciling the bank statements, and preparing the
financial reporting provided to the business owner and his outside
tax preparer. As noted above, simply opening the mail would have
prevented some of the problems - or would have caught it a lot
earlier.
- Don't
accept bad answers to good questions. When the forensic accountant arrived on the
scene, the business owner requested a report showing payments to
all vendors. The bookkeeper had previously argued that it was
difficult to put such a report together, would take a long time,
and would not be correct. The accountant produced the report in
about 90 seconds. The business owner was shocked - and the point
was made. His bookkeeper, for a long time, had prevented him from
seeing the very report that exposed the whole scheme.
- Force
vacations.
Nobody else had access to the bookkeepers work for more than two
years. Any other eyes on the accounting records would have exposed
everything.
- Acknowledge
your instinct.
If the lifestyle of the employee exceeds what you know about their
legitimate compensation there is good reason to look harder. If
the bookkeeper can't produce simple reports from "the
books" they are keeping there is a problem. If you feel like
you are working for the bookkeeper rather than them working for
you, something is wrong. If it feels like the business is doing
better than ever but there isn't any cash find out why.
All of the steps above were
recognized by the business owner in this case: "I knew something
wasn't right. I should have known this was happening." That is
never good after the fact.
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Inventory losses can have a major impact on a company's
operations and profitability. When inventory loss does incur, whether
due to financial statement fraud, misappropriation or other means,
forensic accounting is often the first step to uncover the full extent
of damages.
In such cases, clients hire the
trained specialists in Arxis
Financial's "Forensic
Accounting" practice to assist in determining the
monetary loss or damages and to help uncover how the loss occurred.
Forensic accounting, by its nature,
involves actual or anticipated disputes or litigation. Our specialists
have extensive experience in presenting and defending our findings in
litigation proceedings, including depositions and trial at local, state
and federal court levels, as well as mediation and arbitration. We
assist attorneys in interpreting the valuation, and help counsel to
understand and analyze events or issues. This level of support can be a
key asset in determining a legal strategy as well as reaching a
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If you have any questions about Forensic Accounting Services for
Inventory Losses, please feel free to contact
us.
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