Wednesday, November 26, 2014

Fraud: " You Need An External Set of Eyes"

Nobody wants to talk about Fraud. It’s embarrassing. But it is a crime of opportunity. It happens because your internal controls are weak, no one is watching, your internal accountant, bookkeeper or other employee may have a problem with debts, substance abuse, family problems. It happens. It’s part of the human condition. These problem themselves may not be crimes, but they can influence people to do what they typically may not consider. The FBI says, 80% of people are good people. They will never steal from you. About 10% steal out of some need or because they think they can get away with it. The other 10% will kill you for a piece of toast because that’s all they know. It’s sad but it’s part of life since ancient times.

            Recently, I was analyzing a client’s financial reports prepared by his new internal bookkeeper. As usual I made a number of inquiries and requested some additional reports and reconciliations. Some I got some I didn’t.  From experience, when the outside CPA asks for standard reports and doesn’t get them or the delivery is shrouded in mystery, it’s a bad sign. I reported my concerns to the business owners to put them on notice. Advised them to be mindful and pay close attention to make sure procedures were being followed. At the second period meeting again I asked for reports. Again, same response. I tried to see if there was something I could do to help. Provide support, diagnose a problem. I finally got a series of reports. Upon analysis I saw entries I knew could not be correct. The implications where very, very bad. I asked the bookkeeper to explain. Talk to me, tell me where I can help. How is this possible? The answers were fragmented and puzzling. I had no choice but to call the owner at home, late one night and ask questions, I never like to make.

After several months of reconstruction, we got lucky; the only fraud committed was a result of incompetence. It did however, cost the company money. But all the signs were there for embezzlement and theft. The bookkeeper had access to bank accounts and checks. The bookkeeper had multiple failed marriages, business failures, family issues, was under collection for debts. It was the classical profile of what the FBI has deemed a likely candidate to commit a white collar crime. It is the profile I see time and again in many theft and embezzlement cases. I have seen quite a few in Miami.

            Let’s be clear. Sometimes there is no way to prevent it. In the end as a business owner you have no choice but to trust. From years of experience, like my client above said, “thank god you ask all the questions. Thank god you know what to look for”. “Just the fact that you are there looking over his/her accounting function and you get involved”. I sit at his/her employees desk, drink some coffee ask questions, see how they do their work. That keeps people honest. Many times, it also makes the employees feel good someone cares about what they do and how they do it. They feel valued and that can make a big difference. It’s not just the numbers.

            Many of my smaller clients with 10 or fewer employees and $5 million or less in revenues. These clients are often at risk. They cannot afford top talent. There is little to no segregation of duties, and the owner operator is so busy, he’s not thinking accounting, finance, computer systems and internal controls. He’s thinking, how to make it through the day, bring in sales and keep the existing clients happy. That’s why you need those external set of eyes. 

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