Fraud Tales: Fraud Investigation Reveals Loopholes in Checkbook Controls

Harry Johnson was a savvy businessman who was well aware of the perils of not having the proper fraud deterrence measures in place.  He took great care to see that his successful small business was adequately protected by anti-fraud controls that he created himself.  Then how did Harry end up losing more than $200,000 from fraudulent activity?  This Tale of Fraud is the story of an actual fraud investigation that uncovered exactly what went wrong in Harry’s business.

“Harry was seemingly meticulous about safeguarding the checkbook used for his business,” 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.   “He diligently set up a series of anti-fraud controls that he truly believed would prevent fraud from occurring.”

Anderson said that although Harry, which is a fictitious name, allowed the controller to be listed as a signatory on the checking account, he always carefully watched the controller fill out each check and he always signed each check himself.  Additionally, Harry was the only person who could write in the checkbook, so he vigilantly recorded each check, Anderson said.

The controller was permitted to fill out the deposit slips, but only under Harry’s watchful eye.  And, only Harry could record the amount of the deposit, which he got from the printed bank deposit receipt.  Finally, Anderson said, although the controller performed the monthly bank reconciliation, Harry always matched the amount recorded by the controller in the checkbook to the monthly bank statement.

“To the untrained eye, Harry’s fraud deterrence measures might seem adequate,” said Anderson, a Certified Fraud Examiner who recommends that every organization enact a comprehensive fraud deterrence program created by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  “But a forensic accounting expert would have seen that the measures were filled with loopholes that the controller exploited, allowing him to steal well over $200,000 before Harry realized anything was wrong.”

How did the controller do it?

The fraud investigation Anderson conducted revealed that because the controller was a signatory on the checking account, he was able to prepare and cash counter checks that were never recorded in the checkbook.  In addition, while the controller prepared each deposit slip in front of Harry, he never totaled the deposit.  The fraud investigation found that once the controller got to the bank, he would enter a total that was less than the deposit, allowing him to take a certain amount out in cash that he then pocketed.  The net amount deposited was printed on the bank deposit receipt, Anderson said, and it was this amount that Harry recorded in the checkbook, never realizing that it was not the amount it should have been.

Finally, the fraud investigation discovered that Harry never kept a running balance in the checkbook, but instead, relied on the controller to perform the bank reconciliation and write the updated bank balance in the checkbook, Anderson explained.  The controller always made sure that the month-end amount recorded in the checkbook equaled the month-end balance shown on the bank statement.

“Protecting your company from devious-minded people who are intent on defrauding you is a complex process,” Anderson said.  “It’s not something to do yourself and hope you get it right.  Creating strong anti-fraud controls as part of a comprehensive fraud deterrence program that will adequately protect your business is something you should entrust to a forensic accounting expert.”

If you aren’t absolutely certain that your anti-fraud controls are effective enough to prevent fraud, it’s time to contact a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley to analyze the controls and make recommendations for strengthening them, Anderson said.

This Tale of Fraud article is one in a series of occasional posts that will examine actual cases of fraud that have occurred in businesses, non-profits or government offices.

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

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.