The anti-fraud controls in place at a shipping supplies company were extensive and outwardly thorough. Incoming shipments were closely checked against the shipping manifest and outgoing shipments against the sales requisition that then became the invoice. The warehouse had an alarm to prevent break-ins. And the company conducted a detailed physical inventory at year-end to determine the quantities and cost of the inventory. Still, a fraud investigation conducted by a forensic accountant found that more than $20,000 in inventory was being stolen each year and no one at the company had a clue.
“Company management was fully aware of the need for fraud deterrence measures and took what they thought were the necessary steps to protect their inventory,” 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. “But without a forensic accountant to guide them, the fraud deterrence steps fell short of what the company needed to safeguard against fraudsters intent on stealing.”
Anderson said the shipping supplies company owner had no idea the fraud was occurring because the controls in place were unable to identify that inventory was missing. The theft was discovered only by accident.
An outside accountant who prepared the company’s income tax returns also had an outside business selling collectibles on eBay, which was also where he purchased his shipping supplies, Anderson said. During one purchase, the accountant saw that the seller was local and asked if he could pick up the shipping supplies. While doing so, Anderson said, the accountant noted that the seller had an uncommon last name, which he realized was the same as that of the general manager at the shipping supplies company that was his client.
The next day, the accountant called his client and learned that the general manager’s son worked in the company’s warehouse, said Anderson, a Certified Fraud Examiner who recommends that every organization enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The accountant informed the company owner that he had purchased shipping supplies from the son and picked them up at the son’s house.
The owner immediately engaged a forensic accounting expert to conduct a thorough fraud investigation. The forensic accountant’s investigation revealed several holes in the company’s anti-fraud measures, including:
- The company closely checked incoming and outgoing shipments, but never kept running balances of inventory items, instead relying on the annual physical inventory to provide end of year balances.
- The alarm system protected against intruders breaking in, but there was no security to prevent employees from simply walking out with inventory.
- The company never tracked the profitability of individual customer orders and compared them to year-end profitability.
- Inventory costs were determined only once a year after the physical inventory and were never compared to the costs experienced by similar shipping supply businesses.
Had the company kept a running balance of inventory items, it would have discovered discrepancies with the year-end balances reported after the physical inventory, Anderson said Further, if the company had tracked profitability of customer orders against year-end profitability and/or compared its inventory costs with those of similar businesses, it would have known its profitability was lower than expected and its inventory costs higher than expected, he said.
“Proper fraud deterrence measures would have raised a red flag,” said Anderson, a forensic accounting expert who also is a Certified Fraud Examiner. “That would have led the company to investigate the matter and thereby discover the theft much earlier.”
Anderson said the case of the defrauded shipping supply company ends on a cautionary note. He said the son, when confronted by his father, admitted to the theft. The company fired the son, but declined to file criminal charges to avoid negative publicity. But the accountant who accidentally discovered the fraud in the first place notes that the son continues to sell shipping supplies on eBay. It appears he may have found another job — and another company to defraud.
“Failure to prosecute may solve your immediate problem, but often the fraudster simply moves on to another company,” Anderson said. “And if that company is inheriting your problem, then it stands to reason you may be inheriting someone else’s problem too.”
If you’re absolutely confident that your fraud deterrence measures are sufficient to fully protect your company, consider the case of the defrauded shipping supply company owner who thought the same thing. Perhaps it’s time to engage a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. A Certified Fraud Examiner will analyze your company’s entire operation to identify weaknesses that make it vulnerable to fraudulent activities and then recommend strong fraud deterrence measures to help protect the company, Anderson said.
This Tale of Fraud article is the fourth in a series of occasional posts that examine real cases of fraud against businesses, non-profits or government offices and the fraud investigations that revealed how the fraud was perpetrated.
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 firstname.lastname@example.org.
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.