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.
In Parts 1 and 2 of this three-part series, forensic accounting expert David Anderson of David Anderson & Associates, a Certified Fraud Examiner in Philadelphia, discussed frauds committed by trusted accounting employees, and how these frauds could have been prevented. This week, he closes the series with a look at frauds by trusted members of management which he has investigated.
Fraud #1: The President (and 1/3 owner) of a family-owned retail business was a gambler. He could be found at one or more Atlantic City casinos four or more days a week. However, he ran short of money to support his gambling habit. He knew the family business generated a lot of cash sales, so he schemed to use the company’s cash to finance his gambling. He made sure all cash sales were manually recorded on numbered receipt pads. He then made sure the pads were used in mixed sequence (of the six pads in use at any one time, no two pads were in sequence), so the receipt numbers could not easily be tracked.
Next, he fired the long-time bookkeeper and installed his new girlfriend as the bookkeeper. She had no accounting background at all, and therefore depended on him to teach her bookkeeping and how to use the accounting system. Finally, he made himself responsible for reconciling cash received to the receipts. Then, each day, he took a handful of receipts and threw them in a desk drawer while simultaneously pocketing the cash amount of those receipts. He gave the remaining receipts and cash to the bookkeeper for entry into the accounting system and deposit in the bank.
Over time, the business began to experience cash-flow problems (due to his fraud). He hid this by slowing or even stopping payments to vendors, and then blamed the 2008 recession as the cause of their refusal to ship product to the business. His scheme was discovered when he was out sick one day. His brother, another 1/3 owner of the business, was looking for a document and, in searching for the document in the President’s desk, discovered the drawer with the hidden receipts. By then, the President had taken over $750,000 from the business.
Since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight. Also in this case, the other two business owners should have been suspicious of the President firing the long-time bookkeeper. They should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures, train the bookkeeper, and produce monthly operating reports. If this had been done, the President would not have been able to perpetrate his fraud scheme.
Fraud #2: The Vice President /General Manager of a family-owned business was the heir-apparent to run the business as the primary owner began to cut back on his involvement in the business. However, he had only a minor ownership interest, and was supposed to share the profits of the business with other family members. Instead, he schemed to keep most, if not all, of the profits for himself. He began by charging significant amounts of personal expenses on his company credit card. Since he approved credit card purchases, he was able to have these charged as business expenses of the company.
Next, he began to purchase inventory through this company, but for the benefit of his wife’s retail business. He alone took control of how much the wife’s business was to reimburse the family-owned business for these purchases. Over the course of several years, he had the wife’s business reimburse only a fraction of the inventory she used, but which was paid for by the family-owned business. Next, he closed one of the company stores and installed his wife’s business in the store. Although he stated his wife’s business would reimburse the family-owned business for the rent, he again only had her business reimburse a fraction of the total rent.
Finally, he set up another business to compete with the family-owned business, and began diverting sales to his new business. His fraud was discovered after the company began to experience significant cashflow problems. His attempts to cover-up his fraud caused him to have major disagreements with the primary owner. Due to these disagreements, the primary owner fired the Vice President /General Manager. After the primary owner stepped back into the business, he discovered the fraud.
As with the previous fraud, since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight. The primary business owner should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures and produce monthly operating reports. If this had been done, the Vice President/General Manager would not have been able to perpetrate his fraud scheme.
Fraud #3: The General Manager of an automobile dealership owned only 15 percent of the business, but schemed to keep a greater share of the profits. He purchased two small nearby businesses – a car wash and a used car lot. Previously, the automobile dealership had sent each customer car it serviced and each used car it purchased to an auto detailer. Now, the General Manager started to send each such car to his car wash. He merely washed each car, but charged the automobile dealership for a full detail.
Next, he schemed to have the automobile dealership sell to his used car lot good quality used cars at large discounts, and to purchase from his used car lot poorer quality used cars at large markups. His scheme was discovered when an employee overheard the General Manager discussing the huge profits that his car wash and used car lot were making at the expense of the automobile dealership. The employee reported this to the dealership’s primary owner, and the General Manager was fired.
As with the previous frauds, since senior management can override internal controls, the primary way to prevent such a fraud is to bring in outside oversight. The primary business owner should have insisted the company retain an outside accounting or forensic accounting firm to establish internal control procedures and produce monthly operating reports. If this had been done, the General Manager would not have been able to perpetrate his fraud scheme.
As can be seen from the frauds discussed above, when a business owner cedes active oversight to internal senior management, it is critical to employ an outside accounting or forensic accounting firm to provide a measure of oversight and independent reporting to the business owner.
If you want to learn how a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley can help safeguard your company against such fraud schemes, 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.
(NOTE: David Anderson’s forensic accounting blog will be on hiatus for the holiday season and will return on Monday, January 8.)