Berry Zimmerman

Relational-Centric Marketing - Independent Consultants - Business Improvement Experts
Bellevue, Washington

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Bookkeeping Fraud True Story: Let his pain be your gain

I posted a tip titled, "13 Red Flags to Bookkeeping Fraud." A retail business owner agreed to share his story in the hopes that it will help you from experiencing the same situation in your company.

Written May 24, 2008, read 7894 times since then.

A short while ago, I posted a Biznik tip on the 13 Red Flags to Bookkeeping Fraud. Since then a client shared that they realized only after the fact that several of the red flags we listed were present. A retail business owner, he agreed to share his story in the hopes that it will help you from experiencing the same situation in your company.

The client (Eric) had recently held a large sales event as part of a location move. As is typical during a big sale, things got hectic. "There was lots of cash coming in, and so many cash transactions that we couldn't run them all through the computer system," said Eric. "Our bookkeeper was counting the cash daily, reconciling sales and then going down to the bank to deposit the money."

One day, well into the sales event, Eric noticed that there was a discrepancy between the deposit receipt and deposit amount of over $2,000. Once he started checking transactions, he noticed other discrepancies and not only during the sales event.

As it turned out, his bookkeeper had been skimming cash for over six months. He falsified the deposit slips by using carbon paper to type in a different number than the actual deposit, then pocketed the difference.

Eric brought in an outside CPA to conduct an extensive internal audit, and the CPA determined the total amount stolen was over $60,000. At this point, the bookkeeper has paid back $11,000 and Eric has a lien on his house, which is up for sale. In this incident, Eric is fortunate as many business owners never see a dime back.

I asked Eric what he wanted to share with others about his experience and here's what he had to say:

No business is exempt. You may think yours is, but it isn't.
When you hire somebody, the things that were true at the time may not be so over the course of time. For example, that trustworthy employee you hired can become unhappy over their pay; they may fall prey to substance abuse or develop a gambling addiction.
Get your inventory computerized!
Don't accept handwritten tickets...ever.
Separate functions. Don’t have the same person do inventory, reconcile your bank statements, open mail, make deposits, etc.
Bring in an outside accounting professional on a regular basis to review your internal policies and recommend better ones. Then stick to them.
Spot check your deposit slips against actual deposit amounts.
If you can take cash out of your business, everyone else can. (And if you do it, why not them?)
Keep track of your checks. If you start missing numbers in your sequence, investigate!
Have an outside firm do your payroll. It helps prevent problems that can arise when some of your staff see what others are earning. His six-year bookkeeper became irked when he saw what the commissioned sales people were making and gave himself a "raise."
Large inventory adjustments are not a good sign - investigate them.

In short, things that are obvious become not so obvious over time.

© Business Resource Services, Inc. Reprinted with permission.

Learn more about the author, Berry Zimmerman.

Posted by Brandi L Pierce, Lynnwood, Washington | May 26, 2008

Wow. It always amazes me when I hear that people are still so dishonest. =( There's enough money for everyone and I say earn your own keep!

I'm glad Eric is getting his money back. I had a run in with a bad employee myself. Luckily, the damages were fairly neglible -- but it's still money and hard earned no less!

Very informative article. I will definitely pass this one on.

Cheers!

Brandi | aShadow.com

P.s. Just like you pick your friends, be extra careful how you pick your employees. If you get good ones, pay them well for what they do and they will always have your back.
Posted by Vicki Kriner, Portland, Oregon | May 26, 2008

Great article!

Most of us (especially on Biznik!) want to help others succeed, and it's easy to assume that everyone around you has the same goal - not true, all too often!

Brandi's point is a good one. And Berry's #2 tip is gold; situations change and so do people.

If your "gut" starts telling you something is wrong, it probably is. Act on it. Now.

Vicki Scarlet Girl
Posted by Judy Friend, Pepperell , Massachusetts | May 27, 2008

Great information and informative tips! We all wish we lived at Disney World and can trust everyone but that's just not the case. Sometimes even hiring "friends" turns out to be a nightmere down the road for some of the very reasons Berry mentioned.

Thanks for the tips. It's almost like Buyer Beware - Owner Oversee. Don't leave your business completely in someone else's hands.
Posted by M-Jo Baker, Seattle, Washington | May 27, 2008

Thanks for posting this. As an independent bookkeeper I require my clients to frequently check on me, both for my protection and theirs. I give new clients a document similar to Berry's "13 Red Flags" and encourage them to take an active part in understanding their accounting processes.

It always amazes me the level of responsibility that new clients want to give me, usually far more than I will allow for their safety.

For example: It is common for new clients to request that I become a signer on their checking accounts. I always refuse and explain that this is in violation of one of the basic tenets of accounting: satisfactory internal controls. If I am the one reconciling the bank accounts then I should not be a signer.

My theory is that these small business owners want the accounting to be a "black box" where they are completely out of the loop and it just magically happens.

Similarly my clients are often resistant to any suggestions I make to tighten controls on their employees. "Joe would never steal from me, he's a great guy!" Unfortunately the research shows that if there is an opportunity there is a high probability that an employee will exploit it.

I explain to my clients that they may be harming their employees by presenting them with such "temptations". Think of what happens if the box of yummy candy is left open on your desk vs. closed away in a cabinet in the next room.
Posted by Madeline Bailey, Issaquah, Washington | May 27, 2008

I like this article and I'm glad you brought it up about how no no one is immune. People blame themselves and it can happen to anyone.

I go in behind fraud day in and day out, but that's kind of like a dentist saying "people have cavities." Rarely embezzlement, but fraud, or gross incompetence appears rampant to me.

My idea of how to empower people is to teach them accounting. If you're a business owner, I'd like you to read your financial reports monthly. Wouldn't he have noticed that his income seemed low on his P&L in month one? Even if the business is in a hectic phase, reviewing the P&L takes very little time.

I can see why you're saying computerize your inventory, but in Quickbooks, it's more trouble than it's worth for most small businesses.

And also, while I agree with the division of labor, especially outsourcing payroll, and having a second person do taxes, people can and do trust me to do the rest of it, including check signing/stamping. I've never betrayed anyone, even when the owner was dying and there was a fortune to be had. And I've met office managers who were equally trustworthy. Let's keep the faith! It's okay to trust someone, and read your financial reports for your own sake, to make your business more profitable.
Posted by Alicia Cummins, Richmond, Virginia | Jun 01, 2008

This is a great article!! I'm currently in school for accounting and we are discussing controls at this time. It is IMPERATIVE to have controls in your business. It doesn't matter how small you are. I have done bookkeeping for 2 companies, a non-profit and Realty company and just kept their books. I did not have access to their monies or could I sign their checks. I actually use to have tenants call me to ask if they could send payments to me and I always told them NO. Send the payments to the lockbox.
Posted by Douglas Rector, Renton, Washington | Jun 24, 2008

Great article. Unfortunately fraud is something businesses have to face, If you have an in house bookkeeper another thing to look for is if they refuse to take time off or vacation. they don't want to give up control. Another thing is what I call "blind trust". This is what some employers have when a bookkeeper has been with them for a long period and have developed a trusting relationship. Another thing is to listen on what is going on. If your bookkeeper seems to be living above their means, complains on their finances, comes in Monday mornings and comments on their night at the casino on a regular basis, etc...these are red flag indicators. This is not to say anything is happening, just something to keep in the back of your mind.

The article has very good advice and if you need a CPA or someone who specializes in accounting forensics please let me know. I have some good contacts.
Posted by Amanda Predmore, Sammamish, Washington | Jul 12, 2008

Great info! Do you have a bookkeeper you can recommend? I'm a small business that needs their quickbooks cleaned up and maintained... help! Would rather have a personal referral of someone you either work with or know of their reputation. Thanks! Amanda
Posted by Douglas Rector, Renton, Washington | Jul 12, 2008

Working for a major retailer and investiagting employee fraud this article is right on. Please read my article on the importance of preemployment background checks.
Posted by Amanda Predmore, Sammamish, Washington | Jul 12, 2008

Not looking to employ, in a traditional sense anyway. Looking to contract out this service. Need a referral - does anyone have one? Once I have a couple of referrals I will certainly do background checks on them for certain. Thank you for the additional point/perspective. - Amanda
Posted by John Voris, Carmel, California | Jul 31, 2009

Berry,

Thanks for the warning. Bookkeeping fraud happens somewhere everyday and the honest owners most often believe this could not happen to them. Relatives are often the worse because they are so trusted.

At one time I was a financial recruiter in San Francisco and moved employees between the big 8 CPA firms at the time and private industry.

I heard many employee related horror stories including embezzlement in the accounting department.

The most disturbing form of theft occurred when a bookkeeper chose not to pay the business taxes and divert receivables into her own personal account.

She had been skimming the "traditional" 10% when the owners became concerned with the sluggish economy and her position was suddenly at risk. If the profits continued to dive, an owners wife would return, take over the bookkeeping job and the employee would be out of work.

To offset the slumping net, she began reducing the amount of employee contribution taxes and ignored others completely. The busy owners would simply glance at the paper work, sign and mail the checks to the IRS.

One day she announced her intent to leave and live with her aging mother out of state. They even held a going-away party for her. Two weeks after cleaning out her desk, the IRS walked in to do an audit.

In the end, the company owed over $250,000.00 in back taxes plus penalties and interest. That is not the money she took. Her 10% amounted to only $2,000.00 to $3,000.00 a month over a three year period.

That's what is scary. The money she took was nothing compared to the unpaid taxes the owners now owed.

In fact, I have heard of bookkeepers not taking a dime but failing to paying taxes to maintain the illusion that the owner can afford to keep the employee on the books.

The owners did not have the money and eventually sold off everything they had to meet this new obligation. This included their personal property.

The bookkeeper was never found and so what! Even when embezzlement can be proven, the local District Attorney finds these cases a nuisance when compared to crimes involving bodily injury.

Thanks again Berry.

John Voris - Motivation Analyst